April 21, 2008

Dear Fellow Shareholder:

The first quarter of 2008 ending March 31 was another turbulent one. The liquidity crisis in the credit markets continued. The U.S. economy slowed further, lending credence to the idea that it has entered a recession. The dollar declined in value and commodity prices continued upward. The housing industry depression deepened as home prices declined and mortgage defaults and foreclosures rose. The Federal Reserve and Treasury made increasingly aggressive and creative policy responses, the most visible of which was the "rescue" of Bear Stearns by J.P. Morgan facilitated by a Fed guarantee of $29 billion of Bear’s most illiquid and hard-to-value assets.

Given this backdrop, it is not surprising that stock prices were very volatile and, on balance, declined. It was a poor quarter for our Funds and a very disappointing way to finish our fiscal year. At times like these, it is natural for investors to extrapolate recent trends and come to very bleak conclusions. We would agree that the dimensions of our economic problems are (in some ways) unprecedented and not subject to quick and painless resolution, but we do not believe that our economy and stock market are headed into an extended period of "nuclear winter" as some would suggest.

We will discuss our reasons for (cautious) optimism in the balance of this letter, but first the numbers. The table below shows investment results (after deducting fees and expenses) for each of our four stock Funds and for three major stock market indices—the S&P 500 (larger companies), the Russell 2000 (smaller companies) and the Nasdaq Composite (a proxy for technology companies).

Volumes have already been (and will be) written about the "credit bubble" and the implications of its deflation. It is a fascinating subject and it is very tempting to write about causes, symptoms, villains, victims, policy prescriptions, and long-term implications. We suspect that our shareholders are most interested in answers to the question, "How are we to protect our capital and make it grow?"

We will start with the caveats. We are optimistic about surviving and earning positive returns over the next several years, but investors will need to be patient—the economic news is likely to get worse and remain negative for some time. Home foreclosures have not peaked and it may be many years before a "normal" housing market resumes. Credit losses among lenders will continue at elevated levels. It will take time for lenders to rebuild their reserves. Regulatory capital requirements will be higher and lending standards have been raised, so credit to support consumption will be less available and more expensive. This does not have to be a terrible environment for investing, but we would expect a long period of alternate mood swings between abject pessimism and wishful thinking that could be stressful even for patient investors.

On the positive side, we do not subscribe to the view that the current vicious circle of falling home prices, rising foreclosures, and worsening business environment will inevitably lead to another great depression. We believe there are several reasons we will be able to short-circuit that return trip to the 1930’s:

1. While financial companies are currently reeling, other companies that produce "real" products and services are generally doing well enough that economists cannot tell for sure whether GDP has actually turned negative yet. Many companies do business globally and are enjoying healthy demand abroad. Most companies are entering this slowdown with sound balance sheets. A recession will not be good for them, but it need not be devastating. Even (most) financial companies should be able to cope reasonably well once the credit markets reopen. (The long-term implications of the efforts of the Fed, Treasury and Congress to restore liquidity to markets are another subject.)

2. Pension and endowment funds, investment companies like Berkshire Hathaway, hedge funds and private equity funds, and even individuals have enormous amounts of capital available with which to buy distressed assets and companies. Investors bought and "recycled" billions of dollars of real estate collateral of failed savings and loans that was sold by the Resolution Trust Corporation (RTC) in the 1980’s. The tactics and compensation of some of the "vulture investors" may be unattractive and many individual homeowners will suffer serious losses, but we believe that self-corrective (albeit sometimes ruthless) economic forces can facilitate a bottoming of home prices and restore a needed level of confidence among lenders and borrowers.

3. Government intervention—by the Federal Reserve, Treasury, and Congress—should soften the impact of the recession. The Fed has opened the "discount window," allowing banks, and for the first time, investment banks (brokerage firms) to borrow hundreds of billions of dollars to maintain adequate liquidity in the banking system. As mentioned above, when other investment firms lost faith in Bear Stearns and its failure seemed imminent, the Fed engineered a "rescue" by J.P. Morgan. Americans will be receiving checks soon as part of a $152 billion "stimulus package." Congress is also studying ways to help homeowners adjust mortgage terms or refinance through government programs. The legal and logistical challenges to effectively assisting distressed homeowners are huge, but a substantial amount of fiscal stimulus should find its way into the system.

