<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number 811-4786
--------
Ariel Investment Trust
----------------------
(Exact name of registrant as specified in charter)
200 East Randolph Drive
Suite 2900
Chicago, Illinois 60601
(Address of principal executive office)
Sheldon R. Stein
200 East Randolph Drive
Suite 2900
Chicago, Illinois 60601
(Name and address of agent for service)
with a copy to:
Arthur Don
Seyfarth Shaw LLP
55 East Monroe Street
Suite 4200
Chicago, Illinois 60603
Registrant's telephone number, including area code: (312) 726-0140
--------------
Date of fiscal year end: September 30
------------
Date of reporting period: March 31, 2004
--------------
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
The following is a copy of the report transmitted to shareholders pursuant to
Rule 30e-1 under the Investment Company Act of 1940 (the "Act") (17 CFR
270.30e-1)
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[ARIEL MUTUAL FUNDS LOGO]
[GRAPHIC]
[THE PATIENT INVESTOR(R) LOGO]
SLOW AND STEADY WINS THE RACE
MARCH 31, 2004
ARIEL FUND
ARIEL APPRECIATION FUND
ARIEL PREMIER GROWTH FUND
ARIEL PREMIER BOND FUND
<Page>
INVESTING IN SMALL AND MID-CAP STOCKS IS MORE RISKY AND MORE VOLATILE THAN
INVESTING IN LARGE CAP STOCKS. Statistics and performance data represent past
performance. Past performance does not guarantee future results. The investment
return and principal value of an investment 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.
Performance data current to the most recent month-end may be obtained by
visiting our web site, www.arielmutualfunds.com.
This report candidly discusses a number of individual companies. These opinions
are current as of the date of this report but are subject to change. The
information provided in this report is not reasonably sufficient upon which to
base an investment decision and should not be considered a recommendation to
purchase or sell a particular security.
Investors should consider carefully the investment objectives, potential risks,
management fees, and charges and expenses of the Ariel Mutual Funds before
investing. The current prospectus for the Ariel Mutual Funds contains this and
other information about the Funds. Investors may obtain a copy of the current
prospectus by calling or writing our distributor. Please read it carefully
before investing or sending money. (C)April 2004, Ariel Distributors, Inc., 200
East Randolph Drive, Chicago, IL 60601. 800-292-7435.
Ariel Investment Trust
P.O. Box 219121
Kansas City, Missouri 64121-9121
800-292-7435
www.arielmutualfunds.com
<Page>
Table of Contents
<Table>
The Patient Investor 2
Value Company Updates 4
Value Company in Focus 6
Semi-annual Report 7
</Table>
[GRAPHIC]
Shareholder News PERSONALIZED PERFORMANCE NOW AVAILABLE!
Log on to our award-winning web site www.arielmutualfunds.com to receive your
PERSONAL RATE OF RETURN for each of your Ariel Mutual Funds accounts.
Your personalized performance is the rate at which your account has grown since
you opened it with Ariel Mutual Funds. We factor in the amount and timing of all
your purchases, redemptions, exchanges and distributions. This new feature is
available exclusively on www.arielmutualfunds.com.
When you visit our web site, you can also:
- - Sign up for eDelivery
- - View and print your quarterly account statements
- - Check daily fund prices
- - Purchase, exchange and redeem fund shares
- - Change your mailing address and email address
NOT PART OF THE SEMI-ANNUAL REPORT
<Page>
[THE PATIENT INVESTOR(R) LOGO]
SLOW AND STEADY WINS THE RACE
MARCH 31, 2004
"...if the attentions of corporate America's senior leadership teams are rapt on
check-the-box-like compliance issues, will they have sufficient time for
strategic planning? ...Will the risk-taking that breeds invention go away?"
DEAR FELLOW SHAREHOLDER: The annual report and proxy season is upon us. Immersed
in these corporate tomes, we have noticed many companies commenting on the full
impact of Sarbanes-Oxley one year later. A good example is the Markel
Corporation annual report which notes, "While many of the new regulations are
well-intentioned and seek to achieve admirable goals, these rules cannot
guarantee honesty and integrity. Unfortunately, these new requirements will add
bureaucracy and costs and the ultimate benefit is not clear...it is important
that the additional bureaucracy not get in the way of good decisions." These
words got us thinking.
As we have said in past writings, we believe many positive business practices
have resulted from the passage of Sarbanes-Oxley as well as other new procedures
governing our country's business practices. For example, few would dispute that
the average U.S. company has stronger financial controls today than just three
years ago--fundamental changes to reporting standards have resulted in greater
transparency in all financial aspects of business. Additionally, public company
boards are more independent than ever before--from a clear emphasis on outsider
membership, to their regular and meaningful executive sessions, to their direct
and unambiguous over-sight of outside auditors. These are all good things.
And yet, from our readings as well as discussions with corporate leaders and
friends throughout many industries, we are struck by a noteworthy shift in
executive time management. More simply put, with arduous compliance at the top
of every executive's "To Do" list, many are questioning how CEOs are now
spending their time and wondering what the trade-off will ultimately mean for
corporate profitability and America's global competitiveness.
