PORTFOLIO MANAGER LETTER –
VALUE, HICKORY, PARTNERS VALUE, PARTNERS III OPPORTUNITY
September 30, 2006 – SEMI-ANNUAL REPORT

October 10, 2006

Dear Fellow Shareholder:

What a difference a year makes. Last year at this time, our portfolios were down for the calendar year-to-date, and our trailing 12-months’ performance was underwhelming. Our stocks were getting cheaper, setting up the portfolios for future gains, but shareholders were definitely not cheering. Now, four quarters later, both relative and absolute results are good and we have a report that is more fun to deliver.

The table below shows results over various measuring periods for our four equity Funds (after deducting all expenses), the S&P 500 (larger companies), the Russell 2000 (smaller companies) and the Nasdaq Composite (a proxy for technology companies). Although the shorter-term results are reasonably good, we believe the 10, 15, and 20-year results are the most meaningful.

* All performance numbers assume reinvestment of dividends (except for the 15 and 20-year Nasdaq numbers for which reinvestment of dividend information was not available) and all Fund performance numbers are calculated after deducting fees and expenses.

So, what changed? A year ago, our stocks were suffering from neglect as the obsession with rising energy and commodity prices eclipsed less cyclical companies, and rising interest rates cast a pall over financial services companies. Now, with the world economy starting to slow, the U.S. housing market cooling, and the Federal Reserve no longer raising interest rates, investors seem to have rediscovered many of our stocks. These cyclical factors have little impact on the long-term growth in business value of our companies, but the uncertainty creates volatility. We make our investment living taking advantage of volatility, but we cannot control the timing. Hence, a lousy year once in a while, but a good long-term average rate of return with little risk of permanent loss of capital.

A year ago, we wrote about a shift in our outlook for the companies in our portfolios. Our attitude change from "comfortable" to "excited" reflected the growing discounts to business value we saw in the prices of many of our core holdings, not just a personal mood swing. The prior year, while dreary, provided us the opportunity to capitalize on an environment in which our companies’ businesses performed well, but their stocks didn’t. (This explains why, seemingly perversely, we tend to get more upbeat as our stocks go down.)

The six stocks we singled out as important positions that were especially cheap showed an average gain of 16% over the past twelve months. Fannie Mae (+27%) and Comcast (+28%) were especially strong, while Tyco (+2%) and Countrywide Financial (+8%) lagged. Berkshire Hathaway rose 17% and Liberty Media, in still another round of financial engineering, was split into two new entities which between them generated a 15% total return for the period.

Going forward, all of these stocks remain important holdings. Countrywide seems especially attractive at 7-8 times expected 2007 earnings per share. Fannie Mae is gradually emerging from the clouds of accounting scandal and political debate over its future and we believe it has room for further gains. Berkshire Hathaway has been strong lately, but it still has huge cash reserves that we expect to see deployed more profitably through acquisitions of entire businesses and/or securities.

Liberty Interactive and Liberty Capital both have further upside potential. Interactive owns QVC which continues to grow while generating prodigious amounts of free cash flow. Very little of the cash is needed in the business so most of it can be redeployed by John Malone to acquire complementary businesses or to buy back stock. Capital sells at a substantial discount to the underlying value of its (mostly passive) assets, and we believe Malone should be able to both grow the net asset value of the company and shrink the discount at which the stock sells.

Tyco is in the process of a restructuring of its own. Early next year, it is expected to split into three separate companies—electronics, security and healthcare. The idea is that each business requires a different managerial approach and balance sheet structure and that each has a different natural shareholder constituency. Presumably, when investors are offered their choice of pure plays, they will pay more in the aggregate for the three companies than they did for Tyco the conglomerate. Whether the three new companies remain independent or are sold, we expect to realize $35+ per share from our Tyco holdings.

Comcast is approaching our estimate of intrinsic value and we have trimmed our positions, but we believe it still has considerable growth ahead of it. Other major holdings such as Wal-Mart, UnitedHealth, AIG and Redwood Trust are still very attractive long-term investments, and several smaller companies have important roles, especially in the smaller funds—Hickory and Partners III. The tables on the "Portfolio Profile" page for each Fund show top-ten holdings, largest net purchases and sales, and net contributions to results (positive and negative) during the last quarter. Most of the buying and selling represented adding to favorite positions on weakness and trimming holdings of strong performers whose position sizes increased as their price-to-value relationships became less attractive.

Finally, we should say a few words about Partners III and its short positions. While each of our other Funds own stocks and cash equal to 100% of their net assets, Partners III may borrow to buy additional shares of stocks we think are attractive and "hedge" the over-sized long positions by selling short securities we believe to be over-valued. We shorted the Nasdaq and S&P 500 in the late 1990’s when the mega-cap growth companies that drove those indexes seemed extremely over-valued. We are currently short small- and mid-cap indexes because they seem expensive relative to our stocks (many of which are large-caps these days). This may seem an unlikely departure from our "bottoms-up," one-stock-at-a-time investment approach, but we believe that selling short over-valued stocks, individually or in groups, is just another form of value investing.

We still expect credit and liquidity problems to afflict individuals, hedge funds and financial institutions to some degree in the next year or two. The economy is very resilient and we are not expecting or predicting financial disaster. Nevertheless, it seems inevitable that fear and volatility will make life interesting for investors from time to time. Value investors welcome these times as opportunities to buy undervalued assets, but in the midst of these episodes, it takes courage to "recheck the story and buy more." In fact, for all the attention paid to "stock picking," we believe that our primary value added as investment managers may be our willingness to make contrary bets when our clients are most fearful and to take chips off the table when investors are overly-enthusiastic.

We feel very good about our companies and their ability to play both offense and defense, whatever the economic environment, and we are cautiously optimistic about the outlook for our Funds. Please feel free to contact us if you have questions about our portfolios or investment strategies.

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	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.