Fellow Shareholders,

The Oakmark International Funds both had positive performance for the quarter ending June 30th 2004. The Oakmark International and The Oakmark International Small Cap Funds returned 2% and 3% respectively for the quarter while the MSCI World ex U.S. Index¹⁸ was flat. More importantly, both Funds continue to have strong performance from inception. Oakmark International's return has been 12% since its inception versus a 7% from the Index and Oakmark International Small Cap's return has been 12% since its inception versus a 5% from the Index.

Blocking and Tackling

As mentioned in our last quarterly, economically, the world is in a somewhat peaceful, balanced state. The question then becomes, does this state make it easier or harder to find value-oriented investments? The answer really is not that simple. When the world is in flux, emotionally, there is a greater tendency for investors to dump equities, both good quality and bad, out of fear. This enables longer-term, patient investors such as us to take advantage of other peoples' short-term time horizon. In a way, it makes our job easier. But, in such situations, though there are more opportunities, they exist in difficult environments.

Today, we have the opposite situation. Though the environment is "easier," there is less irrationality in the market, and so we focus more than ever on the fundamentals of a business. What type of sustainable returns are the assets generating? Is management being a good steward of the company's free cash flow? Can we buy this company at an attractive discount to its intrinsic value? These are our investment fundamentals. We strongly believe that if we focus on these issues and behave with discipline, then we will continue to be successful investors over the medium and long term.

Happily, we are still finding lots of value in the world today. Though we are often asked which geographic region offers the greatest investment deals, we rarely can single out one area. We are bottom-up stock pickers and always focus on stock-by-stock portfolio construction. Though we are over-weight in Europe, we are invested very broadly from Europe to the UK, Latin America and Asia. Whether it is a South Korean mobile phone provider or an Italian Bank, we are finding lots of opportunities. But, there are no "gimmies", and finding the right investment requires a strong focus on fundamental analysis. This is what we call our blocking and tackling.

Europe Covered!

Doing our brand of fundamental analysis requires extensive, independent, hands-on research. This means visiting countries, management teams, plants, and any other possible information source. This recent quarter was no exception. Over the course of three months, we visited nine European countries, over twenty cities, and almost 100 companies. We toured plants and met with all levels of management. We do this for one reason: to gather enough information so that we can make sound, informed investment decisions. Understanding how management teams think, operate, and execute is critical to us. This travel is not seasonal; it is a necessity that helps us develop new investment ideas. As an example, this quarter's trips yielded a number of new names in both funds, including Lloyds-TSB Group, BP plc, Croda International, Prosegur, and Eurazeo.

Not only do these trips yield new ideas, and allow us to catch up in more depth with our existing investments, but it also gives us a much clearer picture of the economic conditions in which these companies operate. Spending a week visiting management teams of companies of a variety of sizes and industries yields a better picture of a country or region's economic environment than spending a month with macroeconomists! As in everything we do in the Funds, we believe the best way to invest is looking from the bottom up.

Besides, getting out of Chicago helps us appreciate it as a city even more given a double cheeseburger can cost over $15 in London! Sounds a little silly, but sometimes a lot can be gleaned from anecdotal evidence.

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