WADDELL & REED FINANCIAL INC (Form: 10-Q, Received: 07/25/2006 15:31:25)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-13913

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

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

6300 Lamar Avenue Overland Park, Kansas 66202
(Address, including zip code, of Registrant’s principal executive offices)

(913) 236-2000
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer x

Accelerated Filer o

Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x .

Shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:

Class		Outstanding as of July 21, 2006
Class A common stock, $.01 par value		84,737,212

Waddell & Reed Financial, Inc.

Form 10-Q
Quarter Ended June 30, 2006

Index


Part I.		Financial Information

Item 1.		Financial Statements (unaudited)

		Consolidated Balance Sheets at June 30, 2006 and December 31, 2005

		Consolidated Statements of Operations for the three months and six months ended June 30, 2006 and June 30, 2005

		Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2006 and June 30, 2005

		Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2006

		Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and June 30, 2005

		Notes to the Unaudited Consolidated Financial Statements

Item 2 .		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

Part II.		Other Information

Item 1.		Legal Proceedings

Item 1A.		Risk Factors

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

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

Item 5.		Other Information

Item 6.		Exhibits and Reports on Form 8-K

		Signatures

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)

	June 30,			December 31,
	2006			2005
	(unaudited)
Assets
Assets:
Cash and cash equivalents	$	190,602		162,775
Investment securities	52,046			51,701
Receivables:
Funds and separate accounts	34,856			33,405
Customers and other	28,289			43,261
Income taxes receivable	4,164			—
Deferred income taxes	—			1,978
Prepaid expenses and other current assets	8,660			6,602
Total current assets	318,617			299,722

Property and equipment, net	51,640			52,963
Deferred sales commissions, net	19,171			15,899
Goodwill	175,309			195,309
Intangible assets	54,999			54,999
Other assets	14,678			13,379
Total assets	$	634,414		632,271

Liabilities and Stockholders’ Equity

Liabilities:
Accounts payable	$	52,539		60,930
Accrued sales force compensation	17,498			18,412
Accrued other compensation	15,933			14,536
Short-term notes payable	—			1,746
Income taxes payable	—			11,975
Deferred income taxes	891			—
Other current liabilities	93,023			49,185
Total current liabilities	179,884			156,784

Long-term debt	199,936			198,230
Accrued pensions and post-retirement costs	11,687			8,303
Deferred income taxes	15,018			15,707
Other	6,121			5,873
Total liabilities	412,646			384,897

Commitments and contingencies (Note 9)

Stockholders’ equity:
Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 84,737 shares outstanding (83,804 at December 31, 2005)	997			997
Additional paid-in capital	183,681			195,315
Retained earnings	359,191			393,043
Cost of 14,964 common shares in treasury (15,897 at December 31, 2005)	(323,219		)	(343,100	)
Accumulated other comprehensive income	1,118			1,119
Total stockholders’ equity	221,768			247,374

Total liabilities and stockholders’ equity	$	634,414		632,271

See accompanying notes to unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited, in thousands, except for per share data)

	For the three months					For the six months
	ended June 30,					ended June 30,
	2006			2005		2006		2005
Revenues:
Investment management fees	$	78,190		64,533		152,239		128,115
Underwriting and distribution fees	80,494			65,833		157,506		133,178
Shareholder service fees	22,627			20,320		44,636		40,130

Total revenues	181,311			150,686		354,381		301,423

Operating expenses:
Underwriting and distribution	91,545			73,427		176,299		147,716
Compensation and related costs (including share-based compensation of $5.8 million, $6.2 million, $11.8 million and $9.0 million, respectively)	27,076			26,044		56,522		48,652
General and administrative	64,982			49,867		75,227		60,103
Subadvisory fees	7,599			4,145		14,147		7,666
Depreciation	2,956			2,409		5,810		4,784
Goodwill impairment	20,000			—		20,000		—

Total operating expenses	214,158			155,892		348,005		268,921

Operating income (loss)	(32,847		)	(5,206	)	6,376		32,502

Investment and other income	2,144			1,455		4,407		2,819
Interest expense	(2,984		)	(3,685	)	(6,238	)	(6,939	)

Income (loss) before provision for income taxes	(33,687		)	(7,436	)	4,545		28,382

Provision for income taxes	(665		)	(349	)	13,296		12,719

Net income (loss) before cumulative effect of change in accounting principle	(33,022		)	(7,087	)	(8,751	)	15,663

Cumulative effect of change in accounting principle, net of tax	—			—		(321	)	—

Net income (loss)	$	(33,022	)	(7,087	)	(8,430	)	15,663

Earnings (loss) per share before cumulative effect of change in accounting principle:
— Basic	($0.40		)	(0.09	)	(0.11	)	0.19
— Diluted	($0.40		)	(0.09	)	(0.11	)	0.19

Earnings (loss) per share:
— Basic	($0.40		)	(0.09	)	(0.10	)	0.19
— Diluted	($0.40		)	(0.09	)	(0.10	)	0.19

Weighted average shares outstanding:
— Basic	81,570			80,810		81,388		80,865
— Diluted	81,570			80,810		81,388		81,872

Dividends declared per common share	$	0.1500		0.1500		0.3000		0.3000

See accompanying notes to unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, in thousands)

	For the three months					For the six months
	ended June 30,					ended June 30,
	2006			2005		2006		2005
Net income (loss)	$	(33,022	)	(7,087	)	(8,430	)	15,663
Other comprehensive income:
Available-for sale investments:
Net unrealized appreciation (depreciation) of investments during the period, net of income taxes of $(145), $331, $300 and $211, respectively	(247		)	563		511		359
Derivatives:
Net unrealized loss on derivatives, net of income taxes of $0, $0, $(174) and $0, respectively	—			—		(297	)	—
Reclassification adjustment for amounts included in net income, net of income taxes of $(21), $0, $(127) and $(381), respectively	(36		)	—		(215	)	(648	)

Comprehensive income (loss)	$	(33,305	)	(6,524	)	(8,431	)	15,374

See accompanying notes to unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
For the Six Months Ended June 30, 2006
(Unaudited, in thousands)

													Accumulated
				Additional									other			Total
	Common stock			paid-in			Retained			Treasury			comprehensive			stockholders’
	Shares	Amount		capital			earnings			stock			income			equity
Balance at December 31, 2005	99,701	$	997	$	195,315		$	393,043		$	(343,100	)	$	1,119		$	247,374
Net loss	—	—		—			(8,430		)	—			—			(8,430		)
Share-based compensation	—	—		11,283			9			—			—			11,292
Issuance of restricted shares	—	—		(22,913		)	—			22,913			—			—
Dividends accrued	—	—		—			(25,431		)	—			—			(25,431		)
Exercise of stock options	—	—		(543		)	—			1,641			—			1,098
Tax benefit from equity awards	—	—		539			—			—			—			539
Other stock transactions	—	—		—			—			(4,673		)	—			(4,673		)
Change in fair value of derivatives	—	—		—			—			—			(297		)	(297		)
Reclassification for amounts included in net income (loss)	—	—		—			—			—			(215		)	(215		)
Unrealized gain on investment securities	—	—		—			—			—			511			511

Balance at June 30, 2006	99,701	$	997	$	183,681		$	359,191		$	(323,219	)	$	1,118		$	221,768

See accompanying notes to unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)

	For the six months
	ended June 30,
	2006			2005
Cash flows from operating activities:
Net income (loss)	$	(8,430	)	15,663
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	5,965			5,439
Share-based compensation	11,292			9,038
Gain on sale of available-for-sale investments	(1,040		)	(1,029	)
Net purchases and sales of trading securities	(838		)	1,691
Gain on trading securities	(157		)	(121	)
Goodwill impairment	20,000			—
Write down of investment securities	750			—
Loss on sale and retirement of property and equipment	111			92
Capital gains and dividends reinvested	(99		)	(67	)
Deferred income taxes	2,181			(239	)
Changes in assets and liabilities:
Receivables from funds and separate accounts	(1,451		)	(2,113	)
Other receivables	14,972			(98	)
Other assets	(5,429		)	(1,638	)
Accounts payable	(8,391		)	(10,564	)
Other liabilities	30,071			2,894

Net cash provided by operating activities	$	59,507		18,948

Cash flows from investing activities:
Purchases of available-for-sale investment securities	(2,200		)	—
Proceeds from sales of available-for-sale investment securities	3,524			66,464
Proceeds from maturity of available-for-sale investment securities	59			5,541
Additions to property and equipment	(4,598		)	(4,306	)
Cash paid for acquisitions	—			(15	)

Net cash provided by (used in) investing activities	$	(3,215	)	67,684

Cash flows from financing activities:
Proceeds from long term debt and interest rate swap termination	199,862			—
Repayment of long term debt	(200,000		)	—
Net short-term borrowings (repayments)	—			(21,000	)
Cash dividends	(25,291		)	(24,973	)
Purchase of treasury stock	—			(5,997	)
Exercise of stock options	1,098			994
Excess tax benefits from share-based payment arrangements	539			—
Other stock transactions	(4,673		)	(1,103	)

Net cash used in financing activities	$	(28,465	)	(52,079	)

Net increase in cash and cash equivalents	27,827			34,553

Cash and cash equivalents at beginning of period	162,775			83,900

Cash and cash equivalents at end of period	$	190,602		118,453

See accompanying notes to unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Significant Accounting Policies

Waddell & Reed Financial, Inc. and Subsidiaries

Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the “Company,” “we,” “our” and “us”) derive revenues primarily from investment management, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the “Advisors Funds”), W&R Target Funds, Inc. (the “Target Funds”), Ivy Funds, Inc. and the Ivy Funds portfolios (collectively, the “Ivy Funds”), and Waddell & Reed InvestEd Portfolios, Inc. (“InvestEd”) (collectively, the “Funds”), and institutional and separately managed accounts. The Funds and the institutional and separately managed accounts operate under various rules and regulations set forth by the United States Securities and Exchange Commission (the “SEC”). Services to the Funds are provided under investment management agreements that set forth the fees to be charged for these services. The majority of these agreements are subject to annual review and approval by each Fund’s board of directors/trustees and shareholders. Our revenues are largely dependent on the total value and composition of assets under management, which include mainly domestic equity securities, but also debt securities and international equities. Accordingly, fluctuations in financial markets and composition of assets under management impact revenues and results of operations.

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements included herein pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented. The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”). Certain amounts in the prior years’ financial statements have been reclassified for consistent presentation.

The accompanying unaudited consolidated financial statements have been prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in our 2005 Form 10-K, which include the following: use of estimates, cash and cash equivalents, disclosures about fair value of financial instruments, investment securities and investments in affiliated mutual funds, property and equipment, software developed for internal use, goodwill and intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, stock-based compensation, income taxes, and derivatives and hedging activities.

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at June 30, 2006 and December 31, 2005 and the results of operations and cash flows for the three and six months ended June 30, 2006 and 2005 in conformity with accounting principles generally accepted in the United States.

2. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and short-term investments. We consider all highly liquid investments with original or remaining maturities of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents at June 30, 2006 and December 31, 2005 include amounts of $29.9 million and $26.1 million, respectively, for the benefit of customers segregated in compliance with federal and other regulations. Substantially all cash balances are in excess of federal deposit insurance limits.

