Dear Fellow Shareholders,

World markets turned in mixed results in the third quarter. The broader stock market indices showed small gains or losses, with small and mid-cap stocks worldwide generally outperforming large caps. Our Funds also achieved mixed results in the quarter, either slightly leading or lagging behind their benchmarks. Importantly, year to date, all of our six funds have posted positive absolute returns, and most have beaten their benchmarks as well.

The Economy and the Market

Despite slowing economic growth, we still believe that most businesses will continue to report higher earnings. The Fed has raised short-term rates, but long rates, which we view as more important to the stock market, remain relatively unchanged. Energy prices are also a concern, but we believe they should not significantly slow growth. Yet some recent market volatility has created opportunities to buy excellent companies at attractive prices, particularly in international markets. So, we still believe that equities' prospective returns remain attractive compared to other asset classes.

Don't Forget Our Analysts!

Mutual fund manager incentives and compensation have attracted considerable attention over the past year. Listening to this debate—and the complete inattention to the role of analysts—we are reminded of how much the investment process at Oakmark differs from the industry norm.

The traditional mutual fund industry investment process places the portfolio manager in a starring and a directing role. Portfolio managers are in charge. They direct the research agenda, make their own stock calls, and dominate the compensation pool. Analysts serve the portfolio managers and aspire to become a PM themselves one day, so that they can become well paid.

At Oakmark, our process is research driven and team oriented. Analysts on our investment team play an equal role with portfolio managers. Their bottom-up research drives our investment agenda, and the entire investment team works together to evaluate the merits of an analyst's new idea. (Bill Nygren writes very eloquently about our team approach this quarter in his letter.) Our process depends on quality people, and we set high standards for our analyst hires. Our seasoned analysts have an average of 12 years of experience, and their experience, insight, and investment maturity give us an edge in generating superior performance. It's worth noting that research can be a very rewarding career at Oakmark. Nine of our firm's seventeen partners spend the majority of their time doing stock analysis, and analysts rank among the most highly compensated people at our firm.

Establishing the correct incentives and compensation system is a key component to investment success. However, the right system has to be in place for both portfolio managers and analysts. We have paid considerable attention to ensuring that our compensation system ties rewards to an individual's long-term contribution to the Funds' investment success. Our partnership structure, the passion that our team has for our business, and our high fund share ownership reinforce this alignment.

Oakmark Board Elects a New Chairman

After leading the Oakmark board since the inception of the Funds in 1991, Victor Morgenstern has stepped down as chairman. Gary N. Wilner, M.D., an Oakmark trustee since 1993, has been elected to serve as the new chairman. Gary brings dedication, leadership, and long tenure as an Oakmark trustee to his new position. I would like to thank Victor for his many years of service to Oakmark shareholders as Oakmark chairman; he will continue to serve as an Oakmark board member.

Liquidation of The Oakmark Small Cap Fund

Our goal has always been to deliver superior long-term performance to our shareholders. When we concluded recently that we could not achieve this with The Oakmark Small Cap Fund, we decided that the best step was to close and liquidate the Fund. We are committed to act with integrity and honesty with our clients and we believe that this action underlines that commitment. We completed the liquidation of the Fund on September 28.

Fund Distribution Policy

Most of Oakmark's shareholders, like us, are taxable investors. As shareholders and fiduciaries, we strive to maximize the long-term, after-tax return of our investments. Inevitably, however, we are forced to recognize taxable income—and that's a good thing! This year we plan to pay annual capital gains and income distributions in mid-December (a little later than we historically have) and will post estimates on Oakmark.com in advance of these fund payouts.

Thank you for your continued investment and confidence in The Oakmark Family of Funds. We welcome your comments and questions. You can reach us via e-mail at ContactOakmark@oakmark.com.

John R. Raitt
President of The Oakmark Funds
President and CEO of Harris Associates L.P.

THE OAKMARK FAMILY OF FUNDS

Summary Information

The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. 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.

* Not annualized

FUND EXPENSES

A shareholder of each Fund incurs two types of costs: (1) transaction costs, such as redemption fees, and (2) ongoing costs, including investment advisory fees, transfer agent fees, and other fund expenses. The examples below are intended to help shareholders understand the ongoing cost (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other funds.

Actual Expenses

The following table provides information about actual account values and actual fund expenses for Class I of each Fund. The table shows the expenses a Class I shareholder would have paid on a $1,000 investment in each Fund from April 1, 2004 to September 30, 2004 as well as how much a $1,000 investment would be worth at the close of the period, assuming actual fund returns and expenses. A Class I shareholder can estimate expenses incurred for the period by dividing the account value at September 30, 2004 by $1,000 and multiplying the result by the number in the Expenses Paid During Period row as shown below.

Certain accounts invested for 90 days or less may be charged a 2% redemption fee. Please consult the Fund's prospectus at www.oakmark.com for more information.

The following table provides information about hypothetical account values and hypothetical expenses for Class I of each Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which are not the Funds' actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balances or expenses shareholders paid for the period. Shareholders may use this information to compare the ongoing costs of investing in a Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as redemption fees. Therefore, the third line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.