REGULATION EXASPERATION
As the old saying goes, "time is money." Beyond the quantifiable dollars spent
on everything from auditors to lawyers to more internal staffing, there are
those things that cannot be calculated. More specifically, if the attentions of
corporate America's senior leadership teams are rapt on check-the-box-like
compliance issues, will they have sufficient time for strategic planning? Is
time being taken away from creating the best products? Hiring and retaining the
best people? Building and fostering a culture of success? Will the risk-taking
that breeds invention go away? As one board member of an Ariel holding noted,
"The impact of Sarbanes-Oxley and related regulations has been that many boards
have spent enormous time focusing on minute elements of governance rather than
the overall strategy of the business." Similarly, according to the CEO of one
Ariel Fund holding, "Sarbanes-Oxley is causing my management to devote time to
explaining and defending minutia [which is] not a good return for shareholders."
Yet another remarked that these efforts "bite into the discretionary time of
management with a very marginal gain."
Beyond more frequent and lengthier board meetings, nearly double the number of
audit committee meetings,
NOT PART OF THE SEMI-ANNUAL REPORT
2
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hours caucusing with legal counsel--public company Chief Executive Officers are
also spending an ever-growing amount of time with compliance officers crafting
proxies and word-smithing earnings announcements and other press releases as
much for accuracy as to avoid attacks or worse yet, class action law suits. To
the latter point specifically, the presumption that corporate executives are
trying to do the right thing seems to have been lost. Like the environment for
politicians post-Watergate, corporate executives now operate under a cloud of
suspicion and a "shoot-first-and-ask-questions-later" mentality has left many
with the impression that American business leaders are guilty until proven
innocent. As one of our portfolio executives bemoaned, "[it's] almost like a
witch hunt."
Herb Allen who serves as president of the well-respected investment bank, Allen
& Company and also a Coca-Cola board member, came to the same conclusion in a
recent WALL STREET JOURNAL editorial. In his submission entitled,
"Conflict-Cola," he lambasted a group calling for investment great, Warren
Buffett, to resign from Coke's board due to the group's outsider perception of a
conflict of interest. Clearly, tense diatribes like these burden CEOs and their
boards with an even higher level of mental stress--added anxiety that can sap
morale and negatively impact corporate culture and spirit.
As we have noted in past letters, there is little question that smaller public
companies are disproportionately impacted by these new regulations. Lacking the
scale of the big stocks, there are concerns that the added time and monetary
costs for the small-fries will become even more problematic and ultimately lead
some executives to move their businesses out of the public company spotlight in
return for the obscurity of private company status.
The retreat of a small public company here or there may sound innocuous, but the
ramifications are larger than any one company. As George Roche, Chief Executive
Officer of mutual fund manager, T. Rowe Price noted, "the added administration
is a very real burden to small public companies. Remember, small companies lead
job growth in this nation. Anything that is bad for small companies is bad for
America."
As always, we welcome your comments and appreciate the opportunity to serve you.
Sincerely,
/s/ John W. Rogers, Jr.
JOHN W. ROGERS, JR.
Chairman and CEO
/s/ Mellody Hobson
MELLODY HOBSON
President
[SIDENOTE]
"...corporate executives now operate under a cloud of suspicion and a
'shoot-first-and-ask-questions-later' mentality has left many with the
impression that American business leaders are guilty until proven innocent."
NOT PART OF THE SEMI-ANNUAL REPORT
3
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VALUE COMPANY UPDATES
[ANDREW(R) LOGO]
ANDREW CORPORATION (NASDAQ: ANDW)
10500 West 153rd Street
Orland Park, IL 60462
708-349-3300
www.andrew.com
Andrew Corporation is a global leader in the design, manufacture and
distribution of communications equipment and systems. With the acquisitions of
Allen Telecom and Celiant, Andrew is now one of the largest providers of
equipment to the wireless infrastructure market. Specifically, the company
provides a complete set of products for base stations that include microwave
antennas, coaxial cable and connectors, global positioning satellites and power
amplifiers.
Despite the recent downturn in the telecom industry, we remain committed to
Andrew Corp. With an expansive and diverse product line as well as substantial
capabilities to provide a global wireless network to mobile carriers worldwide,
Andrew is arguably the leader in the wireless infrastructure industry.
Additionally, we believe the company is well-positioned to benefit from
improving trends in the wireless industry, such as solid growth in cell phone
usage and infrastructure upgrades and expansion. By creating more sophisticated
technologies, Andrew Corporation will be one of the first to provide seamless
access to email and the Internet. As the leader in this industry, we believe
Andrew will see increasing sales and margins as the company uses its scale to
increase efficiencies and lower costs. Currently valued at roughly $18 per
share, the stock is trading at a 14% discount to our private market value
estimate of $21.
[CERTEGY LOGO]
CERTEGY INC. (NYSE: CEY)
11720 Amber Park Drive, Suite 600
Alpharetta, GA 30004
678-867-8000
www.certegy.com
Certegy Inc. provides credit and debit processing, check risk management, check
cashing and merchant processing to over 6,000 financial institutions, 117,000
retailers and 100 million consumers worldwide. The company was spun-off from
another Ariel holding, Equifax (NYSE: EFX) in July 2001.