3. Indebtedness

On January 13, 2006, the Company issued $200 million in principal amount 5.6% senior notes due in 2011 (the “New Notes”) resulting in proceeds of approximately $198.2 million (net of discounts, commissions and estimated expenses). The Company used the net proceeds, together with cash on hand, to repay the entire $200 million aggregate principal amount outstanding of its 7.5% senior notes due January 18, 2006 (the “7.5% Notes”). In 2002, the 7.5% Notes were effectively converted to variable rate debt by entering into an interest rate swap agreement. We accounted for the interest rate swap as a fair value hedge of the 7.5% Notes. The swap was considered 100% effective in hedging the changes in the fair value of the 7.5% Notes arising from changes in interest rates, and accordingly, there was no impact on earnings resulting from any ineffectiveness associated with the transaction throughout its term.

The New Notes represent senior unsecured obligations and are rated “Baa2” by Moody’s and “BBB” by Standard & Poor’s. Interest is payable semi-annually on January 15 and July 15 at a rate of 5.6% per annum. The Company may, at its option, call the New Notes at any time pursuant to a make whole redemption provision, which would compensate holders for any changes in interest rate levels of the notes upon early extinguishment. The Company currently has no intention to call the New Notes.

During 2005, the Company entered into two forward starting interest rate swap agreements with five-year fixed swap rates of 4.57% and 4.84%, respectively, on notional amounts of $100 million for each swap. The swaps were put in place to hedge against changes in forecasted interest payments on the 7.5% Notes attributable to changes in the LIBOR swap rate prior to the time we anticipated refinancing the 7.5% Notes in January 2006. We assessed the effectiveness of the swaps as hedges at their inception and in subsequent periods, and considered these swaps to be completely effective cash flow hedges under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As of December 31, 2005, net unrealized gains attributed to the forward swap cash flow hedges were approximately $1.6 million and were included as a component of other comprehensive income.

On January 10, 2006, the Company terminated the two 2005 forward interest rate swap agreements upon the closing of the New Notes. In connection with those terminations, the Company received a net cash settlement of $1.1 million. Such amount has been recorded in accumulated other comprehensive income and is being amortized into earnings as a reduction of interest expense over the five-year term of the New Notes.

4. Investment Securities

Investment Securities are as follows:

	Fair Value
	June 30,		December 31,
	2006		2005
	*(in thousands)*

Available-for-sale securities:
United States government-backed mortgage securities	$	13	$	214
Municipal bonds	11,817		12,134
Corporate bonds	—		719
Affiliated mutual funds	29,738		29,927
	$	41,568	$	42,994

Trading securities:
United States government-backed mortgage securities	136		—
Corporate bonds	504		—
Affiliated mutual funds	9,838		8,707
	$	10,478	$	8,707

Total Investment Securities	$	52,046	$	51,701

Certain information related to our available-for-sale securities is as follows:

	June 30,			December 31,
	2006			2005
	*(in thousands)*
Cost—available-for-sale securities	$	32,645		$	34,654
Gross unrealized gains	8,924			8,937
Gross unrealized losses	(1		)	(597		)

Market value—available-for-sale securities	$	41,568		$	42,994

Purchases and sales of trading securities for the six months ended June 30, 2006 were $974 thousand and $136 thousand, respectively.

In the first quarter of 2006, the Company recorded a $750 thousand write-down for other-than-temporary impairment of a municipal bond classified as available-for-sale.

5. Stockholders’ Equity

Earnings (loss) per Share

The components of basic and diluted earnings (loss) per share were as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2006			2005			2006			2005
	*(in thousands, except per share data)*

Net income (loss), as reported	$	(33,022	)	(7,087		)	(8,430		)	15,663

Weighted average shares outstanding—basic	81,570			80,810			81,388			80,865

Dilutive potential shares from stock options and restricted stock awards, computed under the treasury stock method	—			—			—			1,007
Weighted average shares outstanding—diluted	81,570			80,810			81,388			81,872

Earnings (loss) per share before cumulative effect of change in accounting principle
Basic	$	(0.40	)	$	(0.09	)	$	(0.11	)	$	0.19
Diluted	$	(0.40	)	$	(0.09	)	$	(0.11	)	$	0.19

Earnings (loss) per share
Basic	$	(0.40	)	$	(0.09	)	$	(0.10	)	$	0.19
Diluted	$	(0.40	)	$	(0.09	)	$	(0.10	)	$	0.19

Anti-dilutive Securities

Diluted loss per share is the same as basic loss per share for the three and six month periods ended June 30, 2006 and the three month period ended June 30, 2005 as the impact of stock options and restricted stock awards would have been anti-dilutive. Had the Company generated net income for the three and six months ended June 30, 2006 and the three months ended June 30, 2005, the number of diluted shares outstanding would have been 83,155 thousand shares, 83,043 thousand shares and 81,493 thousand shares, respectively. Options to purchase 2.84 million shares of common stock were excluded from the dilutive earnings per share calculation for the six months ended June 30, 2005 because they were anti-dilutive. Excluded from the diluted earnings per share calculation were 37,397 shares of anti-dilutive unvested restricted stock for the six months ended June 30, 2005.

Dividends

On April 12, 2006, the Board of Directors (the “Board”) approved a dividend in the amount of $0.15 per share to stockholders of record as of July 10, 2006 to be paid on August 1, 2006. The total dividend to be paid is approximately $12.7 million.

Common Stock Repurchases

The Board has authorized the repurchase of our common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our stock based compensation programs. There were no common shares repurchased on the open market for the three and six months ended June 30, 2006, or for the three months ended June 30, 2005. There were 292,600 common shares repurchased on the open market for the six months ended June 30, 2005.

6. Share-Based Compensation

The Company has three stock-based compensation plans: the Company 1998 Stock Incentive Plan, as amended and restated (the “SI Plan”), the Company 1998 Executive Stock Award Plan, as amended and restated (the “ESA Plan”) and the Company 1998 Non-Employee Director Stock Award Plan, as amended and restated (the “NED Plan”) (collectively, the “Stock Plans”).

The SI Plan allows us to grant equity compensation awards, including, among other awards, non-qualified stock options and restricted stock as part of our overall compensation program to attract and retain key personnel and encourage a greater personal financial investment in the Company. A maximum of 30,000,000 shares of common stock are authorized for issuance under the SI Plan. The Stock Plans also allow us to grant non-qualified stock options and/or restricted stock to promote the long-term growth of the Company. A maximum of 3,750,000 and 1,200,000 shares of common stock are authorized for issuance under the ESA Plan and NED Plan, respectively. In addition, we make incentive payments under the Company 2003 Executive Incentive Plan, as amended and restated (the “EIP”) in the form of cash, stock options, restricted stock or a combination thereof. Incentive awards paid under the EIP in the form of stock options or restricted stock are issued out of shares reserved for issuance under the SI and ESA Plans. Generally, shares of common stock covered by terminated, surrendered or cancelled options, by forfeited restricted stock, or by the forfeiture of other awards that do not result in issuance of shares of common stock are again available for awards under the plan from which they were terminated, surrendered, cancelled or forfeited.

Under our Stock Plans, the exercise price of a stock option is equal to the market price of the stock on the date of grant. The maximum term of non-qualified options granted under the SI Plan is ten years and two days and the options generally vest in 33 1 ¤ 3 % increments on the second, third and fourth anniversaries of the grant date. The maximum term of non-qualified options granted under the ESA Plan and NED Plan is 11 years and the options generally vest 10% each year, beginning on the first anniversary of the grant date. Our Stock Plans include a Stock Option Restoration Program feature (the “SORP”) that allows, on the first trading day of August, an employee to pay the exercise price on vested in-the-money options by surrendering common stock of the Company that has been owned for at least six months. This feature also permits an employee exercising an option to be granted new options in an amount equal to the number of common shares used to satisfy both the exercise price and withholding taxes due upon exercise. New options are granted with an expiration date equal to that of the original option and vest six months after the grant date. The SORP, which facilitates ownership of our common stock by management and key employees, results in a net issuance of shares of common stock and fewer stock options outstanding. We receive a current income tax benefit for stock option exercises.

Prior to January 1, 2006, the Company used the intrinsic value method as described in Accounting Principles Board Opinion No. 25, “ Accounting for Stock Issued to Employees” (“APB 25”) to measure employee stock-based compensation as permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under this method, compensation expense related to stock options was measured as the difference between the exercise price and the fair value of the shares on the grant date, if any, and was recognized over the vesting period, which approximated the anticipated service period.

Restricted stock awards are valued on the date of grant, have no purchase price and, with the exception of those issued in the stock option tender in 2003, vest over four years in 33 1 ¤ 3% increments on the second, third and fourth anniversaries of the grant date. Under the Stock Plans, unvested shares of restricted stock may be forfeited upon the termination of employment with the Company or service on the Board, dependent upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of restricted stock have full stockholders’ rights during the term of restriction, including voting rights and the

rights to receive cash dividends. Restricted shares issued in the stock option tender offer were fully vested upon issuance, but remain subject to transfer restrictions that lapse in 33 1 ¤ 3% increments annually beginning March 14, 2005.

Had compensation cost for the Company’s stock-based compensation plans been determined using the fair value method as described in SFAS 123, the Company’s net income and earnings per share for the three and six months ended June 30, 2005 would have approximated the pro forma amounts indicated below:

	Three months ended			Six months ended
	June 30, 2005			June 30, 2005
	*(in thousands, except per share data)*

Net income (loss), as reported	$	(7,087	)	15,663
Add:
Total stock-based employee compensation expense included in reported net income (loss), net of related tax effects	910			910
Deduct:
Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects	(1,158		)	(1,346	)

Pro forma net income	$	(7,335	)	15,227

Basic earnings (loss) per share
As reported	$	(0.09	)	0.19
Pro forma	$	(0.09	)	0.19
Diluted earnings (loss) per share
As reported	$	(0.09	)	0.19
Pro forma	$	(0.09	)	0.19

The weighted-average fair value of each stock option included in the preceding pro forma amounts was estimated using a Black-Scholes option-pricing model and was amortized over the vesting period of the underlying options.

A summary of stock option activity and related information for the six months ended June 30, 2006 follows:

	Options		Weighted average exercise price
Outstanding, December 31, 2005	7,115,837		$	22.27
Granted	—		—
Exercised	(76,028	)	14.45
Terminated/Cancelled	(5,600	)	31.99
Outstanding, June 30, 2006	7,034,209		$	22.34
Exercisable, June 30, 2006	7,034,209		$	22.34

Following is a summary of options outstanding and exercisable at June 30, 2006:

Exercise Price Range	Number	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Aggregate Intrinsic Value
$ 5.95 to $9.99	74,207	0.54	$	7.81
$10.00 to $14.99	657,467	2.50	14.29
$15.00 to $19.99	3,498,574	2.71	17.19
$20.00 to $29.99	906,833	3.04	25.92
$30.00 to $34.19	1,897,128	2.84	33.50
	7,034,209	2.75	$	22.34	$	16,848,149

The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $0.7 million and $0.4 million, respectively.

No stock options have been granted in 2006. Option expense recorded in the first quarter 2006 related to 2005 SORP grants was $138 thousand and those grants are now fully amortized.

