Letter from the President

Dear Fellow Shareholders,

This past quarter was extremely difficult for all equity investors. The Dow¹, S&P 500², and NASDAQ³ all posted double-digit losses for the second consecutive quarter. While the Funds' relative performance has held up in the face of significant declines this year, our absolute returns are not in line with our long-term goal of positive rates of return.

The Market

The market continued to be very volatile over the past few months, and investors faced a range of complex issues. On the plus side, hope grew that the economy and stock prices may be improving, while negative factors included high profile company-specific problems, uncertain profit forecasts, and the threat of war with Iraq.

Without overlooking these issues, we attribute the market's weakness primarily to an emotional exodus from equities as a whole and not to an unacceptably large number of new fundamental problems. Like many, we continue to find values in today's market and believe that this downward stock price pressure is symptomatic more of the end of a bear market, rather than the beginning.

With very low interest rates and expectations of improving economic conditions in 2003 and 2004, we maintain that equities will provide attractive long-term returns versus other asset classes. Over time, economic growth drives corporate earnings, which in turn power the long-term performance of the stock market.

Corporate Governance

One of our three key investment tenets is to invest with company managements whose interests are aligned with us, as shareholders. Adhering to this principle allowed us to avoid a number of recent well-publicized company-specific problems. It is important, however, that the concerns surrounding executive compensation, stock options, and excessive retirement packages be addressed.

We have and will continue to invest in companies that strike the appropriate balance between providing strong incentives for management and overall corporate profitability and integrity. Stock options should be expensed so that they are more accurately reflected as a "cost" of compensation. In addition, compensation packages should be rational, and retirement benefits should reward excellent long-term leadership, but at sensible levels. Periods of excess often uncover problems—and then lead to solutions that benefit all long-term investors. We believe that the market will also be self-correcting with management compensation.

Evaluate Your Equity Allocation

As we saw in late 1999 and early 2000—and as we see today—investors are often most optimistic when the market climbs to new highs and are most pessimistic when it tumbles significantly. Bear markets can trigger exaggerated, emotional behavior—causing equities to become significantly undervalued—as much as stocks in bull markets become overvalued. We continue to direct our efforts to what we've always done: invest in quality companies that we believe are undervalued and have significant long-term potential and focus on the rigors of our investment process rather than respond to the market emotionally.

While exiting equities may seem tempting today, you should consider remaining invested—or increasing your equity position to return to levels before this correction—if you have a long investment horizon. Even if the benefits of equity investing are difficult to appreciate now, we remain confident in the long-term positioning of our Funds and encourage you to stick with your financial plan.

An important part of achieving above-average long-term investment results is investing against the emotional tide, not with it. We look forward to better times ahead.

P.S. In our continuing efforts to provide top quality service to investors, you may now open new Oakmark accounts on our web site, www.oakmark.com. We hope that this makes investing in our funds even easier for you.

October 4, 2002

THE OAKMARK FAMILY OF FUNDS

Summary Information

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