MANAGEMENT DISCUSSION & ANALYSIS – NEBRASKA TAX-FREE INCOME FUND

MARCH 31, 2009

Portfolio Manager:  Thomas D. Carney

The Nebraska Tax-Free Fund returned +2.8% in the first quarter, compared to a +2.2% return for the Barclays Capital 5-Year Municipal Bond Index, our Fund’s primary benchmark. For the fiscal year ended March 31, 2009, the Nebraska Tax-Free Fund’s total return was +3.6%, compared to a +6.0% return for our Fund’s primary benchmark.

The past year witnessed some of the widest range of returns on record for fixed-income investors as the ongoing credit crisis resulted in a dramatic re-pricing of risk among all asset classes. This disparity of outcomes was most acute in the taxable bond market and is covered in the management discussion of our Short-Intermediate Income Fund for anyone interested in reading more. The municipal bond market, however, also experienced a wide divergence of returns as longer-term bonds under-performed shorter-term bonds and high-quality bond returns meaningfully exceeded the returns of lower quality bonds. For example, a broad index of longer-term municipal bonds (those maturing from 12-22 years) composed by Merrill Lynch returned +0.7% in the past year while a similarly broad shorter-term municipal bond index (with bonds maturing from 1-12 years) returned +5.3%. An index of high quality municipal bonds (those rated AAA) returned +4.4% in the past year while an index of lower quality municipal bonds (those rated BBB) performed poorly, returning -14.7% according to Merrill Lynch global bond indices.

Some of the reasons for this disparity of returns for different segments of the municipal bond market over the past year include:

• A shift in the supply/demand structure of the municipal bond market. In terms of supply, the collapse in the use of variable rate financing or auction rate securities resulted in a sharp increase in fixed rate issuance in the municipal marketplace, particularly for longer-term bonds. Demand impacts included the virtual disappearance of leveraged, so-called hedge fund investors on the long end of the municipal market as many were forced to liquidate. In addition, there was a sharp drop in the role of property and casualty insurance companies as their profits and, hence, need for tax-free income from municipal bonds declined. These companies have historically played a key role in the long-term municipal market. These variables helped to put upward pressure on longer-term municipal bond yields, resulting in an overall steepening of the municipal bond yield curve – the difference between short-term and long-term interest rates – and caused the prices of some longer-term bonds to decline in the past year.

• The ongoing drama/plight of most of the municipal bond insurers was another key factor in the differentiation of municipal bond returns in the past year. As these once AAA-rated bond insurers have been downgraded (most to BBB or lower), municipal bonds backed by these insurers have experienced price declines – not because the quality of the underlying bond went down, but because of the real or perceived decrease in the value of the insurance coverage. The result has been a sharp widening of credit spreads between AAA-rated bonds and A-rated or BBB-rated issues with AAA-rated bond returns meaningfully exceeding, for example, BBB-rated bonds.

Our portfolio performed reasonably well in the past year considering the crosscurrents mentioned above. Our return lagged that of our primary benchmark, Barclays Capital 5-year Municipal Bond Index, principally due to our investments in 10-year and longer municipal bonds (non-existent in the Barclays Capital index). As a reminder, our investment objective is not to mimic any particular index as we construct our portfolio. Our goal is to invest in a portfolio of bonds of varying maturities that we believe represent attractive risk and tax-adjusted opportunities. Our primary benchmark, on the other hand, is a static index of 4- to 6-year bonds.

Turning to portfolio metrics, over the past year the average duration of our Fund has increased to 4.1 years from 3.5 years and the average maturity has risen to 8.1 from 7.6 years. Most of this change occurred as we took advantage of longer-term municipal bond weakness to lock in attractive opportunities, both in absolute yield and especially compared to U.S. Treasuries. As of this writing, municipal bonds continue to yield more than comparable U.S. Treasury bonds despite their tax advantages (municipal bonds are generally exempt from Federal taxes), an apparent disconnect we’ve highlighted in previous quarterly discussions. And while municipal bond yields as a percentage of Treasury yields (particularly longer-term) are down sharply from record levels that occurred in December 2008, they remain far above levels that generally prevailed prior to 2008.

The asset quality of our portfolio remains high, with a weighted average credit score, or rating, of AA-.  As a result, we believe any price declines should be recovered at maturity if not before, especially should the historical relationship between municipal and U.S. Treasury bonds reassert itself. Additionally, our current cash and other short-term investments position our Fund well to take advantage of further opportunities in the municipal bond market.  

* All performance numbers assume reinvestment of dividends and/or income.

** Performance of the Nebraska Tax-Free Income Fund (the "Fund") is measured from October 1, 1985, the inception of Weitz Income Partners Limited Partnership (the "Partnership"). As of December 29, 2006, the Fund succeeded to substantially all of the assets of the Partnership. The investment objectives, policies and restrictions of the Fund are materially equivalent to those of the Partnership and the Partnership was managed at all times with full investment authority by Wallace R. Weitz & Company. The performance information includes performance for the period before the Fund became an investment company registered with the Securities and Exchange Commission. During this period, the Partnership was not registered under the Investment Company Act of 1940 and therefore was not subject to certain investment restrictions imposed by the 1940 Act. If the Partnership had been registered under the 1940 Act during this period, the Partnership’s performance might have been adversely affected.

# Index performance is hypothetical and is for illustrative purposes only.

Investors should consider carefully the investment objectives, risks, and charges and expenses of the Fund before investing. The Fund’s Prospectus contains this and other information about the Fund and should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries, and sectors referenced in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. See the Schedule of Investments in Securities included in the Fund’s quarterly report for the percent of assets of the Fund invested in a particular state.

Weitz Securities, Inc. is the distributor of The Weitz Funds.