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 (3/31/04) AS COMPARED TO THE RUSSELL 2000 INDEX11
	Annual Average Total Returns
	(as of 03/31/04)
	Total Return Last 3 Months*	1-year	5-year	Since Inception (11/1/95)
Oakmark Small Cap Fund (Class I)	7.03%	46.87%	9.44%	11.62%
Russell 2000	6.26%	63.83%	9.65%	9.98%
S&P Small Cap 60012	6.22%	56.49%	13.10%	12.40%
Lipper Small Cap Value Index13	5.96%	65.89%	16.54%	13.48%
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.
The performance data quoted represents past performance. Past performance does not guarantee future results.
The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com.
* Not annualized

"When it is a question of money, everybody is of the same religion." Voltaire

Our Results

The Oakmark Small Cap Fund increased 7% for the quarter ended March 31, which also reflects the calendar year gain. During 2004, the Fund has outperformed the market averages while also outperforming our primary benchmark, the Russell 2000 Index, which has gained 6% year-to-date. We are pleased with this result because we believe that absolute positive returns preserve and grow your capital. We are even more pleased that over the past three-year and five-year periods we have grown and compounded the capital of our long-term investors at a 12% and 9% annualized rate, respectively. Please do not think for one moment however, that those returns are going to lead us to complacency. We began 2004 with a renewed focus on our goal of continuing to provide consistent returns. While Oscar Wilde may have said, "Consistency is the last refuge of the unimaginative," we feel that in the investment business consistently above-average returns requires both imagination and discipline. We also firmly believe that you, our investors, sought this consistency and discipline when you elected to partner with us by committing capital to the fund.

Tidal Charts

Particularly strong performers during the quarter were Central Parking Corporation, CIBER Inc., Jack in the Box Inc., Levitt Corporation, and Peoples Bank of Bridgeport. Over time, we have noted that many value stocks have a tendency to sit for long periods with a huge gap between our assessment of intrinsic value and the current market price until a catalyst or some other piece of information triggers a greater appreciation of the opportunity presented by the gap. Then, the gap narrows and often closes within a very short period. We mention this sequence of events because it speaks to the importance of a long-term focus, rather than allowing one's self to be blown about by the vagaries of changing short-term perceptions that have little to do with a company's long-term business value. It also speaks to the foolishness of trying to time the market, especially in today's world of accelerated information flows.

The worst performer during the quarter was R.G. Barry, which saw its share price sell-off when it reported a slowdown in sales of its slipper products, along with the attendant back-up in inventories. We continue to monitor this situation closely, weighing the statistical cheapness of the investment against a management that for a continued period has been unable to avoid tripping over its own feet in executing a turnaround.

Five positions—Central Parking Corporation, Jack in the Box, Optimal Robotics Corporation, Penn Fed Financial Corporation, and PMI—were sold out during the quarter. Four of those issues reached our assessment of fair valuation. We sold one position, Optimal Robotics, after its management changed its strategy to focus more on management, rather than shareholder, returns. After we exited the position, management sold the one business that had represented the major unpinning of our investment thesis. Seven new positions were initiated during the quarter in American Italian Pasta, Coolbrands International, FTI Consulting, Levitt Corporation, NeighborCare Inc., PRIMEDIA, Inc., and Watson Wyatt & Company Holdings. While the buoyant market of 2003 and the beginning of 2004 has eliminated many compelling values that existed at the beginning of 2003, our analytical team has diligently examined the "New Low" list as well as other sources to uncover some very interesting and undervalued situations. We have NOT undertaken a strategy of turning the portfolio over merely for the sake of turning the portfolio over. Rather, we have removed issues from the portfolio because they had reached their valuation targets or our assessments had proven faulty, and we have been able to replace them with what we believe are more attractive issues. We also note that our holdings have not appreciated to the point where a wholesale liquidation is appropriate based on valuation.

