THE OAKMARK SMALL CAP FUND Report from James P. Benson and Clyde S. McGregor, Portfolio Managers

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/02) AS COMPARED TO THE RUSSELL 2000 INDEX11
	Average Annual Total Returns3 (as of 6/30/02)
	Total Return Last 3 Months*	1-year	5-year	Since Inception (11/1/95)
Oakmark Small Cap Fund	-6.85%	5.42%	4.84%	12.83%
Russell 2000	-8.35%	-8.69%	4.44%	8.34%
S&P Small Cap 60012	-6.53%	0.27%	8.26%	11.98%
Lipper Small Cap Value Index13	-4.08%	5.10%	8.57%	12.28%
Past performance is no guarantee of future results. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change.
* Not annualized

The second calendar quarter of 2002 was a period most investors would just as soon forget. Declining stock market values triggered by accounting scandals and uncertain economic growth caused some investors to seek alternative investments to stocks. Housing prices and transaction activity remained active and even bank deposits, despite low interest rates, generally experienced good growth. For the just concluded quarter, stocks slumped in value as the S&P 500 Index¹ fell by over 13% and the NASDAQ Composite² lost 21%. The Russell 2000 Small Cap Index fell by 8% during the quarter which more than erased a 4% rise in the first quarter of 2002. Year-to-date the Russell 2000 is down by nearly 5%. Your fund experienced a loss of approximately 7% during the last three months bringing the year-to-date result to a gain of not quite 5%. While we are pleased to be able to report a gain for our investors, we are increasing our analytical focus to find those companies that we believe not only offer good investment opportunities, but also have management teams that conduct themselves in an ethical fashion.

Mergers and Acquisitions

Since peaking in 1999-2000, merger and acquisition activity in the United States has declined sharply. This can have a negative impact on small cap stocks since smaller companies are often the targets of larger firms. Despite the sluggish merger and acquisition environment, we were fortunate to have two of our companies agree to be acquired during the second quarter.

In May, Citigroup Inc. agreed to acquire Golden State Bancorp for a combination of cash and stock valued at approximately $40 per share at the time of the announcement. While we sold our investment in Golden State Bancorp shortly after the deal was announced, this stock illustrates our investment philosophy reasonably well. We bought Golden State in 1999 when the stock was trading in the upper-teens. At that time, we estimated a per share private market value for this company in the mid-$30's. Management did a good job of growing Golden State's private market value by gaining new customers, cross-selling current customers and maintaining excellent asset quality.

By early this year our estimate of Golden State's value had increased to the mid-$40's as management's actions had a positive impact on raising the bank's value. Since this stock remained consistently below our estimate of private market value we remained an owner of this security. By exiting this position only after most of the valuation gap had been closed, we were able to keep our trading costs down and have the bulk of the gains achieve long-term tax status.

Silverstream Software Corporation is the other stock held in the Fund's portfolio that agreed to be acquired during the past quarter. Novell Inc. reached an agreement to acquire Silverstream for $9.00 per share in cash and this represented a nice premium to our average purchase price of under $6 per share. Silverstream was a 2001 addition to the portfolio and this is a stock that we were able to buy at below net cash (total cash plus marketable securities minus all debt) per share. While finding stocks trading below net cash is rare, when we do find them we are likely to buy these issues if the operating company has decent prospects, since we are essentially getting the operating company for free. We have reduced our Silverstream holdings and if Novell completes this acquisition our remaining Silverstream shares are likely to be sold in the third quarter.

Freedom To Choose

One of the key advantages small cap investors and small cap fund managers have is the freedom to choose among several thousand potential investments. Many of these investments are likely to be overlooked by the majority of investors, thus presenting a potentially favorable investment opportunity for those of us that focus on small cap stocks. An illustration of how concentrated the market capitalization is in the United States was detailed in a mid-June report published by Lehman Brothers where they looked at all companies with market capitalizations greater than $200 million and divided these firms into quintiles. The top quintile contained only eleven firms while thirty firms were in the second quintile. Collectively, 41 companies comprise 40% of the stock market's total capitalization. At the other end of the scale, the bottom quintile contained 2,230 companies, which provides ample investment opportunities in almost any economic or stock market environment.

During the past quarter three stocks were added to your Fund's portfolio. These were Callaway Golf Company, Pharmaceutical Resources Inc. and Sybase Inc. A common characteristic of all three of these firms is their strong balance sheets. Each company has a substantial net cash position, thus none of these firms are dependent on external sources of capital (such as bank borrowings) to operate their businesses. Additionally, having excess cash during a downturn in equity prices should present these financially robust companies with opportunities to make inexpensive acquisitions and/or repurchase their own shares at attractive prices.

Callaway Golf is a leading designer and manufacturer of golf clubs, balls and accessories. In addition to their solid balance sheet, we like Callaway's strong brand position that has been developed over the years principally through design leadership. As the baby boom generation ages over the next decade, they should enter their peak golf playing years. We believe this demographic push will cause the total number of rounds of golf played to increase and, in turn, increase demand for Callaway's products.

Pharmaceutical Resources is a generic drug company with a focus on proprietary active ingredients. The growth in this business is being driven by a combination of a rising number of patented drugs becoming available to generic manufacturers as their patent protection expires and growing demand as the population ages. With numerous new drugs awaiting FDA approval, we believe Pharmaceutical Resources has a bright future.

Sybase Inc. is a provider of database software to large companies. Despite operating in a competitive environment, Sybase has successfully developed niches in providing database software to financial companies, retailers and other industries. With technology spending currently depressed, we do not look for robust near-term results from Sybase. But looking ahead several years, we believe a combination of new products and software upgrades within Sybase's customer base should result in a rebound in profitability. Sybase's strong balance sheet and positive cash flow generation during the recent technology spending downturn give us confidence in their long-term future.

Conclusion

We would like to thank our shareholders for your ongoing interest in and your support of The Oakmark Small Cap Fund. Additionally, we look forward to communicating with you over the next several years.

James P. Benson, CFA Portfolio Manager jbenson@oakmark.com	Clyde S. McGregor, CFA Portfolio Manager mcgregor@oakmark.com

July 1, 2002

Schedule of Investments—June 30, 2002 (Unaudited)