In card processing services, Certegy focuses on small community banks and credit
unions where it enjoys the leading market share and broadest product range in
its niche. The company's transaction processing capabilities span all elements
of managing a credit/debit card business, including card marketing, application
processing, payment processing, fraud management and customer service. Certegy
also has exclusive long-term agreements with community banks and credit union
trade associations which provide high barriers to entry for would-be
competitors.
On the check services side, Certegy has the dominant risk management platform
with exclusive technology. This has enabled the company to win contracts with
Wal-Mart (NYSE: WMT) and Safeway (NYSE: SWY) for check cashing services. The
company counts 30 of the top 50 U.S. retailers as clients. With a current stock
price of roughly $35, the company trades at a 10% discount to our private market
value estimate of $39.
NOT PART OF THE SEMI-ANNUAL REPORT
4
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[ST PAUL TRAVELERS LOGO]
ST. PAUL TRAVELERS COMPANIES, INC. (NYSE: STA)
385 Washington Street
St. Paul, MN 55102
651-310-7911
www.stpaultravelers.com
Founded in 1853, St. Paul Travelers Companies is one of the oldest insurance
firms in the nation. Since its inception, the company has built a solid
reputation by establishing strong distribution networks and developing expertise
in the commercial property-liability business. Today, St. Paul Travelers
Companies is a leader in providing specialty insurance products to niche
markets, such as construction and small commercial businesses. Additionally in
1974, St. Paul diversified its business by investing in asset manager, Nuveen
Investments, Inc.
As part of our ongoing due diligence and in light of the merger with Travelers,
we recently visited the company's Minnesota headquarters. We were impressed with
the depth and breadth of the management team led by CEO Jay Fishman. As we
discussed the Travelers merger (a company twice the size St. Paul), we were
pleased by the integration plan and strategy for the combined companies. We also
believe Fishman's previous experience at Travelers will benefit this process.
The merger, which was approved by shareholders in March, creates the second
largest commercial property & casualty insurer in the United States behind AIG.
The newly combined entity should benefit from economies of scale as well as a
stronger capital position. Currently valued at roughly $42 per share, the stock
is trading at a 19% discount to our $52 estimation of its private market
value.
[TRIBUNE LOGO]
TRIBUNE CO. (NYSE: TRB)
435 North Michigan Avenue
Chicago, IL 60611
312-222-9100
www.tribune.com
Tribune Co. publishes 13 leading daily newspapers, including the LOS ANGELES
TIMES, CHICAGO TRIBUNE and NEWSDAY. Tribune also operates 26 network-affiliated
television stations, making it the largest non-network TV station owner in the
U.S. Additionally, the company owns Superstation WGN, the Chicago Cubs baseball
team and a range of other targeted and Spanish-language publications.
Tribune generates strong margins and significant free cash flow, and has shown
an impressive discipline in managing its costs throughout the recent difficult
economic environment. For example, the company has done a sound job of
developing online help-wanted ads to compete with Internet-only players. For
this reason, we believe Tribune's newspapers will benefit from both the upturn
in help- wanted advertising as well as a stronger national ad market.
Tribune's television stations also enjoy strong programming relationships,
including reruns of popular sitcoms like "Friends," "Will & Grace" and
"Everybody Loves Raymond." Lastly, the company continues to pursue efficiencies
in markets where Tribune owns two television stations and can consolidate
back-office functions to reduce costs.
A long-time Ariel favorite, we have held shares in Tribune since 1989. We
continue to be impressed by the company's outstanding management team and its
smart TV acquisitions. At $51, Tribune trades at a 28% discount to our estimated
private market value of $71.
NOT PART OF THE SEMI-ANNUAL REPORT
5
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VALUE COMPANY IN FOCUS
[SCHERING-PLOUGH CORPORATION LOGO]
SCHERING-PLOUGH CORPORATION (NYSE: SGP)
2000 Galloping Hill Road
Kenilworth, NJ 07033
908-298-4000
www.schering-plough.com
Schering-Plough Corporation develops, manufactures and markets a wide range of
pharmaceutical products, including therapeutic prescription drugs,
over-the-counter (OTC) drugs, animal health products and personal care items.
The company's therapeutic drugs treat a variety of diseases and ailments, from
allergies and respiratory disorders to cancer and cardiovascular disease. Its
OTC remedies include Claritin, the allergy medicine, and Afrin, the nasal spray.
Well-known brands in its personal care line include Dr. Scholl's foot care
products and Coppertone sunscreen.
STRONG COMPETITIVE POSITION
Schering-Plough scientists have discovered and developed a number of
revolutionary treatments. Furthermore, the company has formed joint ventures to
compliment its in-house expertise and leverage these discoveries. For example,
Schering-Plough and Merck recently joined forces on cholesterol lowering drugs,
Zetia/Zocor. Currently awaiting FDA approval, this drug combination provides
better results than the cholesterol lowering drugs available today. The American
Heart Association reports that 50% of American adults have high cholesterol. As
such, we believe this venture could be a tremendous opportunity.