On April 25, 2005, the Compensation Committee of the Board approved the accelerated vesting of all then outstanding unvested options to purchase common stock of the Company previously awarded to employees, financial advisors, officers and directors. This resulted in the accelerated vesting of options to purchase 624,267 shares of common stock of the Company. Of these options, 447,497 were “in-the-money” options having an exercise price less than the then current market price of the Company’s common stock and a weighted average exercise price of $13.90 per share. In order to prevent unintended personal benefits to directors and executive officers with such options, the Board imposed restrictions on any shares received through the exercise of accelerated options held by those individuals. These restrictions prevent the sale of any stock obtained through exercise of an accelerated option prior to its original vesting date, other than the disposition of stock as payment for the exercise price of options and associated income taxes, if any.

The Board approved the accelerated vesting of these options based on the belief that it was in the best interest of the stockholders to reduce future compensation expense that the Company would otherwise be required to report in its statement of operations upon adoption of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment, (revised 2004)” (“SFAS 123R”) in the first quarter of 2006. We anticipate that holders of “in-the-money” accelerated options will remain employed with the Company throughout the original vesting term of such options, and therefore, no expense will be recorded for these options unless option holders are able to exercise an option that would have expired unexercisable pursuant to its original terms.

Effective January 1, 2006, the Company adopted SFAS 123R. The revised standard eliminated the intrinsic value method of accounting required under APB 25. The Company adopted SFAS 123R using the modified prospective transition method of adoption, which does not require restatement of prior periods. Under that transition method, compensation expense recognized in 2006 for all share-based awards granted after December 31, 2005 is based on the grant date fair value of the awards, net of estimated forfeitures.

In its computation of stock-based compensation expense under APB 25, the Company recognized actual forfeitures when they occurred. Under SFAS 123R, the Company is required to estimate forfeitures at the grant date. The Company recognized a cumulative effect of change in accounting principle of $503 thousand ($321 thousand after-tax) on January 1, 2006, the SFAS 123R adoption date, in order to adjust for expected forfeitures on all restricted awards made before December 31, 2005.

Prior to adopting SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of share-based awards as operating cash flows in the consolidated statement of cash flows.

SFAS 123R requires that the cash flows resulting from the tax benefits generated from tax deductions in excess of the compensation costs recognized for the share-based awards (excess tax benefits) be classified as financing cash flows. The excess tax benefit of $539 thousand recorded for the six months ended June 30, 2006, classified as a financing tax inflow, would have been classified as an operating cash flow prior to the Company’s adoption of SFAS 123R.

The Board approved grants of restricted shares of the Company’s Class A common stock in lieu of stock options beginning in 2002. As of June 30, 2006, a total of 3,132,349 shares of unvested restricted stock were outstanding. A summary of restricted share activity and related fair value for the six months ended June 30, 2006 follows:

	Shares		Grant Date Fair Value
Unvested at January 1, 2006	2,686,569		$	21.71
Granted	1,093,517		23.04
Vested	(615,745	)	22.62
Forfeited	(31,992	)	22.07
Unvested at June 30, 2006	3,132,349		$	21.99

The total fair value of shares vested during the six months ended June 30, 2006 and 2005 was $14.1 million and $4.2 million, respectively.

Consistent with the provisions of APB 25, the Company recorded the fair value of restricted stock grants and an offsetting deferred compensation amount within stockholders’ equity for unearned stock compensation cost. Under SFAS 123R guidance, the Company has reclassified its deferred compensation balance to additional paid-in capital on the consolidated balance sheet. As of June 30, 2006, there was $51.0 million of unamortized restricted stock compensation related to unvested restricted stock grants awarded under the Company’s Stock Plans. As of June 30, 2006, the remaining unamortized expense is expected to be recognized over a weighted average period of 2.71 years. For the three and six months ended June 30, 2006, share-based compensation totaled $5.8 million and $11.8 million, respectively (excluding the cumulative effect of change in accounting principle). Share-based compensation totaled $6.2 million and $9.0 million, respectively, for the three and six months ended June 30, 2005.

For restricted stock awards granted prior to the adoption of SFAS 123R, the Company will continue to recognize compensation expense over the full vesting period. Had compensation expense for restricted stock awards issued prior to January 1, 2006 been determined based on the date a participant first becomes eligible for retirement, the Company’s net income in the three month periods ended June 30, 2006 and 2005 would have decreased by $21 thousand and $313 thousand, respectively, and net income in the six month periods ended June 30, 2006 and 2005 would have increased by $327 thousand and decreased by $289 thousand, respectively.

7. Goodwill and Identifiable Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the tangible assets and identifiable intangible assets of an acquired business. Goodwill is not amortized, but instead is reviewed annually and when events or circumstances occur which indicate that goodwill might be impaired. Impairment of goodwill is tested at the Company’s reporting unit level. To determine fair value, our review process uses the income and market approaches. In performing the analysis, we use the best information available under the circumstances, including reasonable and supportable assumptions and projections. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.

Based on our annual review of goodwill in the second quarter of fiscal 2006, in accordance with SFAS No. 142, “ Goodwill and Other Intangible Assets ,” we recorded an impairment charge of $20.0 million related to our subsidiary, Austin Calvert & Flavin, Inc. (“ACF”). Factors that led to this conclusion included, but were not limited to, the negative impact of the continued decline in ACF’s asset under management and diminished involvement of ACF’s investment staff in mutual fund advisory responsibilities during the second quarter of 2006. Continued asset redemptions place significant risk on ACF’s ability to achieve and maintain profitability, and therefore have adversely impacted its earnings potential.

The goodwill impairment is not deductible for income tax purposes and represents a permanent book-tax difference. As a result, no tax benefit has been recognized for the goodwill impairment charge.

At June 30, 2006 and December 31, 2005, consolidated gross goodwill was $213.9 million and $233.9 million, respectively and consolidated accumulated amortization was $38.6 million and $38.6 million, respectively. ACF’s remaining unamortized goodwill balance at June 30, 2006 was $7.2 million.

Identifiable Intangible Assets

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

	June 30,		December 31,
	2006		2005
	*(in thousands)*
Unamortized intangible assets:
Mutual fund management advisory contracts	$	38,699	$	38,699
Mutual fund subadvisory management contracts	16,300		16,300

Total	$	54,999	$	54,999

8. Pension Plan and Postretirement Benefits Other Than Pension

We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”). Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final ten years of employment. We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees, including Waddell & Reed and Legend advisors. The medical plan is contributory with retiree contributions adjusted annually. The following table presents the components of net periodic benefit cost related to these plans.

						Other Postretirement							Other Postretirement
	Pension Benefits					Benefits			Pension Benefits				Benefits
	Three months ended June 30,					Three months ended June 30,			Six months ended June 30,				Six months ended June 30,
	2006			2005		2006		2005	2006		2005		2006		2005
	*(in thousands)*								*(in thousands)*
Components of net periodic benefit cost:
Service cost	$	1,238		1,434		75		105	2,723		2,799		150		211
Interest cost	1,158			1,242		52		77	2,374		2,412		104		153
Expected return on plan assets	(1,405		)	(1,218	)	—		—	(2,811	)	(2,604	)	—		—
Actuarial loss (gain) amortization	163			413		(9	)	22	417		717		(19	)	44
Prior service costs amortization	109			109		5		6	218		218		12		12
Transition obligation amortization	1			1		—		—	3		2		—		—

Total	$	1,264		1,981		123		210	2,924		3,544		247		420

We anticipate that our contribution to the Pension Plan for 2006 will range from $0 to $7 million. During the six month period ended June 30, 2006, we did not make any contribution to the Pension Plan.

9. Contingencies

The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business. Our pending legal and regulatory actions include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.

SEC/New York Attorney General/Kansas Securities Commission

On July 10, 2006, three of the Company’s subsidiaries, Waddell & Reed Investment Management Company, Waddell & Reed Services Company and Waddell & Reed, Inc. (collectively, the “Respondents”), submitted an Offer of Settlement to the SEC (the “SEC Offer”) to settle anticipated public administrative and cease-and-desist proceedings, which the SEC approved and accepted on July 24, 2006. The Respondents also reached concurrent settlement agreements with the New York Attorney General (the “NYAG”) and the Kansas Securities Commission (the “KS Commission”) regarding market timing allegations and have agreed, without admitting or denying any of the regulators’ findings, to consent to the entry of an Order Instituting Administrative Cease and Desist Proceedings by the SEC (the “SEC Order”), an Assurance of Discontinuance with the NYAG (the “AOD”) and a Consent Order with the KS Commission (collectively, the “Orders”) . Capitalized terms used but not defined herein shall have the meaning given them in the applicable Order.

Pursuant to the Orders, the Respondents have agreed to/that:

· Pay a $10 million civil penalty and $40 million in disgorgement to the SEC within 20 days of the entry of the SEC Order. The entire $50 million will be used to create an investor fund, as authorized under the Sarbanes-Oxley Act of 2002. Amounts paid as a civil penalty shall be treated as penalties paid to the government for all purposes, including tax purposes. Additionally, the Respondents will not (i) seek or accept, directly or indirectly, reimbursement or indemnification from any source, including, but not limited to, any payment made to the Respondents through any insurance policy, or (ii) claim, assert or apply for a tax deduction or tax credit for such penalty amounts;

· Retain, within 30 days of the entry of the SEC Order, the services of an Independent Distribution Consultant not unacceptable to the SEC Staff and the independent directors (the “Independent Directors”) of certain mutual funds (the “Funds”) to develop a distribution plan for the distribution of the disgorgement and penalty, according to a methodology acceptable to the SEC Staff and the Independent Directors. The Orders set forth certain timing requirements for the resolution of any determinations or calculations under such plan considered inappropriate by the Respondents and for the submission of a final distribution plan to the SEC;

· Maintain a Code of Ethics Oversight Committee, comprised of senior executives of each Respondent’s operating businesses, having responsibility for all matters relating to issues arising under such Respondent’s Code of Ethics and reporting, at least quarterly, to the Audit Committee (the “Audit Committee”) of each Respondent and each Funds’ Board of Directors;

· Maintain an Internal Compliance Controls Committee, to be chaired by each Respondent’s Chief Compliance Officer and comprised of senior executives of each Respondent’s operating businesses, having responsibility for all matters relating to issues arising with respect to such Respondent’s internal compliance matters and reporting to the Audit Committee of each Respondent and each Funds’ Board of Directors at least quarterly;

· Require its Chief Compliance Officer to review compliance with policies and procedures established to address compliance issues under the federal securities laws and report (i) any violations to the Internal Compliance Controls Committee, and (ii) at least quarterly, any breach of fiduciary duty and/or the federal securities laws to the Independent Directors;

· Establish (i) an Ethics Officer for each Respondent to whom employees may relay concerns, if any, regarding ethics matters, conflicts of interest or questionable practices, which shall be presented to the Independent Directors, and (ii) procedures, which shall be presented for review and approval by the Independent Directors, to investigate such matters;

· Retain, within 30 days of the entry of the SEC Order, an Independent Compliance Consultant for each Respondent (collectively, the “Independent Compliance Consultant”), not unacceptable to the SEC staff and a majority of the Independent Directors, to conduct a comprehensive review of supervisory, compliance and other policies and procedures designed to detect and prevent breaches of fiduciary duty, the Code of Ethics and federal securities laws, generally including, as applicable, market timing controls, pricing practices, utilization of short-term trading and controls for deterring such, and mutual fund sales practices. The Independent Compliance Consultant shall conclude reviews of each Respondent within 120 days after the entry of the Orders and submit its reports, with recommendations, to the Funds’ Boards of Directors, the SEC staff and each Respondent, who may then adopt such recommendations or advise, within a limited time frame, of any recommendations considered unnecessary or inappropriate;