We would point out that there IS a reason why we construct portfolios rather than focus on individual stocks. To use a baseball analogy, ours is a business of hitting singles and doubles. If there is an occasional home run, that's nice, but the singles and doubles provide consistent returns over time while allowing control of the risk we are undertaking. And, we believe that the market and its participants will present us with other opportunities to buy a lot of very high quality securities at very reasonable prices. In the interim, we are looking for one or two really good ideas a year (and are thankful whenever we are able to find a few more than that).

Making Sausage

Is there anything unique about the process of investing in small cap value stocks? Aside from liquidity issues, perhaps the biggest difference from the large cap area is a much diminished information flow. This is not because of the companies themselves, which are oftentimes quite happy to talk to institutional or even individual investors.

Rather, Wall Street research often provides little information. A company like Microsoft might have twenty different analysts from the Street following it. For the top two hundred largest capitalization stocks, it is not unusual to have at least ten analysts from different companies poking and prodding the news releases and financials, talking to management, and producing earnings estimates. The information flow on these companies tends to be huge. And, given that even a blind pig can find an acorn on occasion, sometimes one or more of the Street analysts will be outliers in their research and offer an insight that makes it possible to exploit an inefficiency in price, however briefly. The opposite is true in the small cap arena.

Probably some ten years ago, the Street started pulling back on the number of companies it covered. Companies like Merrill Lynch, which used to proudly announce that their analysts followed more companies than any other firm on Wall Street, have increasingly trimmed back their coverage to following fewer than a thousand companies. Given that our benchmark is the Russell 2000, that means a lot of companies are either not being covered or are covered by at best one or two institutional analysts, often at small regional or second-tier firms. Many of the companies in The Oakmark Small Cap Fund are followed by one or two analysts. That presents us with an opportunity.

Of course, another opportunity comes from the nature of the information flow about these companies. Most large cap companies, followed by an abundance of Street analysts as well as buy side analysts for institutional investors, tightly control access to management, including what have become rigidly scripted investor presentations and guidelines even for the types of questions investors can ask. Earnings guidance information is now the high point of a quarter's information, and woe unto the analyst who deviates greatly from that guidance. What used to pass for analysis has now become information distribution by what are very close to being "embedded" reporters, with all that that may subsume.

Contrarily, in the small cap world, analysts get to meet managements, attend analyst days where there is the opportunity for interchange with many levels of management, and still tour plants and other operating facilities. Often these companies do not have a true head of investor relations (the guardian of relative truth), so one's idea of the intellectual and moral makeup of managements comes from direct exchange. One also gets the opportunity to learn about industries and competitors in considerably more depth than one usually gets from visiting a large cap company.

At Harris Associates, we are blessed with a very high quality group of analysts who present us with a continuing flow of well-researched, interesting ideas. While we won't go so far as saying that the portfolio manager could easily be replaced by a coin-flipping primate, the fundamental work of our analysts makes our daily jobs considerably easier.

The Future

One of the nice aspects of our job and the focus of our firm is that as fundamental value investors, we don't spend a lot of time trying to guess the future, especially what we have no control over and no ability to assess. We leave it to others who make their living predicting economic growth or interest rates. This is probably for the best because we don't think we have any especial talent in that area, and they may actually be ones where the coin-flipping primate can truly excel (or perhaps already has, depending on one's opinion of various commentators). Instead, we plod along, looking to unearth the occasional diamond in the rough of an investment opportunity. In our favor, the continued and even intensified focus on short-term events drives many investment analysis and portfolio management decisions today. Sometimes (actually more than sometimes), doing nothing is the correct decision if you have confidence in your original assessment. Regardless, we are not going to do anything different this coming year from what we have done in the past: searching for business values at that margin of safety discount to intrinsic value that we like. We remain grateful to you, our shareholders and partners, for your patience and confidence in entrusting us with your capital to manage.

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

Schedule of Investments—March 31, 2004 (Unaudited)

See accompanying notes to financial statements.