NEW MANAGEMENT TEAM
Over the past year, Schering-Plough has radically revamped its senior management
team. Specifically, the company recruited Fred Hassan (former CEO of Pharmacia)
to be its new CEO. With extensive industry experience, Hassan has handpicked a
team of proven industry veterans to help him refocus the company and address
current issues. Some of the primary areas to tackle include providing adequate
documentation on the manufacturing process; funding new medicinal discoveries;
and dealing with its cash-cow, Claritin, moving to the OTC market. Hassan's new
team is already implementing aggressive cost containment measures--such as
reducing the workforce by 10%--and redirecting the research and development
effort to broaden its product lines.
COMPELLING VALUATION
These challenges coupled with the current industry environment have caused
Schering-Plough's stock price to suffer. However, with new management in place,
we believe this stock represents an investment opportunity. Schering-Plough is
currently selling for $16, which represents a 40% discount to our estimation of
its private market value of $26.
NOT PART OF THE SEMI-ANNUAL REPORT
6
<Page>
SEMI-ANNUAL REPORT
MARCH 31, 2004 (UNAUDITED)
ARIEL FUND
ARIEL APPRECIATION FUND
ARIEL PREMIER GROWTH FUND
ARIEL PREMIER BOND FUND
<Page>
INVESTING IN SMALL AND MID-CAP STOCKS IS MORE RISKY AND MORE VOLATILE THAN
INVESTING IN LARGE CAP STOCKS. Statistics and performance data represent past
performance. Past performance does not guarantee future results. The investment
return and principal value of an investment 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.
Performance data current to the most recent month-end may be obtained by
visiting our web site, www.arielmutualfunds.com.
This report candidly discusses a number of individual companies. These opinions
are current as of the date of this report but are subject to change. The
information provided in this report is not reasonably sufficient upon which to
base an investment decision and should not be considered a recommendation to
purchase or sell a particular security.
Investors should consider carefully the investment objectives, potential risks,
management fees, and charges and expenses of the Ariel Mutual Funds before
investing. The current prospectus for the Ariel Mutual Funds contains this and
other information about the Funds. Investors may obtain a copy of the current
prospectus by calling or writing our distributor. Please read it carefully
before investing or sending money. (C)April 2004, Ariel Distributors, Inc., 200
East Randolph Drive, Chicago, IL 60601. 800-292-7435.
Ariel Investment Trust
P.O. Box 219121
Kansas City, Missouri 64121-9121
800-292-7435
www.arielmutualfunds.com
<Page>
Table of Contents
<Table>
Ariel Fund
Management Discussion 10
Performance Summary 11
Schedule of Investments 12
Statistical Summary 13
Ariel Appreciation Fund
Management Discussion 14
Performance Summary 15
Schedule of Investments 16
Statistical Summary 17
Ariel Premier Growth Fund
Management Discussion 18
Performance Summary 19
Schedule of Investments 20
Statistical Summary 22
Ariel Premier Bond Fund
Management Discussion 24
Performance Summary 25
Schedule of Investments 26
Statements of Assets and Liabilities 34
Statements of Operations 35
Statements of Changes in Net Assets 36
Financial Highlights 38
Notes to the Financial Statements 41
Proxy Policy Statement 45
Ariel Research Reports 45
Board of Trustees 46
Officers 48
</Table>
<Page>
ARIEL FUND ARGFX
MANAGEMENT DISCUSSION
Q: HOW DID ARIEL FUND PERFORM AGAINST ITS BENCHMARK?
A: For the quarter ending March 31, 2004, the smaller companies comprising
Ariel Fund returned +6.74%. By means of comparison, the similarly-sized
issues of the Russell 2500 Value Index rose +6.18%. Meanwhile, large cap
stocks were even more subdued as evidenced by the comparatively puny +1.69%
rise of the Standard & Poor's 500 Index.
Effective February 1, 2004, the Russell 2500 Value Index was adopted as the
primary benchmark for Ariel Fund. As you may know, the Russell 2500 Value
Index is a composite of smallER companies. We decided to switch from the
pure small cap Russell 2000 Value Index to the Russell 2500 Value Index
because of its inclusion of some mid-cap names. Our analysis shows that the
representation of these issues more accurately captures our long-held bias
of holding onto our small stocks as they grow into the mid-cap value
arena.(1)
Q: WHAT DROVE ARIEL FUND'S PERFORMANCE?
A: First and foremost, as SMARTMONEY noted, "...concerns over valuations,
rising interest rates and terrorism fears...push[ed] people towards more
defensive areas, like consumer staples." While Ariel Fund certainly
benefited from the market's rotation given our inherent consumer bias, a
few stock-specific issues muted the positive effect of the sector's
newfound attention. Beyond the consumer area, the Fund was positively
impacted by its Health Care holdings. Conversely, the Fund's Financial
Services issues were lackluster which we view as a natural and temporary
overreaction in an environment fearing rising interest rates.
Q: WHAT STOCKS DID ARIEL FUND BUY OR SELL DURING THE QUARTER?
A: After a nine month new idea drought, Ariel Fund added three names to the
portfolio during the first quarter: Argosy Gaming Company (NYSE: AGY), the
riverboat casino operator; Certegy Inc. (NYSE: CEY), a leading global
payment services provider; and Harte-Hanks, Inc. (NYSE: HHS), an old
advertising favorite. The Fund's position in soap maker, Dial Corporation
(NYSE: DL) was eliminated on the good news of its acquisition by The Henkel
Group, the German-based consumer products conglomerate. We also reduced the
Fund's position in high-end retailer, Neiman Marcus Group (NYSE: NMG.A) as
this issue approached our estimate of its private market value.
