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

Fiscal 2007 in Review

Profits last year came from all corners of the portfolio. A wide variety of companies that fall under the category of "media content and distribution" enjoyed strong rebounds from depressed levels. Within the Liberty Media "complex," Liberty Global rose 55%, Discovery Holdings was up 28%, and Liberty Media, which was split into two companies, Liberty Interactive and Liberty Capital, appreciated 40%.

Financial services stocks were well-represented in the "contributor" column, despite the problems in the subprime mortgage sector. Redwood Trust, a holding since 1994 when we provided some of their initial capital, earned a total return of 34% and is better positioned than ever for future growth. Newcastle, another company we have owned since its founding in the late 1990’s, returned 27%. Newcastle has done an excellent job of investing opportunistically in many areas of mortgage finance. We think that they, like Redwood, have the access to capital, the expertise, and the discipline to take advantage of the credit and liquidity problems that are beginning to emerge in world financial markets. Berkshire Hathaway (our largest holding in 3 of 4 funds) was +21% as its operations and investments performed very well and Warren Buffett was able to make several significant acquisitions. Fannie Mae (+9%), Freddie Mac (+1%), and Countrywide (-7%) were not major factors.

Other important contributions came from Tyco (+19%), Cabela’s (+21%), and Telephone and Data Systems. Investors love to criticize management of Telephone and Data Systems (which controls the company with super-voting shares) for being too conservative—refusing to use more leverage to do larger stock buybacks. Yet the company continues to add profitable wireless subscribers and to generate strong cash flows from its rural wireline business. Periodically, investors recognize the company’s achievements, and this year the stock was up 49%.

During the year, we added several new stocks to the portfolios. The number of new positions is partly a function of changing market conditions, but it also reflects the maturing of our staff of young analysts (and the willingness of an old portfolio manager to admit they are very good at what they do).

Dell is a direct marketer of computers and other electronic equipment that we have discussed in previous letters. Our bet is that Dell’s self-inflicted problems are fixable and that its highly efficient business model is not broken.

Apollo is a leader in for-profit higher education. Apollo’s (and its peers’) earnings growth rate has slowed, but it still generates a growing stream of free cash flow which it can use for expansion and share buybacks. We believe that Apollo sells at a discount to its private market value. We would be happy to own it for many years and to participate in the growth in the value of the business, but the company might also find its way into a private equity portfolio at a healthy premium to its current price.

Mohawk and USG (formerly U.S. Gypsum, when companies had names that meant something) are building materials companies that hold dominant positions in their industries (flooring and wallboard, respectively). Both are diversified among new home, remodel, and commercial construction markets, but are clearly cyclical businesses. Their stocks are depressed because of the current slowdown in residential construction and fears of a recession that would affect commercial construction. Both have demonstrated the ability to earn high returns and increase market share over the course of a business cycle.

TD Ameritrade is a leading online discount brokerage firm based in Omaha. Their recent merger with TD Waterhouse helps diversify their business, adds meaningful scale, and provides the opportunity for significant cost savings in consolidation. We believe the stock is very cheap based on post-merger earnings power.

American Express returned to our portfolios this year. Amex is a great business with a dominant payments franchise, a wonderful consumer brand, and an entrenched competitive position. The business earns over 30% on equity, has high-return reinvestment opportunities and returns substantial amounts of cash to shareholders through dividends and share repurchases.

UPS is another wonderful business that we have admired for a long time. UPS dominates the U.S. ground parcel market and has a growing global transportation and logistics network that would be nearly impossible for a new entrant to replicate. The company continues to invest in that network (at high rates of return) to help cement its competitive advantage. The stock has declined lately due to a temporary slowdown in earnings, and while not quite cheap enough to take a full position, we have bought a modest number of shares and are hopeful that near-term economic weakness may give us the opportunity to buy more.

We have also eliminated several positions we have held for many years. We hate to see them go, but we had to make room for other holdings with more attractive valuations. Our US Bancorp position has its roots in an early 1990’s purchase of Omaha National Bank stock when its price was depressed due to (unfounded) fears of credit problems in its commercial loan portfolio. Host and Harrah’s date back to the late 1990’s and we lived through real estate recessions and 9/11 with them. Both have terrific managements and have been wonderful investments for us. With luck we’ll be able to own them again.

Finally, a review of fiscal 2007 would not be complete without a comment on the subprime mortgage crisis that was brewing all year and has recently hit the front pages. We have been concerned about credit quality in the mortgage markets for several years and have focused our holdings on players that we believe have the sophistication, discipline and financial strength to participate profitably. (More on this later in the letter.) In the section that follows, we will explain some of the terms and practices that have been in the news lately. There are plenty of risks associated with borrowing and lending, but some of the press coverage has been incomplete, at best. Hopefully, some clarification and context will be helpful to concerned shareholders.

Many people think of bankers and other lenders as dour curmudgeons who will lend only to those who do not need a loan—who are more concerned with the return "of" their capital than the return "on" their capital. There are still some lenders who fit this mold, and they are the ones we like to invest with. However, loans are "earning assets" that have value and the creators of these assets ("originators") can get greedy, sloppy, or just plain over-zealous in their work, especially if they are paid by the loan and do not plan to keep the loans on their own balance sheets.

