Fellow Shareholders,

Foreign stocks sold off aggressively in the first quarter of 2003. In Europe, most of the major markets fell in excess of 15% in local currency terms, with some markets hitting six year lows. The Japanese market (Nikkei Index³⁰), close to a 20-year low, had the best quarterly return of all major markets, declining 7%. Though we are disappointed with the Funds' respective 12% declines, the values we are currently finding make us extremely enthusiastic about future prospects.

We are "Giddy"!

As value investors, nothing excites us more than irrational valuations. Recall how distraught we were in 1999 and early 2000 when T-M-T (technology, media, and telecom) stocks were unrealistically priced, and our "old economy" stocks were ignored. Major indices were selling at unrealistic valuations no matter what the metric. CNBC was on TV's everywhere—in diners, in barber shops and once, we kid you not, in the front seat of a cab. The major focus of any party or coffee conversation seemed to be which "hot" mutual fund or tech stock to buy. The aftermath of this speculative period has been painful for many investors. Equities have been out of favor for three plus years and other asset classes, such as bonds, have soared. Now, we hear talk of bond funds and why, at current levels, the bond markets are not overpriced. Sound familiar?

We believe stocks are excessively underpriced. The value of any stock, in our view, is the present value of its future free cash flows. The businesses we own continue to generate lots of free cash even as their prices continue to fall. This means value expansion. Though we cannot predict when the course of events will reverse itself, we believe the further the value gap widens, the more return there will be in the future. Clearly, the global political situation has been unstable, and military action in the Mideast is wearing on the markets. When there is certainty of outcome, we do believe that will mean relief to global equity markets.

Though we realize people are uncomfortable buying stocks after they have fallen, we argue that this is usually the time they should be bought. Fundamentals do assert themselves over time; that is why we focus so intently on them. Current valuations are being impacted by global politics, not company specific factors. We believe these impacts are not permanent. When the cloud of global political uncertainty lifts, the glow of reality will be clear. This "reality", in our opinion, is bargain basement equity prices.

Word About Investing in France

We have received questions concerning our holdings of French stocks in light of France's actions in regards to Mideast politics. Though we understand why people could be upset with certain French political leaders, we feel, as bottom up value investors, our duty is to invest in the best investment opportunities no matter where they may be located. The companies we have invested in for the Funds are global enterprises, owned by global investors, and employ people in countries all over the world. We think our holdings of French stocks are exceptional companies selling at low prices, therefore fulfilling our value criteria. We will not divest any of the stock of French listed companies until the value proposition of these companies change.

Going Forward

Throughout the recent turbulence in global equity markets we have remained focused on our task of identifying the best individual investment opportunities around the world. The companies we own in both The Oakmark International Fund and The Oakmark International Small Cap Fund are, in our opinion, not only significantly undervalued but, in aggregate, represent one of the highest quality collection of businesses these Funds have ever owned. We remain quite excited about the future prospects for both Funds.

Thank you for your continued confidence and support.

David G. Herro, CFA Portfolio Manager dherro@oakmark.com	Michael J. Welsh, CFA, CPA Portfolio Manager mwelsh@oakmark.com