Q: WHAT IS ARIEL FUND'S LONGER-TERM TRACK RECORD?
A: Since inception, Ariel Fund's average annual total return of +14.25%
surpasses the +13.52% of the Russell 2500 Value Index for the period ending
March 31, 2004. Additionally, Lipper ranks Ariel Fund number one (out of 17
funds) in the small cap core category since its November 1986 inception.
According to Lipper, Inc., Ariel Fund ranked 489 out of 526, 116 out of 296
and 13 out of 83 small cap core equity funds for the one-, five- and
ten-year periods ended March 31, 2004, respectively. Lipper, Inc. is a
nationally recognized organization that reports performance and calculates
rankings for mutual funds. Each fund is ranked within a universe of funds
with similar investment objectives.
(1) In keeping with industry rules concerning the change of a mutual fund
benchmark, over the next year, Ariel Fund's performance will be depicted
against both the Russell 2500 Value Index as well as the Russell 2000 Value
Index.
10
<Page>
ARIEL FUND PERFORMANCE SUMMARY INCEPTION: NOVEMBER 6, 1986
ABOUT THE FUND
Ariel Fund seeks long-term capital appreciation by investing in under-valued
companies in consistent industries that show strong potential for growth. The
Fund looks for issuers that provide quality products or services. To capture
anticipated growth, the Fund holds investments for a relatively long
period--usually three to five years. The Fund primarily invests in companies
with market capitalizations between $500 million and $2.5 billion at the time of
investment with an emphasis on smaller capitalization (small cap) stocks.
PORTFOLIO COMPOSITION
<Table>
<Caption>
RUSSELL
2500 S&P
ARIEL VALUE 500
FUND INDEX INDEX
Consumer Discretionary & Services 33.0% 15.6% 14.1%
Financial Services 19.6% 31.3% 22.5%
Producer Durables 14.0% 7.1% 4.1%
Cash & Other 11.9% 1.4% 4.9%
Materials & Processing 7.0% 10.7% 3.4%
Health Care 6.6% 4.4% 13.0%
Consumer Staples 4.4% 3.2% 7.7%
Technology 3.5% 9.4% 14.9%
Utilities 0.0% 8.5% 6.9%
Other Energy 0.0% 4.6% 1.7%
Autos & Transportation 0.0% 3.8% 2.4%
Integrated Oils 0.0% 0.0% 4.4%
</Table>
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 2004 (ASSUMES REINVESTMENT OF
DIVIDENDS AND CAPITAL GAINS)*
<Table>
<Caption>
1ST QUARTER YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR LIFE OF FUND
- --------------------------------------------------------------------------------------------------------------------
Ariel Fund +6.74% +6.74% +44.62% +13.26% +14.20% +14.83% +14.25%
Russell 2500 Value Index +6.18% +6.18% +61.59% +15.79% +15.19% +14.50% +13.52%
Russell 2000 Value Index +6.92% +6.92% +64.49% +16.02% +16.14% +13.61% +12.95%
Russell 2000 Index +6.26% +6.26% +63.83% +10.90% +9.66% +10.44% +10.44%
S&P 500 Index +1.69% +1.69% +35.12% +0.63% -1.20% +11.68% +11.73%
</Table>
Total return does not reflect a maximum 4.75% sales load charged prior to
7/15/94.
[CHART]
THE VALUE OF A $10,000 INVESTMENT IN ARIEL FUND
<Table>
<Caption>
ARIEL FUND RUSSELL 2500 VALUE S&P 500
12/31/86 10,203 9,757 9,849
12/31/87 11,367 9,281 10,366
12/31/88 15,905 11,848 12,088
12/31/89 19,900 13,648 15,916
12/31/90 16,699 11,274 15,424
12/31/91 22,163 15,857 20,122
12/31/92 24,763 19,806 21,655
12/31/93 26,924 23,629 23,833
12/31/94 25,786 23,320 24,148
12/31/95 30,562 30,260 33,223
12/31/96 37,747 36,980 40,851
12/31/97 51,502 49,218 54,481
12/31/98 56,595 48,272 70,051
12/31/99 53,335 48,992 84,800
12/31/00 68,677 59,176 77,061
12/31/01 78,438 64,940 67,904
12/31/02 74,371 58,527 52,898
12/31/03 95,222 84,824 68,071
03/31/04 101,638 90,064 69,224
</Table>
TOP TEN HOLDINGS (AS OF MARCH 31, 2004)
1 CAESARS ENTERTAINMENT, INC.
World's largest casino gaming company
2 LEE ENTERPRISES, INC.
Newspaper publisher
3 MARKEL CORP.
Specialty insurance provider
4 AMERICAN GREETINGS CORP.
World's second largest producer of greeting cards
5 IDEX CORP.
Industrial product manufacturer
6 JANUS CAPITAL GROUP INC.
Mutual fund manager
7 INVACARE CORP.
Leading producer of medical equipment
8 NEIMAN MARCUS GROUP, INC., CLASS A
Premier luxury retailer
9 VALASSIS COMMUNICATIONS, INC.
Preeminent marketing services company
10 HERMAN MILLER, INC.
Manufacturer of office furniture
*The graph and performance table do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
The S&P 500 is a broad market-weighted index dominated by large cap stocks. The
Russell 2500 Value Index measures the performance of small and mid-sized,
value-oriented companies with low price-to-earnings ratios. The Russell 2000
Value Index measures the performance of smaller, value-oriented companies with
lower price-to-earnings ratios. The Russell 2000 Index measures the performance
of smaller companies. All indices are unmanaged, and an investor cannot invest
directly in an index.
