Dear Fellow Shareholders,

World stock markets rose sharply in the fourth quarter, bringing most of the broad market indexes to double-digit gains for the full year. Each of our Funds produced significant positive returns during the quarter. More importantly, every one of our Funds achieved a new all-time high asset value during the quarter.

Maintaining a Consistent Investment Discipline

We have often written about how important a long-term focus is to our investing discipline. While this sounds simple, even the most sophisticated investors find it difficult to maintain such a focus in practice. The news media, brokerage firm analysts, and market makers all eagerly highlight the latest "news" and build fear, uncertainty, or hype around recent industry and company developments. With such intense scrutiny of short-term issues, investors find it challenging to maintain a proper perspective about the true long-term significance of the challenges and opportunities that companies face.

Our value investing process examines a company's intrinsic business value and its ability to grow that value over the long term. Often, current marketplace concerns fade when we view them in relation to their impact on a business' long-term value. Frequently, these problems are simply short-term setbacks that are a normal part of any company's growth and evolution. They may also create an attractive investment opportunity. After analyzing a company faced with such questions, if we believe that the market is valuing the business at a substantial discount to its intrinsic value, we will buy the stock. Then, we patiently wait for the "crisis-du-jour" to fade and for the market to recognize the true, underlying value of the firm.

Mutual fund investors often face the same difficulties as professional investors in maintaining a long-term investment focus. Mutual fund industry commentators often steer investors' focus to the most recent 3-6 months of a fund's performance. Human nature leads investors to want to own the current "winners," raising doubts about funds that have lagged for a quarter or two. As a result, financial advisors often find that the hottest funds in the hottest sectors are the easiest to sell—leading many investors to buy into the latest fad at the peak of overvaluation. In contrast, we believe that to invest successfully in funds, one must resist the temptation to chase short-term trends and should instead choose fund managers with disciplined, long-term strategies, patiently giving them time to let their strategies work.

At Oakmark, we recognize that there will be periods when our performance differs significantly (in either direction) from that of the market. Given our long-term value approach and the volatility of short-term investor sentiment, the market may lag in recognizing the undervaluation of our holdings. Over the past decade, all of our Funds have had quarters near the top and near the bottom of their peer groups. Our long-term investors should expect more of the same. We like to emphasize, however, that all of our Funds have generated substantial long-term returns. We believe that following a patient, disciplined and long-term mutual fund investment strategy has richly rewarded our investors. Please see our website (www.oakmark.com/peerperformance) for details of our long term investment results and performance relative to our peers.

Chad Clark Named International Small Cap Fund Co-Manager

As we recently announced, Chad Clark will become co-portfolio manager of The Oakmark International Small Cap Fund effective January 28, 2005. He will join current co-manager, David Herro, Chief Investment Officer of International Equities, who has managed the International Small Cap Fund since its inception in November 1995. This change reflects the increasing strength and depth of our international investing team. Chad succeeds Michael Welsh, who continues as co-manager of The Oakmark International Fund and The Oakmark Global Fund.

Oakmark Trustee Morgenstern to Retire

Victor Morgenstern, who stepped down as Chairman of the Oakmark Board of Trustees in October, has resigned from the Board effective year-end 2004. Once again, I would like to thank Victor for his many years of service to Oakmark shareholders, first as CEO of the Funds' advisor and then as a Trustee and Oakmark Board Chairman.

Thank you for your continued investment and confidence in The Oakmark 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 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