· Submit to the SEC, no later than 24 months after entry of the SEC Order, the written certification of each Respondent’s chief executive officer that the respective Respondent has fully adopted and complied in all material respects with the undertakings set forth in the SEC Order and the recommendations of the Independent Compliance Consultant;

· No later than October 1, 2006, establish reduced Net Management Fee Rates for certain mutual funds, which will result in a reduction of $5 million per year (for a period of five years) in fees that would otherwise have been paid by such funds;

· Disclose via website, within 120 days of the Effective Date of the AOD, a calculator that will enable an investor to calculate (i) the actual fees and costs on a fund-by-fund basis charged to them based upon their most recent quarterly closing balance (the “Actual Fees”), and (ii) the fees and costs that would be charged in a hypothetical investment of $10,000 held for the next 10 years and the impact of such fees and costs of fund returns for each year and cumulatively, assuming (x) a 5% return for each year and continuation of the reduced Net Management Fee Rates for disclosures made through October 31, 2011, and (y) a 5% return each year and the then-current Net Management Fee Rates for disclosures made after October 31, 2011 (the “Hypothetical Fees”);

· Include in each investor’s periodic account statement(s), beginning December 31, 2006, or as soon as practicable but no later than March 31, 2007, the Actual and Hypothetical Fees;

· Disclose, subject to SEC approval, in the applicable prospectus or amendment thereto a summary of the Hypothetical Fees;

· No payments made or costs incurred by the Respondents will be borne by fund shareholders and none of the Respondents or any affiliates shall assess any fee or charge to any fund shareholders to defray, recoup or reimburse any such payments or costs, including the reduction in management fees; within 15 days of the end of fiscal years 2006-2011, each Respondent’s president or chief executive officer shall certify to the NYAG as to compliance in all material respects therewith; and

· Pay a $2 million penalty to be used for investor education in the State of Kansas.

The AOD also addresses the appointment or engagement of certain officers and consultants to perform certain duties and responsibilities, and conditions which must be met in order for the Respondents to serve as an investment advisor to the Funds. Such conditions include, but are not limited to, the following: (i) that the Funds’ Chairman of the Board be independent, (ii) at least 75% of the Funds’ Board of Directors be “disinterested” and Independent Members, (iii) a Senior Officer or Independent Compliance Consultant make certain acknowledgements, be provided requisite hiring authority and assigned certain duties and responsibilities, and (iv) the reasonableness of proposed management fees be determined using an annual independent written evaluation prepared by the Senior Officer or Independent Fee Consultant, taking into consideration certain assumptions, a summary of such evaluation to be publicly disclosed to fund shareholders.

See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

These settlements resolve outstanding investigations and conclude negotiations with these authorities regarding market timing allegations.

Williams Excessive Fee Litigation

See Note 17 of the Notes to the Consolidated Financial Statements of the Company’s 2005 Form 10-K and Note 9 of the Notes to the Unaudited Consolidated Financial Statements of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 for the background, description and

discussion of this matter. On May 30, 2006, the investment advisor and underwriter subsidiaries of the Company for the Ivy Funds were dismissed from the case with prejudice. The investment advisor and underwriter subsidiaries of the Company for the Advisors Funds are still defendants in the case. Trial is currently set to begin on October 24, 2006.

In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. At this stage of the litigation, the Company is unable to estimate the expense or exposure, if any, that it may represent. The ultimate resolution of this matter, or an adverse determination against the Company, could have a material adverse impact on the financial position and results of operations of the Company. However, this possible impact is unknown and not reasonably determinable; therefore, no liability has been recorded in the consolidated financial statements.

Waddell & Reed Financial, Inc. vs. Torchmark Corporation

See Note 17 of the Notes to the Consolidated Financial Statements of the 2005 Form 10-K and Note 9 of the Notes to the Unaudited Consolidated Financial Statements of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006 for the background, description and discussion of this matter.

During the second quarter of 2006, the arbitration in this matter was concluded. Post-hearing briefs have been submitted. It is anticipated that the arbitration panel will render a ruling within the next 45 days. Torchmark contends that it is owed approximately $8 million, including interest. The Company contends that it is not obligated to pay the $8 million and, in fact, is owed several million dollars by Torchmark representing refunds received by Torchmark from the State of Kansas.

In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. The ultimate resolution of the matter, or an adverse determination against the Company could have a material adverse impact on the financial position and results of operations of the Company.

NASD Enforcement Action

On May 30, 2006, restitution of approximately $2.3 million was paid by the Company to variable annuity clients. Of this $2.3 million, approximately $920 thousand was to be deposited back into the clients’ existing variable annuities. The remainder was remitted directly to the annuity holders. This final payment resolves the matter.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. All statements, other than statements of historical fact included in this Form 10-Q regarding our financial position, business strategy and other plans and objectives for future operations are forward-looking statements. All forward-looking statements included in this Form 10-Q are based on information available to us on the date hereof, and we assume no obligation to update such forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct or that we will take any actions that may presently be planned and neither us nor any other person will be responsible for the accuracy or completeness of any such forward-looking statements. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2005, which include, without limitation, the adverse effect from a decline in securities markets or a decline in our products’ performance, regulatory settlements, reduction of investment management fees, failure to renew investment management agreements, adverse results of litigation and/or arbitration, acts of terrorism and/or war, competition, changes in government regulation, and availability and terms of capital. Should one or more of these risks materialize or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. All subsequent written or oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by such factors.

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited financial statements and notes thereto in our 2005 Annual Report on Form 10-K, as well as a more detailed explanation of risk factors at the end of this Item 2 under the heading entitled “Forward Looking Information.”

Overview

Our earnings and cash flows are heavily dependent on financial market conditions. Significant increases or decreases in the various securities markets, particularly United States equity markets, can have a material impact on our results of operations, financial condition and cash flows. We derive our revenues primarily from providing investment management, distribution and administrative services to the Funds and institutional and separately managed accounts. Investment management fees, a substantial source of revenues, are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Underwriting and distribution revenues, another substantial source of revenues, consist of commissions derived from sales of investment and insurance products, distribution fees on certain variable products, and fees earned on fee-based asset allocation products, as well as advisory services. The products sold have various commission structures and the revenues received from product sales vary based on the type and amount sold. Our products are distributed through either our sales force of registered financial advisors (the “Advisors channel”) or third-party distribution methods such as other broker-dealers and other registered investment advisors (including the retirement advisors of the Legend group of subsidiaries (“Legend”)) (the “Wholesale channel”). Our institutional efforts include defined benefit plans, pension plans, endowments, subadvisory relationships and high net worth clients (the “Institutional channel”). Rule 12b-1 service and distribution fees earned for servicing and/or distributing certain mutual fund shares are based upon a percentage of assets and fluctuate based on sales, redemptions and financial market conditions. Other service fees include transfer agency fees, custodian fees for retirement plan accounts and portfolio accounting.

Highlights for the current quarter:

· Overall gross sales increased 89% to $2.2 billion compared to the second quarter of 2005.

· Total assets under management increased $5.9 billion compared to the second quarter of 2005.

· Shareholder accounts grew to 2.83 million at quarter-end.

· Settlement with the SEC and state regulators, resulting in a pre-tax charge of $55.0 million.

· Goodwill impairment of $20.0 million related to our subsidiary, ACF.

Recent Accounting Developments

In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS 123R, which the Company adopted effective January 1, 2006. The revised standard eliminated the intrinsic value method of accounting required under APB 25 and requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company adopted SFAS 123R using the modified prospective transition method of adoption, which does not require restatement of prior periods. Under that transition method, compensation expense recognized in 2006, for all share-based payments granted after December 31, 2005, is based on the grant date fair value of the stock grants less estimated forfeitures.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006. We are in the process of evaluating the impact of the adoption of this interpretation on our results of operations and financial condition.

Results of Operations — Three and Six Months Ended June 30, 2006 as Compared with Three and Six Months Ended June 30, 2005

Net Income/Loss

Net loss for the second quarter of 2006 was $33.0 million, or $0.40 per diluted share, compared to a net loss of $7.1 million, or $0.09 per diluted share, for the same period in 2005. The net loss in the second quarter of 2006 is primarily attributable to the settlement with the SEC, the New York Attorney General and the Kansas Securities Commission related to market timing investigations which resulted in a charge of $55 million, $12 million of which represented non-deductible penalties. The settlement with the SEC totaled $50 million, to be distributed to the certain Funds pursuant to a plan to be developed by an independent consultant and approved by the Funds’ boards of directors. We are also required to engage independent consultants to develop the distribution plan and review supervisory, compliance and other policies and procedures, at a projected cost of $3 million accrued as part of the charge. We agreed to a $2 million penalty to be designated for investor education in the State of Kansas, and to reduce management fees by $5 million per year for each of the next five years in the Advisors Funds and the Target Funds. The fee concessions are separate from the amounts to the SEC and the Kansas Securities Commission and are not part of the $55 million charge. Net loss was also impacted by a non-deductible goodwill impairment charge of $20 million related to ACF. Net loss in the prior year’s second quarter was impacted by legal and regulatory settlements of $35.0 million, $6.3 million in costs related to the separation of employment of our former chief executive officer, and severance and restructuring costs in our Advisors channel.

	For the three months ended
	June 30, 2006			June 30, 2005
	*(in thousands)*
Net Loss	$	(33,022	)	(7,087	)
Loss per share:
Basic	$	(.40	)	(.09	)
Diluted	$	(.40	)	(.09	)

Net loss for the six months ended June 30, 2006 was $8.4 million, or $0.10 per diluted share, compared to net income of $15.7 million, or $0.19 per diluted share, for the six months ended June 30, 2005. In addition to the regulatory settlement and goodwill impairment charges totaling $75 million mentioned above, year-to-date results in 2006 were negatively impacted by employee separation costs recorded in the first quarter of $1.9 million at ACF in response to performance issues and related loss of assets under management. Net income in the prior year’s comparable period was impacted by charges of $41.3 million as previously discussed.

	For the six months ended
	June 30, 2006			June 30, 2005
	*(in thousands)*
Net Income (Loss)	$	(8,430	)	15,663
Earnings (Loss) per share:
Basic	$	(.10	)	.19
Diluted	$	(.10	)	.19

In connection with the adoption of SFAS 123R in the first quarter 2006, we recognized a cumulative effect of change in accounting principle. In prior periods, we chose to record forfeitures of restricted stock when they occurred rather than estimate their impact on the date of grant. Upon implementation of SFAS 123R, we recognized expected forfeitures on awards granted prior thereto as an adjustment to compensation cost. The cumulative effect of this adjustment, net of tax, was income of $0.3 million.

Total Revenues

Total revenues increased 20% to $181.3 million and 18% to $354.4 million for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005. Increases in both periods can be attributed to growth in average assets under management of 17% and 16% for the three and six months ended June 30, 2006, respectively, and an increase in gross sales of 89% and 69% for the three and six months ended June 30, 2006, respectively, compared to the same periods in the prior year.