11
<Page>
ARIEL FUND SCHEDULE OF INVESTMENTS
<Table>
<Caption>
NUMBER OF SHARES COMMON STOCKS--88.04% COST MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY & SERVICES--32.96%
4,041,675 American Greetings Corp. * $ 58,428,592 $ 92,028,940
554,800 Argosy Gaming Co. * 17,376,285 19,723,140
1,629,133 Bob Evans Farms, Inc. 34,239,534 52,849,074
8,454,600 Caesars Entertainment, Inc. * 64,611,005 110,247,984
769,600 DeVry, Inc. * 11,434,803 23,203,440
107,200 Grey Global Group, Inc. 64,667,170 73,968,000
1,714,800 Harte-Hanks, Inc. 38,221,233 40,160,616
2,797,325 Hasbro, Inc. 36,964,218 60,841,819
1,612,700 Journal Register Co. * 31,799,105 33,705,430
2,329,000 Lee Enterprises, Inc. 78,792,501 105,224,220
760,700 Matthews International Corp. 16,020,078 25,255,240
1,580,750 Neiman Marcus Group, Inc., Class A 47,365,175 85,265,655
878,800 Radio One, Inc., Class D * 12,549,695 16,257,800
5,165,600 ServiceMaster Co. 59,861,682 62,038,856
2,758,250 Valassis Communications, Inc. *++ 82,027,596 83,850,800
216,150 WMS Industries, Inc. * 3,240,112 6,700,650
--------------------------------------------
657,598,784 891,321,664
--------------------------------------------
CONSUMER STAPLES--4.38%
875,453 J.M. Smucker Co. 28,901,790 46,206,409
1,481,600 Longs Drug Stores Corp. 30,277,558 27,898,528
1,320,300 McCormick & Co., Inc. 23,972,434 44,256,456
--------------------------------------------
83,151,782 118,361,393
--------------------------------------------
FINANCIAL SERVICES--19.55%
1,535,800 Certegy Inc. 50,651,955 53,783,716
2,017,550 HCC Insurance Holdings, Inc. 48,157,720 65,227,392
3,316,175 Horace Mann Educators Corp.++ 62,722,417 52,130,271
5,417,200 Janus Capital Group Inc. 71,409,486 88,733,736
333,725 Markel Corp. * 70,134,680 96,079,427
1,381,700 Rouse Co. 36,423,253 74,059,120
3,086,600 Sotheby's Holdings, Inc. * 37,692,628 39,662,810
2,405,300 Waddell & Reed Financial, Inc. 48,038,520 58,977,956
--------------------------------------------
425,230,659 528,654,428
--------------------------------------------
HEALTH CARE--6.55%
1,800,400 Apogent Technologies, Inc. * 50,201,847 55,236,272
1,939,000 Invacare Corp. 67,965,154 87,526,460
1,258,750 Sybron Dental Specialties, Inc. * 24,437,826 34,300,938
--------------------------------------------
142,604,827 177,063,670
--------------------------------------------
MATERIALS & PROCESSING--7.04%
1,461,655 Brady Corp. 46,030,172 55,659,822
1,220,875 Energizer Holdings, Inc. * 24,463,015 57,002,654
2,100,300 Interface, Inc. * 13,672,179 16,697,385
2,368,300 Jones Lang LaSalle, Inc. *++ 41,920,285 60,888,993
--------------------------------------------
126,085,651 190,248,854
--------------------------------------------
PRODUCER DURABLES--14.04%
3,946,300 Andrew Corp. * 33,665,588 69,060,250
946,770 General Binding Corp. * 13,845,655 16,095,090
2,358,935 Graco, Inc. 34,868,781 68,668,583
2,995,000 Herman Miller, Inc. 61,637,035 79,756,850
2,100,500 IDEX Corp.++ 68,452,628 91,329,740
4,208,600 Steelcase, Inc. 54,723,549 54,711,800
--------------------------------------------
267,193,236 379,622,313
--------------------------------------------
TECHNOLOGY--3.52%
2,440,150 Anixter International, Inc.++ 59,767,665 68,934,238
709,300 Littelfuse, Inc. * 17,824,884 26,385,960
--------------------------------------------
77,592,549 95,320,198
--------------------------------------------
Total Common Stocks 1,779,457,488 2,380,592,520
--------------------------------------------
<Caption>
PRINCIPAL AMOUNT REPURCHASE AGREEMENTS--12.17% COST MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------------
$ 329,251,865 State Street Bank & Trust Co., 0.45%, dated
3/31/2004, due 4/1/2004, repurchase price
$329,255,981 (collateralized by U. S. Treasury
Bonds, 6.375%-8.75% due 5/15/2016-8/15/2027) 329,251,865 329,251,865
--------------------------------------------
Total Repurchase Agreements 329,251,865 329,251,865
--------------------------------------------
Total Investments-100.21% $ 2,108,709,353 2,709,844,385
===============
Liabilities less Other Assets-(0.21)% (5,745,413)
---------------
NET ASSETS-100.00% $ 2,704,098,972
===============
</Table>
* Non-income producing.