The credit market "freeze" which began last August has lasted longer than we would have imagined possible. The credit bubble at the heart of today’s economic and investment problems was a very long time in the making and deflating it will also take time.

We believe that during this period of adjustment, which may take years, there can be lots of investment opportunities for value investors. A company’s business value is a function of the cash it will generate for its owners over the next few decades. A soggy year or two does not make the value zero. On the other hand, the world has changed permanently for certain kinds of companies. Our challenge is to acknowledge the changes, to value the businesses realistically and then to have the courage of our convictions, understanding that it may take a while for the market’s enthusiasm to return.

Given such a muted outlook, some shareholders may ask, "Why not sell all of our stocks and wait for a more favorable environment?" For some, selling and taking refuge in cash may be an appropriate answer. (For those looking for shelter we do offer the Government Money Market Fund.) As we have said many times, peace of mind is very important. Exposing one’s capital to volatility that will cause personal anxiety may be a bad idea, especially for one who has enough capital and is interested in preserving it. As Warren Buffett is fond of saying, "Marrying for money is almost always a bad idea, but it’s really dumb if you’re already rich."

For those who are interested in the prudent pursuit of capital appreciation, the answer is more complicated. The investment outlook is always uncertain. The interplay of fear and greed leads to gross mis-pricing of stocks from time to time, and paraphrasing Mr. Buffett again, "Our job is to be fearful when others are greedy and greedy when others are fearful." There are real things to be afraid of today, and stocks in general are not dirt cheap. Nevertheless, we think it is worth the effort to continue to identify, buy and hold stocks of good companies that are available at reasonable prices.

In the Funds’ Annual Report, which will be available on our website in the near future, there are several pages of data on each of the stock Funds. The financial world has changed a great deal over the past year, and the summary tables of buys and sells, gains and losses, etc. may be less useful than usual. However, they do provide a capsule summary of changes to the portfolios during the fiscal year. There is also a list of holdings for each portfolio. The stocks in each Fund are arranged by Global Industry Classification Standards (GICS) (responding to requests from several analysts and consultants) which represents a slight change from past reports.

We found a few new investment ideas (Vulcan Materials, Wells Fargo and Lowe’s) and we took profits in stocks that had appreciated and became fully valued (Apollo Group, Discovery Holding and News Corp). We discovered and acknowledged some mistakes (Countrywide Financial). We sold some stocks whose values had declined or whose upside potential was diminished by changes in their business outlook. We added to existing positions whose fundamentals improved while their stock prices declined (WellPoint).

Generally speaking, we continued to find greater value in larger, financially stronger companies. This continues a trend that has been in place for a few years and which has allowed us to upgrade portfolio quality without sacrificing upside potential. One element of "quality" that is particularly important in today’s environment is "excess capital." With banks facing a capital shortage now, companies with plenty of capital can finance their own expansion and take advantage of opportunities to buy distressed assets.

For each company we analyze, we try to determine an approximate intrinsic business value. The idea is that if we can buy stocks at deep discounts to their intrinsic values, those values will eventually be reflected in the stocks’ prices. We have no illusions about the precision in this process, but we have found that when the aggregate "price-to-value" (P/V) of our entire portfolio is lower than usual, subsequent portfolio performance tends to be better than when P/V is higher. Today’s P/V of our portfolios is definitely on the low end of the range. This has no predictive value in the short run, but gives us some confidence about the next few years.

Investing is our business and, happily, it is what we like to do. We are excited by the challenges of this market, but we have no illusions about earning "easy" returns. We think our investment methods will continue to work as they have over the past 25 years since our firm was started (the results of the past 12 months notwithstanding) but as we have said—possibly ad nauseam—we and our shareholders may have to be unusually patient.

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. We look forward to seeing you there.

Wallace R. Weitz	Bradley P. Hinton
Co-manager Value and Partners Value	Co-manager Value and Partners Value
Portfolio Manager Hickory and Partners III	brad@weitzfunds.com
wally@weitzfunds.com

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.

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