	For the three months ended
	June 30, 2006		June 30, 2005	Variance
	*(in thousands, except percentage data)*
Investment management fees	$	78,190	64,533	21	%
Underwriting and distribution fees	80,494		65,833	22	%
Shareholder service fees	22,627		20,320	11	%
Total revenues	$	181,311	150,686	20	%

	For the six months ended
	June 30, 2006		June 30, 2005	Variance
	*(in thousands, except percentage data)*
Investment management fees	$	152,239	128,115	19	%
Underwriting and distribution fees	157,506		133,178	18	%
Shareholder service fees	44,636		40,130	11	%
Total revenues	$	354,381	301,423	18	%

Investment Management Fee Revenues

Investment management fee revenues were $78.2 million for the quarter ended June 30, 2006, representing an increase of $13.7 million, or 21%, from last year’s second quarter. Total average assets under management for the current quarter were $44.9 billion compared to $38.2 billion for the second quarter of 2005. For the six months ended June 30, 2006, investment management fee revenues were $152.2 million, an increase of $24.1 million, or 19%, from the comparable period in 2005. Total average assets under management for the first six months of 2006 were $44.3 billion compared to $38.3 billion for the same period in 2005.

Revenues from investment management services provided to our retail mutual funds, which are distributed through the Advisors and the Wholesale channels, increased $13.7 million, or 26%, for the quarter ended June 30, 2006 compared to the same quarter in the prior year, while the related retail average assets increased 24% to $37.1 billion. For the six months ended June 30, 2006, revenues from investment management services provided to our retail mutual funds increased $25.1 million, or 24%, compared to the first six months of 2005, while the related retail average assets increased 22% to $36.4 billion. Investment management fee revenues increased more than the related retail average assets due to significant sales growth in Ivy specialty funds, which tend to have higher management fee rates. Retail sales in the second quarter of 2006 were $2.0 billion, a 90% increase over sales in the second quarter of 2005, and were $4.0 billion for the six months ended June 30, 2006, a 78% increase over the same period in 2005.

Institutional and separate account revenues remained level at $11.0 million for the second quarter of both 2006 and 2005. Reductions in management fee revenues of $800 thousand earned by ACF for the second quarter of 2006 compared to the same quarter in 2005, based on a decline in average assets of 45% over the same period, were offset by increases in management fee revenues earned by other components of the Institutional channel. Year-to-date institutional and separate account revenues decreased 5% to $21.1

million in 2006 compared to the same period in 2005 primarily due to ACF’s reduced management fee revenues.

The following tables provide information regarding the composition of our average assets under management by asset class and distribution channel.

	Second Quarter 2006
	Advisors		Wholesale	Institutional	Total
	*(in millions)*

Asset Class:
Equity	$	23,870	8,271	7,147	$	39,288
Fixed Income	3,855		334	614	4,803
Money Market	735		63	—	798
Total	$	28,460	8,668	7,761	$	44,889

	Second Quarter 2005
	Advisors		Wholesale	Institutional	Total
	*(in millions)*

Asset Class:
Equity	$	20,252	4,762	7,606	$	32,620
Fixed Income	3,933		313	621	4,867
Money Market	670		56	—	726
Total	$	24,855	5,131	8,227	$	38,213

	Year to Date 2006
	Advisors		Wholesale	Institutional	Total
	*(in millions)*

Asset Class:
Equity	$	23,719	7,723	7,269	$	38,711
Fixed Income	3,867		338	614	4,819
Money Market	724		59	—	783
Total	$	28,310	8,120	7,883	$	44,313

	Year to Date 2005
	Advisors		Wholesale	Institutional	Total
	*(in millions)*

Asset Class:
Equity	$	20,303	4,622	7,737	$	32,662
Fixed Income	3,962		318	630	4,910
Money Market	682		55	—	737
Total	$	24,947	4,995	8,367	$	38,309

Change in Assets Under Management

The following tables summarize changes in our assets under management by distribution channel. All sales are net of commissions. The activity includes all Funds and institutional business, including money market funds and net asset value accounts for which we receive no commissions.

	Second Quarter 2006
	Advisors			Wholesale		Institutional		Total
	*(in millions)*
Beginning Assets	$	28,630		8,227		7,995		$	44,852

Sales (net of commissions)	847			1,175		222		2,244
Redemptions	(810		)	(505	)	(369	)	(1,684		)
Net Sales	37			670		(147	)	560

Net Exchanges	(40		)	38		—		(2		)
Reinvested Dividends & Capital Gains	112			25		30		167
Net Flows	109			733		(117	)	725

Market Depreciation	(378		)	(8	)	(190	)	(576		)
Ending Assets	$	28,361		8,952		7,688		$	45,001

	Second Quarter 2005
	Advisors			Wholesale		Institutional		Total
	*(in millions)*
Beginning Assets	$	24,921		5,022		8,242		$	38,185

Sales (net of commissions)	560			503		123		1,186
Redemptions	(824		)	(286	)	(349	)	(1,459		)
Net Sales	(264		)	217		(226	)	(273		)

Net Exchanges	(14		)	11		—		(3		)
Reinvested Dividends & Capital Gains	53			16		30		99
Net Flows	(225		)	244		(196	)	(177		)

Market Appreciation	696			101		269		1,066
Ending Assets	$	25,392		5,367		8,315		$	39,074

	Year to Date 2006
	Advisors			Wholesale		Institutional		Total
	*(in millions)*
Beginning Assets	$	27,188		6,729		7,946		$	41,863

Sales (net of commissions)	1,690			2,326		394		4,410
Redemptions	(1,659		)	(853	)	(819	)	(3,331		)
Net Sales	31			1,473		(425	)	1,079

Net Exchanges	(104		)	99		—		(5		)
Reinvested Dividends & Capital Gains	160			35		59		254
Net Flows	87			1,607		(366	)	1,328

Market Appreciation	1,086			617		107		1,810
Ending Assets	$	28,361		8,953		7,687		$	45,001

	Year to Date 2005
	Advisors			Wholesale		Institutional		Total
	*(in millions)*
Beginning Assets	$	25,297		4,702		8,659		$	38,658

Sales (net of commissions)	1,142			1,114		361		2,617
Redemptions	(1,558		)	(588	)	(855	)	(3,001		)
Net Sales	(416		)	526		(494	)	(384		)

Net Exchanges	(31		)	25		—		(6		)
Reinvested Dividends & Capital Gains	92			17		63		172
Net Flows	(355		)	568		(431	)	(218		)

Market Appreciation	450			97		87		634
Ending Assets	$	25,392		5,367		8,315		$	39,074

The second quarter of 2006 yielded overall gross sales of $2.2 billion, an increase of $1.1 billion, or 89%, over the same period in 2005. Gross sales of the Advisors, Wholesale and Institutional channels improved 51%, 134% and 80% to $847 million, $1.2 billion and $222 million, respectively, over the same quarter last year. Gross sales of $4.4 billion were recorded for the six months ended June 30, 2006, an increase of $1.8 billion, or 69%, over the same period in 2005. Gross sales of the Advisors, Wholesale and Institutional channels improved 48%, 109% and 9% to $1.7 billion, $2.3 billion and $394 million, respectively, over the first six months of last year. Gross sales of subadvised funds were $751 million and $1.6 billion for the three and six months ended June 30, 2006.

Long-term redemption rates (which exclude money market fund redemptions) in the Advisors channel improved to 8.9% in this year’s second quarter and 9.4% year-to-date, compared to 10.6% in the second quarter of 2005 and 10.1% for the first six months of 2005. In the Wholesale channel, long-term redemption rates were higher in this year’s second quarter, at 23.1%, compared to 21.8% in the same period last year. The second quarter rate of 23.1% increased from the first quarter 2006 rate of 18.3%, primarily due to higher redemptions in one of our specialty funds. For the six months ended June 30, 2006, however, the Wholesale channel’s long-term redemption rates decreased to 20.8% compared to 23.2% for the comparable

period in 2005. During the second quarter of 2006, the long-term redemption rate for our institutional business increased to 19.1% from 17.0% compared to the second quarter of 2005 and increased slightly, from 20.6% to 21.0%, for the six month period ended June 30, 2006 compared to 2005. These redemption rate increases in our institutional business were primarily due to ACF.

Underwriting and Distribution Fee Revenues and Expenses

The following tables illustrate our underwriting and distribution fee revenues and expenses segregated by the method of distribution within the respective Advisors or Wholesale channel:

	Second Quarter 2006
				Wholesale
	Advisors			Third-Party		Legend	Total
	*(in thousands)*
Revenue	$	57,724		9,468		13,302	$	80,494
Expenses
Direct	40,736			12,708		8,992	62,436
Indirect	21,523			4,917		2,669	29,109
	62,259			17,625		11,661	91,545
Net Underwriting & Distribution	($4,535		)	(8,157	)	1,641	($11,051		)

	Second Quarter 2005
				Wholesale
	Advisors			Third-Party		Legend	Total
	*(in thousands)*
Revenue	$	50,063		4,501		11,269	$	65,833
Expenses
Direct	33,658			6,887		7,762	48,307
Indirect	18,509			3,603		3,008	25,120
	52,167			10,490		10,770	73,427
Net Underwriting & Distribution	($2,104		)	(5,989	)	499	($7,594		)

	Year to Date 2006
				Wholesale
	Advisors			Third-Party		Legend	Total
	*(in thousands)*
Revenue	$	114,004		17,377		26,125	$	157,506
Expenses
Direct	79,204			23,799		17,646	120,649
Indirect	41,389			8,749		5,512	55,650
	120,593			32,548		23,158	176,299
Net Underwriting & Distribution	($6,589		)	(15,171	)	2,967	($18,793		)

	Year to Date 2005
				Wholesale
	Advisors			Third-Party		Legend	Total
	*(in thousands)*
Revenue	$	102,268		8,678		22,232	$	133,178
Expenses
Direct	69,577			13,572		15,050	98,199
Indirect	37,003			6,786		5,728	49,517
	106,580			20,358		20,778	147,716
Net Underwriting & Distribution	($4,312		)	(11,680	)	1,454	($14,538		)

Distribution Margin

The Advisors channel distribution margin, which excludes our wholesale efforts and better reflects the activity of our sales force only, was -7.9% in this year’s second quarter compared to - 4.2% for last year’s comparative period due primarily to an increase in indirect expenses for costs associated with additional computer services to support the Advisors’ sales efforts and an increase in sales convention expense .

Advisors Channel

Underwriting and distribution revenues earned in our Advisors channel in this year’s second quarter increased $7.7 million, or 15%, from the comparative period last year to $57.7 million mainly due to:

· higher Rule 12b-1 asset based service and distribution fees of $4.1 million; and

· increased commissions on front-load products of $4.0 million on a 39% increase in related sales and a product mix shift toward products with lower sales load rates.

Underwriting and distribution revenues earned in our Advisors channel for the six months ended June 30, 2006 increased $11.7 million, or 11%, from the comparative period last year to $114.0 million mainly due to:

· increased commissions on front-load products of $8.2 million on a 36% increase in related sales and a product mix shift toward products with lower sales load rates; and

· higher Rule 12b-1 asset based service and distribution fees of $3.8 million. This was due to an increase of $6.7 million in fees as average assets under management increased 13% over the first six months of the prior year, offset by a $2.9 million true-up adjustment to increase Rule 12b-1 revenues recorded in the first quarter of 2005.