++Affiliated company (See Note Six).
The accompanying notes are an integral part of the financial statements.
12
<Page>
ARIEL FUND STATISTICAL SUMMARY MARCH 31, 2004 (UNAUDITED)
<Table>
<Caption>
52-WEEK RANGE EARNINGS PER SHARE P/E CALENDAR
--------------- ------------------- ------------------
2003 2004 2003 2004 MARKET
TICKER PRICE ACTUAL ESTIMATED ACTUAL ESTIMATED CAP.
COMPANY SYMBOL 3/31/04 LOW HIGH CALENDAR CALENDAR P/E P/E ($MM)
General Binding Corp. GBND 17.00 7.55 20.44 0.72 0.96 23.6 17.7 274
Interface, Inc. IFSIA 7.95 2.54 8.63 -0.36 0.10 NM 79.5 410
Horace Mann Educators Corp. HMN 15.72 12.81 16.95 -0.06 1.31 NM 12.0 672
Longs Drug Stores Corp. LDG 18.83 13.81 25.60 0.98 1.05 19.2 17.9 706
Sotheby's Holdings, Inc. BID 12.85 6.42 15.93 -0.24 0.25 NM 51.4 791
Jones Lang LaSalle, Inc. JLL 25.71 13.52 26.55 1.12 1.35 23.0 19.0 819
Littelfuse, Inc. LFUS 37.20 17.25 38.25 0.70 1.21 53.1 30.7 821
Journal Register Co. JRC 20.90 15.02 21.31 1.18 1.28 17.7 16.3 876
Brady Corp. BRC 38.08 27.55 43.46 1.54 1.85 24.7 20.6 900
WMS Industries, Inc. WMS 31.00 12.00 32.40 -0.04 0.66 NM 47.0 926
Grey Global Group, Inc. GREY 688.54 601.00 823.25 18.64 23.08 36.9 29.8 947
Anixter International, Inc. AXE 28.25 20.85 31.15 1.23 1.50 23.0 18.8 1,034
Argosy Gaming Co. AGY 35.55 17.70 36.18 1.90 2.14 18.7 16.6 1,045
Sybron Dental Specialties, Inc. SYD 27.25 16.90 32.14 1.51 1.60 18.0 17.0 1,047
Matthews International Corp. MATW 33.20 22.56 33.39 1.45 1.61 22.9 20.6 1,068
Bob Evans Farms, Inc. BOBE 32.33 23.00 34.37 2.05 2.18 15.8 14.8 1,138
Invacare Corp. IVC 45.14 29.68 46.58 2.25 2.59 20.1 17.4 1,409
IDEX Corp. IEX 43.48 28.63 43.66 1.87 2.22 23.3 19.6 1,440
American Greetings Corp. AM 22.77 12.78 23.45 1.53 1.65 14.9 13.8 1,526
Valassis Communications, Inc. VCI 30.40 23.50 32.21 2.03 1.74 15.0 17.5 1,583
Steelcase, Inc. SCS 13.00 8.54 14.68 -0.05 0.13 NM NM 1,923
Herman Miller, Inc. MLHR 26.60 15.80 29.74 0.43 0.70 61.9 38.0 1,937
Radio One, Inc. ROIAK 18.50 13.11 19.83 0.29 0.37 63.8 50.0 1,940
Waddell & Reed Financial, Inc. WDR 24.52 17.35 27.72 1.13 1.50 21.7 16.3 1,999
Graco, Inc. GGG 29.11 27.70 29.40 1.85 2.06 15.7 14.1 2,005
Lee Enterprises, Inc. LEE 45.18 31.10 46.94 1.80 2.01 25.1 22.5 2,030
Harte-Hanks, Inc. HHS 23.42 17.19 23.42 0.98 1.09 23.9 21.5 2,050
HCC Insurance Holdings, Inc. HCC 32.33 25.03 34.75 2.23 2.69 14.5 12.0 2,081
DeVry, Inc. DV 30.15 18.18 31.90 0.82 0.98 36.8 30.8 2,113
Certegy Inc. CEY 35.02 24.22 35.24 1.42 1.75 24.7 20.0 2,253
J.M. Smucker Co. SJM 52.78 34.64 52.87 2.33 2.59 22.7 20.4 2,644
Neiman Marcus Group, Inc. NMG.A 53.94 28.50 59.70 3.24 3.69 16.6 14.6 2,656
Apogent Technologies, Inc. AOT 30.68 14.45 31.23 1.36 1.64 22.6 18.7 2,717
Andrew Corp. ANDW 17.50 5.23 18.98 0.19 0.57 92.1 30.7 2,779
Markel Corp. MKL 287.90 216.00 288.11 9.56 19.32 30.1 14.9 2,837
ServiceMaster Co. SVM 12.01 8.97 12.10 0.56 0.62 21.4 19.4 3,531
Energizer Holdings, Inc. ENR 46.69 24.81 47.88 3.00 3.22 15.6 14.5 3,803
Hasbro, Inc. HAS 21.75 13.66 22.98 1.20 1.38 18.1 15.8 3,826
Janus Capital Group Inc. JNS 16.38 11.33 19.00 0.90 0.82 18.2 20.0 3,923
Caesars Entertainment, Inc. CZR 13.04 6.88 13.74 0.49 0.68 26.6 19.2 3,987
McCormick & Co., Inc. MKC 33.52 23.69 33.61 1.44 1.57 23.3 21.4 4,604
Rouse Co. RSE 53.60 34.15 53.60 3.85 4.15 13.9 12.9 5,488
</Table>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items.
