THE OAKMARK SMALL CAP FUND Report from James P. Benson and Edward A. Studzinski, Portfolio Managers

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/03) AS COMPARED TO THE RUSSELL 2000 INDEX13
	Annual Average Total Returns1
	(as of 9/30/03)
	Total Return Last 3 Months*	1-year	5-year	Since Inception (11/1/95)
Oakmark Small Cap Fund	5.79%	21.84%	7.25%	9.99%
Russell 2000	9.08%	36.50%	7.46%	7.93%
S&P Small Cap 60014	7.08%	26.86%	10.20%	10.44%
Lipper Small Cap Value Index15	9.46%	33.80%	11.67%	11.40%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
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 positive returns we achieved during the third calendar quarter of 2003 built upon the strong returns of the second quarter, but the sharp stock market sell-off in the final week of the quarter trimmed our gains. Investors seem to be nervous with respect to the sustainability of the economic expansion. While we understand these concerns, we believe the fiscal and monetary stimulus in the economy is likely to create a sustained economic recovery. Our goal is to invest in companies positioned to do well in an economic recovery, but these companies must also possess the staying power to do reasonably well if the economy unexpectedly fades. In summary, during the just concluded quarter the S&P 500 Index rose by 3% and the Russell 2000 Index climbed by 9%. Your Fund experienced a gain of 6% during the past three months, which places its performance above the S&P 500 Index⁶, but below the Russell 2000 Index.

Recent Successes and Shortcomings

One of the key reasons for having a portfolio diversified among 40-50 stocks is to decrease the volatility of the portfolio's returns over time. Despite your Fund's 14% gain on a year-to-date basis, we are trailing our benchmark index, the Russell 2000, for the first time since 1999. There are two principal reasons for this relative underperformance. First, several stock groups within the Russell 2000 that have done particularly well thus far in 2003 are underrepresented in our portfolio. The strongest small cap stocks have been those with negative earnings over the trailing twelve months and this is a group of stocks where we have only a limited number of investments. We have tended to avoid some industries within this strong group of stocks such as airlines, biotechs, telecommunications and technology capital equipment companies since our analysis indicates that most of these companies fail to earn a reasonable return on capital over time. We prefer to invest in companies where we believe our invested capital can earn above average rates of return and achieve above average growth on value. During those periods when stocks of unprofitable companies perform better than the market averages, we are likely to underperform. However, while we are not surprised by our relative underperformance thus far in 2003, we continue to invest with a long-term bias towards reasonably priced stocks of profitable companies.

The second topic we would highlight is stock selection. While the majority of our stock holdings are up on a year-to-date basis with two of our stocks more than doubling (Mentor Graphics and Measurement Specialties which was sold earlier in 2003), two stocks have been notable drags on our performance. The two offenders are MCSi Inc., which we sold for a loss earlier in 2003 following an accounting scandal, and Surebeam which is encountering slower than expected consumer adoption of its food safety technology. While we continue to believe Surebeam's technology for killing food borne pathogens via irradiating food would make our food safer, the outlook for this company's products and services remains dependent on consumer acceptance. We will continue to monitor Surebeam's progress closely.

What's New (and Not So New)

During the past few months there has been extensive media coverage of "market timers" and their trading in mutual funds. We believe trading by market timers in your Fund would be detrimental to our long-term investors since large scale, rapid-fire additions and subtractions of funds would drive up our trading costs. Therefore, back in 1999 we took a proactive stance against people that wanted to rapidly trade your Fund by imposing a 2% redemption fee on shares sold that were held 90 days or less. This redemption cost has, we believe, largely eliminated any interest market timers would have in your Fund. While this is largely old news, we just wanted to remind everyone how we conduct the stewardship of your funds.

Our new news is a change in your portfolio management team. We bid a fond farewell to Clyde McGregor and thank him for his valuable contributions over the past three years. The demands on Clyde's time have been increasing over the past year or so as the other fund he manages, The Oakmark Equity and Income Fund, experienced tremendous growth. Ed Studzinski joins the management team of your Fund. Ed has been an active participant in supplying investment ideas for your Fund for many years and we believe his investment insights should prove valuable to your Fund.

Portfolio Changes

During the third quarter we sold three stocks from your Fund's portfolio and we added four new stocks. The companies we sold were Columbus McKinnon, InFocus Corp. and Measurement Specialties. We sold all three companies based upon our belief that intensifying international competition would continue to pressure their profit margins. We initiated positions in Hudson Highland Group (a specialty staffing company), Jack In The Box (a quick serve restaurant company), Landry's Restaurants (a firm that operates mainly casual dining seafood restaurants) and Schweitzer-Mauduit (a manufacturer of premium specialty papers). We believe all four of our new positions are healthy companies that are well positioned to benefit from an economic recovery.

Summation

We would like to thank our shareholders for your continuing interest in and your support of The Oakmark Small Cap Fund. We look forward to communicating with you again next quarter.

James P. Benson, CFA Portfolio Manager jbenson@oakmark.com	Edward A. Studzinski, CFA Portfolio Manager estudzinski@oakmark.com

Schedule of Investments—September 30, 2003

See accompanying notes to financial statements.