The following tables illustrate commissionable investment product sales by our financial advisors, including sales of our InvestEd portfolios. Sales are shown gross of commissions and exclude sales by Legend retirement advisors, money market funds, other mutual funds, insurance products, and mutual funds sold at net asset value for which we receive no commission.

				Variance
	2Q 2006		2Q 2005	Amount		Percentage
	*(in millions, except percentage data)*

Front-end load sales (Class A)	$	464	316	148		47	%
Variable annuity products	84		79	5		6	%
Front-load product total	548		395	153		39	%

Deferred-load sales (Class B & C)	51		56	(5	)	-9	%
Allocation products	16		6	10		167	%
Total advisor sales	$	615	457	158		35	%

				Variance
	YTD 2006		YTD 2005	Amount		Percentage
	*(in millions, except percentage data)*

Front-end load sales (Class A)	$	936	639	297		46	%
Variable annuity products	147		158	(11	)	-7	%
Front-load product total	1,083		797	286		36	%

Deferred-load sales (Class B & C)	107		114	(7	)	-6	%
Allocation products	29		15	14		93	%
Total advisor sales	$	1,219	926	293		32	%

Total underwriting and distribution expenses in our Advisors channel increased $10.1 million, or 19%, to $62.3 million for the second quarter of 2006.

· Direct expenses increased $7.1 million during the current quarter compared to last year’s second quarter mainly due to:

· higher point-of-sale commissions of $3.9 million resulting from increased front-load product sales; and

· higher Rule 12b-1 asset based service and distribution fees of $3.1 million.

· Direct expenses increased $9.6 million during the six months ended June 30, 2006 compared to the same period in the prior year mainly due to:

· higher point-of-sale commissions of $7.1 million resulting from increased front-load product sales; and

· higher Rule 12b-1 asset based service and distribution fees of $2.1 million. This was due to an increase of $5.0 million in expenses for servicing and distributing select share classes in line with the increase to average assets under management, offset by a $2.9 million true-up adjustment in the first quarter of 2005 to increase Rule 12b-1 expenses.

· Indirect expenses increased $3.0 million, or 16%, from last year’s second quarter to $21.5 million, due to costs associated with additional computer services instituted to support the Advisors’ sales efforts of over $2.0 million and an increase in sales convention expense of $0.8 million. Indirect expenses increased $4.4 million, or 12%, for the six months ended June 30, 2006 compared to the same period in 2005 due to additional computer services as mentioned above of $2.5 million and an increase in sales convention expense of $1.3 million.

Wholesale Channel

Underwriting and distribution revenues earned in the Wholesale channel increased by $7.0 million in the current quarter compared to the second quarter of 2005 mainly due to:

· increased third-party revenue of $5.0 million earned primarily from higher Rule 12b-1 asset based service and distribution fees due to an increase in average assets under management; and

· higher point-of-sale commissions and Rule 12b-1 service fee revenue of $2.0 million earned by Legend during the second quarter of 2006.

Underwriting and distribution revenues earned in the Wholesale channel increased by $12.6 million for the six months ended June 30, 2006 compared to the same period in 2005 mainly due to:

· increased third-party revenue of $8.7 million earned primarily from higher Rule 12b-1 asset based service and distribution fees due to an increase in average assets under management; and

· higher point-of-sale commissions and Rule 12b-1 service fee revenue of $3.9 million earned by Legend during the current year period.

Underwriting and distribution expenses in the Wholesale channel increased by $8.0 million in the second quarter of 2006 compared to last year’s second quarter. Direct expenses accounted for $7.1 million of the increase. The increase in direct expenses was the result of the following:

· higher asset based expenses for Rule 12b-1 service and distribution and point of sale commissions of $3.2 million;

· higher deferred acquisition amortization expense of $1.1 million;

· higher commissions paid by Legend of $1.3 million due to an increase in assets under administration; and

· higher commissions paid to wholesalers of $1.4 million due to increased sales volume.

Indirect expenses in the Wholesale channel increased $0.9 million in the second quarter of 2006 compared to 2005 due to additional headcount and higher wholesaling support costs.

Underwriting and distribution expenses in the Wholesale channel increased by $14.6 million for the first six months of 2006 compared to the first six months of last year. Direct expenses accounted for $12.8 million of the increase. The increases in direct expenses resulted from the following:

· higher asset based expenses for Rule 12b-1 service and distribution fees and point of sale commissions of $5.8 million;

· higher deferred acquisition amortization expense of $2.1 million;

· higher commissions paid by Legend of $2.7 million due to an increase in assets under administration; and

· higher commissions paid to wholesalers of $2.3 million due to increased sales volume.

Indirect expenses in the Wholesale channel increased $1.8 million for the first six months of 2006 compared to 2005 due to additional headcount and higher wholesaling support costs.

Shareholder Service Fee Revenue

Shareholder service fee revenues for the quarter from transfer agency, custodian and accounting services were $22.6 million, an increase of $2.3 million, or 11%, from the second quarter of 2005. The average number of shareholder accounts, one of the primary drivers of service fee revenue, also increased 11% to 2.79 million at June 30, 2006, compared with 2.51 million at June 30, 2005. Shareholder service fee revenues for the six months ended June 30, 2006 were $44.6 million, an increase of $4.5 million, or 11%, from the comparable period in 2005. The average number of shareholder accounts for the six month period increased 10% to 2.74 million at June 30, 2006, compared with 2.48 million at June 30, 2005.

Compensation and Related Costs

On April 2, 2006, we granted 1,057,900 shares of restricted stock with a fair market value of $23.10 per share under the Company 1998 Stock Incentive Plan, as amended and restated, and the Company 1998 Executive Stock Award Plan, as amended and restated. The value of those shares, aggregating $24.4 million, will be amortized to expense over the four year vesting period.

In the second quarter of 2006, compensation and related costs increased by $1.0 million, or 4%, to $27.1 million compared to the same period in 2005. The second quarter of 2005 included $2.7 million in charges associated with the resignation of our former CEO. Excluding these charges, compensation and related costs increased $3.7 million. Share-based compensation accounted for $2.3 million of the increase because of higher amortization expense associated with our annual grant of restricted stock. The remaining increase was due to increases in salaries, wages and related payroll taxes of $700 thousand and higher bonus accruals of approximately $1.0 million.

In the first six months of 2006, compensation and related costs increased by $7.9 million, or 16%, to $56.5 million compared to the same period in 2005. During 2006, we incurred charges of $1.9 million (which included $1.5 million of share-based compensation expense) at ACF in response to performance issues and related loss of assets under management. Additionally, the six month period ended June 30, 2005 included $2.7 million in special charges as discussed above. Excluding these charges, compensation and related costs increased $8.7 million. S hare-based compensation accounted for $3.6 million of this increase because of higher amortization expense associated with our annual grant of restricted stock. Additionally, salaries, wages and related payroll taxes increased $2.5 million. Other increases in compensation and related costs were due to headcount and salary increases and higher accruals for incentive compensation. Average employee headcount increased 3.7%.

Share-based compensation, previously reported as a separate line item in the consolidated statement of operations, has been included in compensation expense for both periods presented.

Subadvisory Fees

Subadvisory fees represent fees paid to other asset managers for providing advisory services for certain Ivy and Target mutual fund portfolios. These subadvisory relationships were in place when we acquired certain businesses, and are with asset managers who specialize in certain investment styles not offered by the Company. Subadvisory fees for the three and six months ended June 30, 2006 were $7.6 million and $14.1 million, respectively, representing increases of $3.5 million and $6.5 million, respectively, from last year’s comparable periods. The increases are due to an increase from $3.7 billion to $7.0 billion in the average assets under management of subadvised funds from the second quarter of 2005 to the second quarter of 2006, and an increase from $3.4 billion to $6.6 billion from the first six months of 2005 to the same period in 2006.

General and Administrative Costs

General and administrative expenses increased by $15.1 million to $65.0 million for the second quarter of 2006 compared to the same quarter in the prior year and increased $15.1 million to $75.2 million for the six months ended June 30, 2006 compared to the same period in the prior year. The three and six month periods in both years included the following charges: $55.0 million in 2006 for the settlement with the SEC and state regulators, and $38.2 million in 2005 for the settlement of outstanding legal matters with Torchmark Corporation for various actions and the NASD and a consortium of states relating to variable annuity sales practices. Excluding these charges, general and administrative expenses decreased $1.7 million for the three and six months ended June 30, 2006 compared to the prior year. The decrease is due to lower legal costs and the use of more IT resources on distribution projects, which are included as part of underwriting and distribution expense.

Investment and Other Income, Interest Expense and Taxes

Investment and other income increased $700 thousand from last year’s second quarter to $2.1 million for the second quarter of 2006. The increase was due to increased earnings from higher average balances and interest rates on commercial paper holdings of $1.0 million, offset by a decrease in mutual fund trading portfolio returns of approximately $400 thousand. Investment and Other Income increased $1.6 million to $4.4 million for the six months ended June 30, 2006 compared to the same period in the prior year. The increase was due to increased earnings from higher average balances and interest rates on commercial paper holdings of $2.1 million and gains from the sale of available-for-sale securities of $1.0 million. Offsetting these increases was a decrease in mutual fund trading portfolio returns of approximately $950 thousand and a $750 thousand write-down for other-than-temporary decline in the market value of a municipal bond investment.

Interest expense decreased $700 thousand to $3.0 million compared to last year’s second quarter. The majority of the decrease was due to interest incurred on short-term borrowings in the prior year. There have been no outstanding short-term borrowings during the current year. We also refinanced $200 million in senior notes that matured in January 2006 (described below) at a rate of 5.6% and therefore accrued interest at a lower rate on our senior notes during the current quarter compared to last year. Interest expense also decreased $700 thousand to $6.2 million for the six months ended June 30, 2006 compared to the same period in the prior year due primarily to interest paid on short-term borrowings in the prior year.

The higher effective tax rate in the current year reflects the impact of non-deductible charges recorded in connection with a portion of the settlement of litigation with the SEC and state regulators and a non-deductible goodwill impairment charge for ACF. In 2005, the effective tax rate reflects non-deductible charges recorded in connection with the settlement of litigation with the NASD and consortium of states related to variable annuity sales practices in 2005. We expect our normalized effective income tax rate to be in the range of 36.2% to 36.5%.

Liquidity and Capital Resources

Our primary source of liquidity is cash provided by operations. Cash and cash equivalents were $190.6 million at June 30, 2006, an increase of $27.8 million from December 31, 2005. Cash and cash equivalents at June 30, 2006 and December 31, 2005 include reserves of $29.9 million and $26.1 million, respectively, for the benefit of customers in compliance with securities regulations.

Cash flow from operations is our primary source of funds, and totaled $59.5 million for the first six months of 2006 compared to $18.9 million for the same period in 2005. Timing of settlement payments and litigation insurance recoveries between periods and an increase in customer cash contributed to the increase in operating cash flows during the current year. We expect to make payments in August of 2006 of $52 million related to settlements with regulatory authorities discussed earlier.

Cash flow used in investing activities was $3.2 million for the six months ended June 30, 2006 compared to cash flow provided by investing activities of $67.7 million for the same period in 2005. During the current year, proceeds from the sale or maturity of available-for-sale securities of $3.6 million were offset by $2.2 million of purchases of available-for-sale securities and $4.6 million in capital expenditures, mainly for home office expansion, data processing equipment, software development and computer software. In 2005, the Company received proceeds from the sale or maturity of available-for-sale securities of $72.0 million and expended $4.3 million for capital additions.

