Fellow Shareholders,

Your Oakmark International and International Small Cap Funds continued to perform satisfactorily in Q3 2004 with a loss of less than 1% for the International Fund and a 4% return for International Small Cap while the MSCI World ex U.S. Index¹⁴ was flat. More importantly Oakmark International's return is 12% since its inception versus 6% for the Index and Oakmark International Small Cap's return is 12% since its inception versus 5% for the Index.

A Pleasing Earnings Season

Though share prices have had an extremely lackluster summer, we happily report that, from an operational perspective, the companies in The Oakmark International Funds' portfolios are doing well in our opinion. With industrial production rising throughout the world and consumer spending remaining strong, companies across most industrial sectors are posting what we consider to be very robust operating results. These results are the reason that we are so optimistic about share prices going forward: given low valuations around the world, we believe that share prices should rise if these earnings conditions stay intact. And, if "the market" does not respond by buying shares, we believe even more stock buybacks may occur from the companies we own. Many of these companies are taking advantage of low equity prices by "de-capitalizing"—or, buying back their own shares. Diageo, BP, Associated British Ports, Takeda , Euronext, Givaudan, and Swatch are just some of the examples of companies we own who are currently involved in stock buy backs. Five years ago, this would have been a rarity, which shows that foreign companies are not only becoming more concerned about returns but that they also understand their own share price does not always reflect reality.

Globalization is Working

Remember all the messy protests surrounding The World Trade Organization and The World Bank meetings? Though it is not perfectly clear what the protestors were rallying against, a common theme of anti "globalization" was heard.

We believe globalization is triggering global prosperity. Consider the boom today in "old economy" industries like steel, coal, mining, shipping, and construction equipment. An industry once believed to be dead—the Great Lakes iron ore trade—has awakened, with iron again being shipped en masse from the iron range of Northern Minnesota to the steel mills of Northern Indiana.

What is causing this? China and India are now becoming wealthy enough to actually be consumers as well as producers. This ultimately translates into a higher level of global aggregate demand. And as long as any company or economy is competitive, there will be benefits for both consumers and producers. Yes, we have to watch that this expansion in economic activity does not strain our environment, but overall, we believe this expansion is great for the global economy and will lead to a higher level of global employment and higher living standards.

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