In the subprime arena, the care with which many originators "underwrite" their loans has deteriorated over the past few years. Careful study of the prospective borrower’s job history and income level gave way to "stated income" loans (cynically nicknamed "liar loans"). Lenders offered to lend higher percentages of the purchase price ("loan to value" ratio or LTV) and the quality of the appraisal of the home’s value received less scrutiny. Adjustable rate mortgages (ARMs) were extended to borrowers who could (barely) afford the initial "teaser" interest rates but not the higher rates that would take effect when the interest rate "reset."

The buyers of these loans are typically financial institutions and other investors who depend on the "representations and warranties" of the originators that the loans have been properly underwritten. If it turns out that the originator misrepresented the quality of the loans, the buyer may "put" the loans back to the originator. The originator repurchases the loans at the buyer’s cost, then recovers whatever he can through sale of the loan (at a discount from face value) or through foreclosure.

The recent series of bankruptcies has occurred among mortgage brokers that did not have, and could not borrow, the capital necessary to buy back all the loans that were put to them. These firms depended on banks and securities firms for both the warehouse loans used to fund the mortgages they originated and for the secondary markets into which they sold the loans they made. When either or both ends of this chain disappeared, the broker/originators were out of luck.

The burning questions on the minds of our shareholders are, "How much worse will the credit problems get?" and "What does this mean for our Funds’ portfolios?" We regularly reassess both the financial strength of our portfolio companies and the evolution of their business models. In some cases, we have sold entire positions, in others we have gradually reduced them, and in a few, we have added to our holdings on weakness. Here are a few examples of our tactical approach over the past few years.

We participated in the recapitalization of a subprime mortgage company after it faced a liquidity crisis in 1998 and we made roughly 10-20 times our money over the next five years as it recovered and prospered. We sold the last of our stock in 2004 as industry lending terms became more aggressive and the housing market became more speculative.

We first bought Countrywide Financial and Washington Mutual (WaMu) in the early 1990’s. Countrywide has gained market share through internal growth and very efficient operations. Washington Mutual grew through acquisitions, and while it was not as strong as Countrywide from an operating perspective, it grew steadily and treated shareholders well with a combination of generous dividends and stock buybacks. Both have been very good investments for us. We sold our WaMu in the first quarter of (calendar) 2007 because of its exposure to subprime and Alt-A (what some refer to as "the mysterious middle ground between subprime and prime") and because we had less confidence in management’s ability to successfully cope with a crisis in the mortgage industry.

Since rising interest rates hurt Countrywide’s origination volumes, earnings have been on a plateau around $4 per share for three years. The stock has traded between $30 and $45 during that time and we have regularly bought more shares in the low-to-mid $30’s and reduced our position in the $40’s. As fears deepen and the possibility of a temporary, but severe, hit to Countrywide’s earnings looms, we have chosen to hold our position. Our rationale is that we do not know that it will go much lower, and we strongly believe that it should sell at much higher levels in the future. The alternative is to sell our position now with the hope of avoiding some temporary markdowns but risk missing our chance to repurchase the position before the stock recovers. Stocks have a way of bottoming long before the bad news is over and the good news appears. We sold some Berkshire Hathaway A shares in the 1970’s at $510 per share for some short-term reason, and with the stock now at $109,800 per share we’re beginning to think we are not going to get it back for $510.

Fannie Mae and Freddie Mac have some subprime exposure, but primarily in the form of AAA bonds backed by subprime mortgages. Both have strong balance sheets and in a crisis, they should be able to buy assets at very attractive prices. Also, if a capital shortage were to develop in the mortgage markets, Freddie and Fannie would be able to provide liquidity to the market and thus score points with a Congress that has recently been inclined to restrain the growth of their businesses. This could help reduce the "political" risk that causes these stocks to sell at depressed valuations.

Redwood and Newcastle, as mentioned earlier, are nimble, entrepreneurial companies that are well-positioned to take advantage of any distress in the mortgage markets—subprime or otherwise. Rising foreclosures and forced home sales will affect all residential mortgage investors, but on balance, we expect Redwood and Newcastle to be beneficiaries of any resulting liquidity crisis. These are positions we might want to add to if generalized concerns cause their stocks to fall. (For readers who are interested in learning more about how a sophisticated mortgage investor approaches its work, we highly recommend the Redwood Review, available quarterly on Redwood Trust’s web site.)

Subprime loans occupy a small corner of the world’s financial markets. They happen to be in the spotlight at the moment, but the same availability of credit, derivative and structured finance technology, and human motivations that led to subprime mortgage problems will probably cause other financial accidents from time to time. There is also a reasonable chance that the slowdown in the housing industry will spill over into other areas of the economy and cause corporate earnings disappointments, if not a recession. This does not mean that we should withdraw to the sidelines and wait for "normal" times—financial markets will always be subject to these uncertainties. It does mean that common sense and investing discipline are more important than ever.

We believe that our companies are very well positioned to withstand adversity, and that many of them have the excess liquidity necessary to take market share and make acquisitions in a period of stress in the economy or financial markets. We have no idea what the stock market will do over the next several quarters, but we feel very good about the businesses we own and their prospects for growth in value over the next few years.

Please plan to join us at the Scott Conference Center in Omaha at 4:30 p.m. on May 22. 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. We look forward to seeing you there.

Sincerely,

Wallace R. Weitz	Bradley P. Hinton
Co-manager Value and Partners Value	Co-manager Value and Partners Value
Portfolio Manager Hickory and Partners III

Investors should consider carefully the investment objectives, risks, and charges and expenses of the Funds before investing. The Funds’ Prospectus contains this and other information about the Funds. 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 Funds’ quarterly report for the percent of assets of each Fund invested in particular industries or sectors.