Cash flow used in financing activities for the six months ended June 30, 2006 was $28.5 million compared to $52.1 million for the same period in 2005. On January 13, 2006, the Company issued $200 million in principal amount 5.6% senior notes resulting in net proceeds of approximately $199.9 million. The Company used the net proceeds, together with cash on hand, to repay the entire $200 million aggregate principal amount outstanding of its existing 7.5% variable rate debt. The Company paid dividends in 2006 and 2005 of $25.3 million and $25.0 million, respectively, and received cash from the exercise of stock options of $1.1 million and $1.0 million in the respective periods . The Company repurchased common stock in connection with the vesting of employee restricted stock to cover their minimum tax withholdings of $4.7 million and $1.1 million in 2006 and 2005, respectively. In the first six months of 2005, we had net short-term debt repayments of $21.0 million and purchased $6.0 million of our common stock.

We entered into a three-year revolving credit facility effective October 7, 2005, which initially provides for borrowings of up to $200.0 million. At June 30, 2006, there was no balance outstanding under the facility. In addition, there were no outstanding balances on money market loans at June 30, 2006.

Future Capital Requirements

We expect significant uses of cash in 2006 to include expected dividend payments, interest payments on outstanding debt, share repurchases, legal and regulatory settlements, pension funding, home office leasehold improvements and potential acquisitions. Management believes its available cash, marketable securities, and expected cash flow from operations will be sufficient to fund its operating and capital requirements for 2006. We may continue to repurchase shares of our common stock from time to time, as management deems appropriate. Share repurchases should be financed by our available cash and investments and/or cash from operations.

Long-term capital requirements include capital expenditures primarily for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, repayment and servicing of the Company’s debt obligations and repurchases of the Company’s stock.

Critical Accounting Policies and Estimates

Management believes certain critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Due to the implementation of SFAS 123R, we identified a new critical accounting policy related to share-based compensation, which is listed below. The Company’s other critical accounting policies and estimates are disclosed in the “Critical Accounting Policies and Estimates” section of our 2005 Form 10-K.

Share-Based Compensation

We account for share-based compensation in accordance with SFAS 123R. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date and is recognized as expense on a straight-line basis over the four year vesting period. Determining the fair value of share-based awards at grant date requires judgment, including estimating the amount of share-based awards expected to be forfeited. If actual results differ significantly from these estimates, our results of operations could be materially impacted.

Supplemental Information

	Second		Second				Year-to-		Year-to-
	Quarter		Quarter				Date		Date
	2006		2005		Change		2006		2005		Change
Redemption rates—long term (annualized)
Advisors	8.9	%	10.6	%			9.4	%	10.1	%
Wholesale	23.1	%	21.8	%			20.8	%	23.2	%
Institutional	19.1	%	17.0	%			21.0	%	20.6	%
Total	13.4	%	13.5	%			13.6	%	14.2	%

Sales per advisor (000’s) (1)
Total	269		188		43.1	%	527		376		40.2	%
2+ Years (2)	396		289		37.0	%	784		575		36.3	%
0 to 2 Years (3)	83		49		69.4	%	145		100		45.0	%

Gross production per advisor	15.9		13.4		18.7	%	31.8		26.3		20.9	%

Number of financial advisors (1)	2,273		2,422		-6.2	%	2,273		2,422		-6.2	%
Average number of financial advisors (1)	2,284		2,434		-6.2	%	2,313		2,459		-5.9	%

Number of shareholder accounts (000’s)	2,833		2,530		12.0	%	2,833		2,530		12.0	%

Number of shareholders	651,542		642,037		1.5	%	651,542		642,037		1.5	%

(1) Excludes Legend retirement advisors

(2) Financial advisors licensed with the Company for two or more years

(3) Financial advisors licensed with the Company less than two years

Forward Looking Information

From time-to-time, information or statements provided by or on behalf of the Company, including those within this Quarterly Report on Form 10-Q may contain certain “forward-looking information,” including information relating to anticipated growth in our revenues or earnings, anticipated changes in the amount and composition of assets under management, our anticipated expense levels, and our expectations regarding financial markets and other conditions. Readers are cautioned that any forward-looking information

provided by or on behalf of the Company is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below. Further, such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, whether as a result of new information, future developments or otherwise.

Our future revenues will fluctuate due to many factors, such as the total value and composition of assets under our management and related cash inflows or outflows in the Funds and other investment portfolios; fluctuations in national and worldwide financial markets resulting in appreciation or depreciation of assets under our management; the relative investment performance of the Funds and other investment portfolios as compared to competing offerings; the expense ratios of the Funds; investor sentiment and investor confidence; the ability to maintain our investment management and administrative fees at current levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; our introduction of new mutual funds and investment portfolios; our ability to contract with the Funds for payment for investment advisory-related administrative services provided to the Funds and their shareholders; the continuation of trends in the retirement plan marketplace favoring defined contribution plans and participant-directed investments; potential misuse of client funds and information in the possession of our financial advisors; and the development of additional distribution channels may not be successful. Our revenues are substantially dependent on fees earned under contracts with the Funds and could be adversely affected if the independent directors of one or more of the Funds determined to terminate or significantly alter the terms of the investment management or related administrative services agreements.

Our future operating results are also dependent upon the level of our operating expenses, which are subject to fluctuation for the following or other reasons: variations in the level of compensation expense due to, among other things, performance-based bonuses, changes in our employee count and mix, and competitive factors; unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; legal expenses; and disruptions of services, including those provided by third parties such as communications, power, and the mutual fund transfer agent system. In addition, our future operating results may also be impacted by our ability to incur additional debt, by adverse litigation and/or arbitration judgments or settlements, failure to retain key personnel and financial advisors, regulatory enforcement exams, actions or settlements and acts of terrorism and/or war. The Company’s business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on our operations and results, including but not limited to effects on costs we incur and effects on investor interest in mutual funds and investing in general or in particular classes of mutual funds or other investments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company has had no significant changes in its Quantitative and Qualitative Disclosures About Market Risk from that previously reported in the Company’s 2005 Form 10-K.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report, have concluded that the Company’s disclosure controls and procedures are effective to

provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Part II. Other Information

Item 1. Legal Proceedings

See the Notes to the Unaudited Consolidated Financial Statements, Note 9 “Contingencies” beginning on page 17 of this Quarterly Report on Form 10-Q regarding the status of the SEC/New York Attorney General/Kansas Securities Commission investigation, Williams excessive fee litigation, Torchmark Corporation litigation, and NASD Enforcement Action. Information required by this Item 1 is incorporated herein by reference to the disclosure contained in Note 9 of the Notes to the Unaudited Consolidated Financial Statements.

Item 1A. Risk Factors

The Company has had no significant changes to its Risk Factors from those previously reported in the Company’s 2005 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth certain information about the shares of Class A common stock we repurchased during the second quarter of 2006.

Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Program

April 1 - April 30	131,946	23.31	131,946	n/a	(1)
May 1 - May 31	803	22.28	803	n/a	(1)
June 1 - June 30	7,429	19.90	7,429	n/a	(1)

Total	140,178	23.12	140,178

(1) On August 31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our Class A common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding Class A common stock or (ii) $50 million of our Class A common stock. We may repurchase our Class A common stock through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems such as POSIT, during regular or after-hours trading sessions. POSIT is an alternative trading system that uses passive pricing to anonymously match buy and sell orders. To date, we have not used electronic communication networks or alternative trading systems to repurchase any of our Class A common stock and do not intend to use such networks or systems in the foreseeable future. Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased. During the second quarter of 2006, all stock repurchases were made pursuant to this repurchase program and were purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares with the exception of 887 shares in private repurchases.

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

(a)	Annual Meeting of Stockholders held on April 12, 2006.

(b)	Directors re-elected to additional three year terms at the Annual Meeting:

	Dennis E. Logue and Ronald C. Reimer

	Other Directors whose terms of office continued after the Annual Meeting:

	Henry J. Herrmann, Alan W. Kosloff, James M. Raines, William J. Rogers and Jerry W. Walton

(c)(1)	Election of Directors	For	Withheld

	Dennis E. Logue	64,234,093	4,976,591

	Ronald C. Reimer	67,041,700	2,168,984

	No broker non-votes on this proposal.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits :

3.1 Restated Certificate of Incorporation

10.1 Offer of Settlement. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on July 24, 2006 and incorporated herein by reference.

10.2 Assurance of Discontinuance. Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K on July 24, 2006 and incorporated herein by reference.

10.3 Stipulation for Consent Order. Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K on July 24, 2006 and incorporated herein by reference.

31.1 Section 302 Certification of Chief Executive Officer

31.2 Section 302 Certification of Chief Financial Officer

32.1 Section 906 Certification of Chief Executive Officer

32.2 Section 906 Certification of Chief Financial Officer

(b) Reports on Form 8-K :

Current Report on Form 8-K Items 2.02 and 9.01 dated April 26, 2006. Furnished not filed. No financial statements were required to be filed.

Current Report on Form 8-K Items 1.01 and 9.01 dated July 24, 2006. No financial statements were required to be filed.

Current Report on Form 8-K/A Items 7.01 and 9.01 dated July 24, 2006. No financial statements were required to be filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 25th day of July 2006.

	WADDELL & REED FINANCIAL, INC.

	By:	/s/ Henry J. Herrmann
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Daniel P. Connealy
		Senior Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

	By:	/s/ Mark A. Schieber
		Vice President and
		Controller
		(Principal Accounting Officer)

Exhibit 3.1

RESTATED
CERTIFICATE OF INCORPORATION
of
WADDELL & REED FINANCIAL, INC.

Waddell & Reed Financial, Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), hereby certifies as follows:

1. The name of the Corporation is Waddell & Reed Financial, Inc. and it originally filed its Certificate of Incorporation with the Secretary of State of the State of Delaware on December 24, 1981, under the name of LIBFIN Company.

2. This Restated Certificate of Incorporation was duly adopted in accordance with Section 245 of the General Corporation Law of the State of Delaware.

3. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Certificate of Incorporation of the Corporation as theretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation.

4. The text of the Certificate of Incorporation of the Corporation as theretofore amended or supplemented is hereby restated, without amendment or change, to read in its entirety as follows:

FIRST: NAME .

The name of the corporation (which is hereinafter referred to as the “ Corporation ”) is:

WADDELL & REED FINANCIAL, INC.

SECOND: REGISTERED OFFICE AND AGENT .

The address of the Corporation’s registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, 19801, in the County of New Castle. The name of the Corporation’s registered agent at such address is The Corporation Trust Company.

THIRD: PURPOSE .

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

FOURTH: CAPITAL STOCK .

4.1 Authorized Shares. The total number of shares of all classes of stock which the Corporation shall have authority to issue shall be two hundred fifty-five million (255,000,000), of which two hundred fifty million (250,000,000) shares are to be Class A Common Stock, having a par

value of one cent ($0.01) each; and five million (5,000,000) shares are to be Preferred Stock, having a par value of one dollar ($1.00) each.

4.2 Common Stock.

4.2.1 As used herein, the term “ Common Stock ” means the Class A Common Stock.

4.2.2 The holder of each outstanding share of Common Stock shall be entitled to one vote in person or by proxy for each share on all matters upon which the stockholders of the Corporation are entitled to vote.

