Small Company Fund

Effective September 12, 2008, the Fund is closed to new and existing shareholder accounts and scheduled for liquidation on or about November 24, 2008. For more information please refer to the prospectus.

Third Quarter 2008

On September 12, 2008 the Managers Funds Board of Trustees ("Board") approved the recommendation to liquidate the Managers Small Company Fund. Similarly, the Board also approved the hiring of Morgan Stanley to serve as transition manager and facilitate the conversion to cash. Epoch Investment Partners and Kalmar Investment Advisers were immediately notified and the transition commenced Tuesday, September 16, 2008. The days following the September board meeting were especially volatile and noteworthy. Sunday, September 14, 2008, Lehman Brothers filed Chapter 11 bankruptcy and Bank of America announced plans to acquire Merrill Lynch. As a result of this and additional market turmoil, the third week of September saw huge market swings, increased volume, and much uncertainty. Specifically, the Russell 2000 Index moved by more than 3% (+/-) each day and nearly 7% on Thursday, September 18. Morgan Stanley completed the liquidation on Wednesday, September 17, 2008, and the Fund has been in cash since.

Prior to the decision to liquidate the Fund, Managers Small Company underperformed its primary benchmark by approximately 250 basis points (2.50%). The disappointing absolute returns were mostly due to poor performance within the energy sector. In particular, seven Fund holdings depreciated more than 40% during the first two-plus months of the quarter. Unsatisfactory relative performance was attributable to poor sector selection, poor stock selection, and the Fund's slight style biases during the quarter.

The main contributor to underperformance was an underweight to financials. Due to a lack of attractive growth opportunities and transparency, the Fund had been significantly underexposed to this sector for several years, and this decision was beneficial in the recent past. However, small-cap financials rebounded during the third quarter, and the sector returned +10.7% through September 17, 2008. Similarly, performance was hurt by an overweight to the energy sector, which had also been in place for several quarters and advantageous in the past, but detracted last quarter. The energy sector was the worst-performing sector through mid-September, and energy stocks fell markedly due to decreasing demand and falling prices. Stock selection also hurt relative performance and was weakest within the information technology sector. Specifically, Fund holdings returned -7.79% compared to -5.27% for the Index. THQ (-40.5%) and ADC Telecommunications (-38.3%) were two of the Fund's worst tech performers. Congruently, the Fund's slight bias towards higher-growth, higher P/E, and larger-market-cap stocks hurt relative performance, as small-cap and value outperformed mid-cap and growth.

The above detractors were partly offset by strong stock selection within the materials and telecommunication services sectors. The Fund had a small allocation to the telecomm sector, which represents roughly 1.3% of the Index, and Fund holdings returned +5.68% compared to -14.62% for Index constituents. Materials stocks struggled during the quarter, but Portfolio holdings held up much better than the Index, returning -1.88% compared to -11.81%.

As previously stated, Morgan Stanley completed the transition to cash on September 17, 2008. During the remaining two weeks of the quarter, U.S. equity markets were extremely volatile, and the Russell 2000 Index returned +0.55% between September 18 and September 30, 2008. Since the Fund was completely transitioned to cash by the close of business on September 17, the Fund's lack of equity exposure hurt relative performance and exaggerated the Fund's underperformance during the quarter.

The performance shown represents past performance and is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. From time to time the advisor has waived fees or reimbursed expenses, which may have resulted in higher returns. The listed returns and yields on the Fund are net of expenses and the returns and yields on the indices exclude expenses. Current performance of the Fund may be lower or higher than the performance quoted.

The Fund is subject to risks associated with investments in small capitalization companies, such as erratic earnings patterns, competitive conditions, limited earnings history, and a reliance on one or a limited number of products.

Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of Managers Investment Group and are not intended as a forecast or guarantee of future results. Any securities discussed may no longer be held in an account’s portfolio. It should not be assumed that any of the securities transactions discussed were or will prove to be profitable, or that the investment recommendations we make in the future will be profitable.

Unlike the Fund, the Index is unmanaged, is not available for investment and does not incur expenses. Please see Index Definitions for all our funds' benchmarks.

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