April 21, 2008

Dear Fellow Shareholder:

The Nebraska Tax-Free Income Fund’s total return for the first quarter of 2008 was +0.4%, which consisted of approximately +0.9% from net interest income (after deducting fees and expenses) and -0.5% from (realized and unrealized) depreciation of our bonds. Our Fund’s primary benchmark, the Lehman Brothers 5-Year Municipal Bond Index, returned +1.9%.

The table below shows the results of the Nebraska Tax-Free Income Fund over various time periods through March 31, 2008, along with the Lehman Brothers 5-Year Municipal Bond Index, our primary benchmark. The key measures of the Fund’s portfolio (average maturity and duration) have most closely resembled this Lehman Brothers index. As a reminder, we don’t manage the Fund to mimic any particular index but thought it would be informative to provide an example of a broadly constructed unmanaged index whose credit quality and maturity composition were similar to the Fund.

The following table shows a profile of our portfolio as of March 31:

A longstanding relationship between municipal bond yields and taxable alternatives (U.S. Treasury bonds, for example) became unhinged in the past year. Since municipal bonds generate interest income that is exempt from Federal (and usually state income) taxes, their yields have historically been less than U.S. Treasury bonds. As an example, the graph below, courtesy of Citigroup and Thomson Financial, depicts this relationship between 10-year municipal and 10-year Treasury bonds over a 12-year time span (January 1996 to April 2008). Until early this year, 10-year municipal bonds yielded less than 10-year Treasuries, and have averaged approximately 80% of their taxable counterpart over this long period of time. That municipal bonds should yield less than Treasury bonds makes intuitive sense given munis’ tax-free advantage. However, a host of issues conspired to push this relationship above 100% early this year. This is a rare occurrence in the municipal marketplace and, absent credit concerns, typically only occurs when investors are concerned that Congress might remove their tax-exempt status – not an issue at the present time.

Sources: Yield Book® and Citi.

The principal result of the disconnect in yield relationship between municipal bonds and Treasuries was that shorter-term municipal bond yields (less than 10 years) declined meaningfully less than Treasury yields. Longer-term municipal bond yields (greater than 10 years), however, actually rose materially (prices fell).

So what has buffeted the municipal bond marketplace to create this seeming anomaly? Some key contributors include:

• The center of the turmoil was likely the result of leverage. Hedge funds and other traders, who bought longer-term municipal bonds with borrowed money, were forced to sell as the unfolding credit crunch spread. This flood of selling pushed prices lower.
• A major contributor was the ongoing plight of the bond insurers, which many state and local governments use to protect their bonds – and (hopefully) win them lower interest rates. Bond insurers such as Ambac Financial Group, Inc. and MBIA, Inc. have been hurt by guarantees they made away from their core municipal guarantee business. As these once AAA-rated bond insurers have been downgraded, 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 seizing up of the market for auction rate securities has been a problem for municipal bond issuers. These typically long-term debt instruments carry floating interest rates that are reset weekly or monthly via an auction process. As the investment banks that ran the auctions stopped committing their capital to make sure the auctions ran smoothly, this market largely froze up and added to the anxiety about liquidity. This increased upward pressure on long municipal bond yields as investors anticipated many of these auction rate securities would be re-issued as longer-term bonds.
• The dramatic decline in U.S. Treasury interest rates may also have added to the breakdown in the historical relationship between municipal bond and Treasury yields. It is plausible that U.S. Treasury bond yields are artificially low as investors have sought the relative safety and comfort of the government guarantee.

For further discussion on the events of the past year, please see the "Fiscal Year in Review" section of the Short-Intermediate Income Fund letter.

The Nebraska Tax-Free Income Fund had a total return of 3.0% in fiscal 2008, compared to 6.2% for the Lehman Brothers 5-year Municipal Bond Index, our Fund’s primary benchmark. This one-year outcome is somewhat discouraging, especially since it is our first full fiscal year in our current form (i.e. public mutual fund). Our investments in 10-year and longer municipal bonds (non-existent in the Lehman Brothers index) particularly hurt our results as they experienced the largest price declines. The credit quality of these bonds (as well as our entire portfolio) is solid and we expect to recover these price declines at maturity, if not before. More importantly, we have taken advantage of the rare opportunity to invest capital in the Fund at yields well in excess of Treasury bonds (before adjusting for the tax-exempt benefit).

As a reminder, we invest in a portfolio of bonds of varying maturities that we believe represent the best opportunities. The Lehman Brothers index, on the other hand, is a static index of 4-6 year bonds. We believe our portfolio positioning affords us the best opportunity to generate solid long-term returns and are willing to accept shorter periods of underperformance (like now) to accomplish this goal.

Turning to portfolio metrics, over the past year, the average duration of our Fund was unchanged at 3.5 years while the average maturity declined to 7.6 from 8.5 years. The overall credit quality of Fund investments remains high and we are well-positioned to take advantage of any further opportunities the market may present us.

The divergence in inflation and interest rates over the past year is reason for caution, we believe. Inflation measures (both consumer and producer) have risen meaningfully while interest rates (U.S. Treasury) have fallen even more. The Consumer Price Index, for example, has risen 4% in the past year, up from a 2.8% rise a year ago. Five-year Treasury bond yields, on the other hand, have declined by nearly half to 2.4% at March 31. High inflation is not the friend of the bond investor as it erodes the purchasing power of interest returns. While it’s plausible that a recession (if one occurs in the U.S.) could lower inflationary pressures in the economy, we believe U.S. Treasury rates are still abnormally low. The tremendous ‘flight to quality’ by investors fearful of further cataclysmic events certainly explains much of this decline in Treasury rates.

The opportunities in the municipal marketplace have been real, we believe, and we have taken advantage of them. The absolute low level of interest rates (particularly U.S. Treasuries) does give us reason for pause, however. Given these crosscurrents, we expect to be more defensively positioned by holding cash reserves while we remain on the lookout for qualifying investments with more favorable terms.

Please plan to join us at the Scott Conference Center in Omaha at 4:30 p.m. on May 27. The center is located at 6450 Pine Street on the Aksarben campus. There will be no formal business to conduct, so we can devote the entire meeting to answering your questions. Maps and driving directions are available from our client service representatives. Thanks for your continued support, and we look forward to seeing you there.

Best Regards,

Thomas D. Carney
Portfolio Manager
tom@weitzfunds.com

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. The Prospectus 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. 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.