4.2.3 Authority is hereby expressly granted to the Board of Directors or any duly authorized committee thereof from time to time to issue any authorized but unissued shares of Common Stock for such consideration and on such terms as it may determine.

4.2.4 At any meeting of stockholders, the presence in person or by proxy of the holders of shares entitled to cast a majority of all the votes which could be cast at such meeting by the holders of all of the outstanding shares of stock of the Corporation entitled to vote on every matter that is to be voted on at such meeting shall constitute a quorum.

4.2.5 At every meeting of stockholders, (i) in all matters other than the election of directors, a majority of the votes which could be cast at such meeting upon a given question and (ii) in the case of the election of directors, a plurality of the votes which could be cast at such meeting upon such election, by such holders who are present in person or by proxy, shall be necessary, in addition to any vote or other action that may be expressly required by the provisions of this Certificate of Incorporation, the Bylaws of the Corporation, or by the law of the State of Delaware, to decide such question or election, and shall decide such question or election if no such additional vote or other action is so required.

4.2.6 Subject to the rights of any holders of Preferred Stock to elect directors as provided in this Certificate of Incorporation, stockholder action can be taken only at an annual or special meeting of stockholders and stockholder action may not be taken by written consent in lieu of a meeting.

4.3 Preferred Stock.

4.3.1 Authority is hereby expressly granted to the Board of Directors from time to time to issue Preferred Stock, for such consideration and on such terms as it may determine, as Preferred Stock of one or more series and in connection with the creation of any such series to fix by the resolution or resolutions providing for the issue of shares thereof the designation, powers and relative participating, optional, or other special rights of such series, and the qualifications, limitations, or restrictions thereof. Such authority of the Board of Directors with respect to each such series shall include, but not be limited to, the determination of the following:

(a) the distinctive designation of, and the number of shares comprising, such series, which number may be (except where otherwise provided by the Board of Directors in creating such series) increased or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors;

(b) the dividend rate or amount for such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends bear to the dividends payable on any other class or classes or any other series of any class or classes of stock, and whether such dividends shall be cumulative, and if so, from which date or dates for such series;

(c) whether or not the shares of such series shall be subject to redemption by the Corporation and the times, prices, and other terms and conditions of such redemption;

(d) whether or not the shares of such series shall be subject to the operation of a sinking fund or purchase fund to be applied to the redemption or purchase of such shares and if such a fund be established, the amount thereof and the terms and provisions relative to the application thereof;

(e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes, or of any other series of any class or classes, of stock of the Corporation and if provision be made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange;

(f) whether or not the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if they are to have such additional voting rights, the extent thereof;

(g) the rights of the shares of such series in the event of any liquidation, dissolution, or winding up of the Corporation or upon any distribution of its assets; and

(h) any other powers, preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof, to the full extent now or hereafter permitted by law and not inconsistent with the provisions hereof.

4.3.2 All shares of any one series of Preferred Stock shall be identical in all respects except as to the dates from which dividends thereon may be cumulative. All series of the Preferred Stock shall rank equally and be identical in all respects except as otherwise provided in the resolution or resolutions providing for the issue of any series of Preferred Stock.

4.3.3 Except as otherwise required by law, Section 4.3.4 hereof, or provided by a resolution or resolutions of the Board of Directors creating any series of Preferred Stock, the holders of Common Stock shall have the exclusive power to vote; and the holders of Preferred Stock shall have no voting power whatsoever. Except as otherwise provided in such a resolution or resolutions or in Section 4.3.4 hereof, the number of authorized shares of the Preferred Stock may be increased or decreased by the affirmative vote of a majority of the outstanding shares of capital stock of the Corporation entitled to vote.

4.3.4 Designation of the Rights and Preferences of the Series A Junior Participating Preferred Stock. 750,000 shares of the authorized Preferred Stock are hereby designated Series A Junior Participating Preferred Stock (“Series A Junior Participating Preferred Stock”). The rights and preferences of the Series A Junior Participating Preferred Stock are as follows:

(a) DIVIDENDS.

(1) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of February, May, August and November in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after April 28, 1999 (the “Rights Declaration Date”) (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction

the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(2) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph 4.3.4(a)(1) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

(3) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.

(b) VOTING RIGHTS. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights:

(1) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the

stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(2) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.

(3) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a “default period”) which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors.

(4) During any default period, the voting right described in section 4.3.4(b)(3) of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to section 4.3.4(b)(5) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the

Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock.

(5) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this section 4.3.4(b)(5) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this section 4.3.4(b)(5), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders.

(6) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (i) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (ii) any vacancy in the Board of Directors may (except as provided in Section 4.3.4(b)(4)) be filled by vote of a majority of the remaining directors theretofore

elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Section 4.3.4(b) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (ii) of the foregoing sentence.

(7) Immediately upon the expiration of a default period, (i) the right of the holders of Preferred Stock as a class to elect directors shall cease, (ii) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (iii) the number of directors shall be such number as may be provided for in the certificate of incorporation or bylaws irrespective of any increase made pursuant to the provisions of section 4.3.4(b)(4) (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (ii) and (iii) in the preceding sentence may be filled by a majority of the remaining directors.

(8) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

(1) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 4.3.4(a) are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not:

(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock;

(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends

are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or

(iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(2) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Section (1) of this 4.3.4(c), purchase or otherwise acquire such shares at such time and in such manner.

(d) REACQUIRED SHARES. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.

(e) LIQUIDATION, DISSOLUTION OR WINDING UP.

(1) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior

Participating Preferred Stock shall have received an amount equal to $100 per share of Series A Junior Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the “Series A Liquidation Preference”). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the “Common Adjustment”) equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (3) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the “Adjustment Number”). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively.

(2) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of the Series A Junior Participating Preferred Stock and such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.

(3) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the

number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(f) CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(g) NO REDEMPTION. The shares of Series A Junior Participating Preferred Stock shall not be redeemable.

(h) RANKING. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation’s Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.

(i) AMENDMENT. At any time when any shares of Series A Junior Participating Preferred Stock are outstanding, the Amended and Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class.

(j) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock.

4.4 Dividends. Whenever dividends upon the Preferred Stock are at the time outstanding and the dividend preference to which such stock is entitled shall have been paid in full or declared and set apart for payment for all past dividend periods, and after the provisions for any sinking or purchase fund or funds for any series of Preferred Stock shall have been complied with, the Board of Directors may declare and pay dividends on the Common Stock, payable in cash, stock or otherwise; and the holders of shares of Preferred Stock shall not be entitled to share therein, subject to the provisions of Section 4.3.4 hereof and the provisions of the resolution or resolutions creating any series of Preferred Stock.

4.5 Liquidation. In the event of any liquidation, dissolution, or winding up of the Corporation or upon the distribution of the assets of the Corporation remaining, after the payment to the holders of the Preferred Stock of the full preferential amounts to which they shall be entitled as provided in the resolution or resolutions creating any series thereof, the remaining assets of the Corporation shall be divided and distributed among the holders of the Common Stock ratably, except as may otherwise be provided in any such resolution or resolutions. Neither the merger or consolidation of the Corporation with another corporation nor the sale or lease of all or substantially all the assets of the Corporation shall be deemed to be a liquidation, dissolution, or winding up of the Corporation or a distribution of its assets.

4.6 Amendment of Certificate of Incorporation. Except as otherwise provided by law or by this Certificate of Incorporation, and subject to any rights of the holders of Preferred Stock, the provisions of this Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded in whole or in part, without the approval of a majority of the shares of the Common Stock entitled to vote.

FIFTH: DIRECTORS .

5.1 Staggered Board. The Board of Directors shall consist of not less than seven nor more than 15 persons. Subject to any rights of holders of Preferred Stock to elect directors under specified circumstances, the exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. Each class shall consist initially of four Class I directors, four Class II directors and two Class III directors. Class I directors shall be elected initially for a one-year term, Class II directors initially for a two-year term and Class III directors initially for a three-year term. At each succeeding annual meeting of stockholders beginning in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his or her term expires or until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and

any other vacancy occurring in the Board of Directors shall be filled by a majority of the Board of Directors then in office, even if less than a quorum or a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article Fifth unless expressly provided by such terms.

5.2 Election. No holder of Common Stock shall have the right to exercise cumulative voting rights. Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot.

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

SIXTH: BYLAWS .

The Board of Directors is expressly authorized and empowered to make, alter and repeal the Bylaws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any Bylaws made by the Board of Directors.

SEVENTH: PREEMPTIVE RIGHTS .

No holder of Preferred Stock or Common Stock of the Corporation shall have any preemptive right as such holder (other than such right, if any, as the Board of Directors in its discretion may by resolution determine pursuant to this Article Seventh) to purchase, subscribe for or otherwise acquire any shares of stock of the Corporation of any class now or hereafter authorized, or any securities convertible into or exchangeable for any such shares, or any warrants or any instruments evidencing rights or options to subscribe for, purchase or otherwise acquire any such shares, whether such shares, securities, warrants or other instruments are now, or shall hereafter be, authorized, unissued or issued and thereafter acquired by the Corporation.

EIGHTH:

8.1 Elimination of Certain Liability of Directors.

The directors of the Corporation shall be entitled to the benefits of all limitations on the liability of directors generally that are now or hereafter become available under the General Corporation Law of Delaware. Without limiting the generality of the foregoing, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good

faith or which involve intentional misconduct or a knowing violation of law, (iii) for paying a dividend or approving a stock repurchase in violation of Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Section 8.1 shall be prospective only, and shall not affect, to the detriment of any director, any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification.

8.2 Indemnification and Insurance.

8.2.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “ proceeding ”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director or officer of another company, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 8.2.2 hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers.

8.2.2 Right of Claimant to Bring Suit. If a claim under Section 8.2.1 is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to

recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

8.2.3 Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise.

8.2.4 Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be signed by Henry J. Herrmann, its Chief Executive Officer, and attested by Wendy J. Hills, its Secretary, on the 13th day of July, 2006.

		WADDELL & REED FINANCIAL, INC.

		By:	/s/ Henry J. Herrmann
			Henry J. Herrmann
			Chief Executive Officer
ATTEST:

By:	/s/ Wendy J. Hills
	Wendy J. Hills
	Secretary

Exhibit 31.1

I, Henry J. Herrmann, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Waddell & Reed Financial, Inc.;

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

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

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: July 25, 2006

	/s/ Henry J. Herrmann
	Henry J. Herrmann
	Chief Executive Officer

Exhibit 31.2

I, Daniel P. Connealy, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Waddell & Reed Financial, Inc.;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 25, 2006

	/s/ Daniel P. Connealy
	Daniel P. Connealy
	Senior Vice President and
	Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Henry J. Herrmann, Chief Executive Officer of Waddell & Reed Financial, Inc. (the “Company”) hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the “Act”), that:

1. The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (the “Report”) dated July 25, 2006 and filed with the United States Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 25, 2006

	/s/ Henry J. Herrmann
	Henry J. Herrmann
	Chief Executive Officer

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Daniel P. Connealy, Senior Vice President and Chief Financial Officer of Waddell & Reed Financial, Inc. (the “Company”) hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the “Act”), that:

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 25, 2006

	/s/ Daniel P. Connealy
	Daniel P. Connealy
	Senior Vice President and
	Chief Financial Officer