Rouse Co. estimates are before depreciation and deferred taxes. Radio One
estimates are before depreciation and amortization. NM=Not Meaningful.
Energizer, Harte-Hanks and ServiceMaster estimates are before amortization. All
estimates of future earnings per share shown in this table are prepared by Ariel
Capital Management research analysts. P/E ratios are based on earnings stated
and 3/31/04 stock price.
13
<Page>
ARIEL APPRECIATION FUND CAAPX
MANAGEMENT DISCUSSION
Q: HOW DID ARIEL APPRECIATION FUND PERFORM AGAINST ITS BENCHMARK?
A: For the quarter ending March 31, 2004, the performance of mid-cap stocks
was a bit more muted than that of their small cap brethren. As such, the
medium-sized companies comprising Ariel Appreciation Fund returned +3.72%
during the quarter. The Russell Midcap Value Index managed a +5.35% gain.
Meanwhile, large cap stocks were even more subdued as evidenced by the
comparatively puny +1.69% rise of the Standard & Poor's 500 Index.
Q: WHAT DROVE ARIEL APPRECIATION FUND'S PERFORMANCE?
A: Like Ariel Fund, Ariel Appreciation Fund benefited from the market's
rotation given our inherent consumer bias. That said, a few stock-specific
issues muted the positive effect of the sector's newfound attention. Beyond
the consumer area, the Fund was positively impacted by its Health Care
holdings. Conversely, the Fund's Financial Services issues were lackluster
which we view as a natural and temporary overreaction in an environment
fearing rising interest rates.
Q: WHAT STOCKS DID ARIEL APPRECIATION FUND BUY OR SELL DURING THE QUARTER?
A: Drug manufacturer, Schering-Plough Corporation (NYSE: SGP) was the one
addition to the Ariel Appreciation Fund portfolio. On the sale side, we
eliminated our positions in both Kroger (NYSE: KR) and Safeway (NYSE: SWY)
in response to deteriorating fundamentals in the supermarket business.
Q: WHAT IS ARIEL APPRECIATION FUND'S LONGER-TERM TRACK RECORD?
A: Over the long-term, Ariel Appreciation Fund has outperformed both its
benchmarks since inception. Specifically, during this period, the Fund
gained +13.38% compared to +13.20% for the Russell Midcap Value Index and
+12.80% for the Russell Midcap Index as of March 31, 2004. Additionally,
Ariel Appreciation Fund has earned a four star (****) Overall Rating from
mutual fund tracker, Morningstar, Inc. for the period ended March 31, 2004.
Ariel Appreciation Fund was rated four stars among 246, three stars among
148 and four stars among 47 domestic mid-cap blend funds for the three-,
five- and ten-year periods ended 03/31/04, respectively. For each fund with
at least a three-year history, Morningstar calculates a Morningstar
Rating(TM) based on a Morningstar Risk-Adjusted Return measure that
accounts for variation in a fund's monthly performance (including the
effects of sales charges, loads and redemption fees), placing more emphasis
on downward variations and rewarding consistent performance. These ratings
change monthly. The top 10% of funds in an investment category receive five
stars, the next 22.5% receive four stars, the next 35% receive three stars,
the next 22.5% receive two stars, and the bottom 10% receive one star. The
Overall Morningstar Rating for a fund is derived from a weighted average of
the performance figures associated with its three-, five- and ten-year (if
applicable) Morningstar Ratings. Morningstar does not guarantee the
accuracy of this information.
14
<Page>
ARIEL APPRECIATION FUND PERFORMANCE SUMMARY INCEPTION: DECEMBER 1, 1989
ABOUT THE FUND
Ariel Appreciation Fund pursues long-term capital appreciation by investing in
under-valued firms with growth potential. Like Ariel Fund, this Fund seeks out
issuers that provide quality products or services. To capture anticipated
growth, the Fund will hold investments for a relatively long period--usually
three to five years. The Fund primarily invests in companies with market
capitalizations between $2.5 billion and $20 billion at the time of investment,
with an emphasis on medium capitalization (mid-cap) stocks.
PORTFOLIO COMPOSITION
<Table>
<Caption>
ARIEL RUSSELL
APPRE- MIDCAP S&P
CIATION VALUE 500
FUND INDEX INDEX
Financial Services 40.5% 32.7% 22.5%
Consumer Discretionary & Services 28.7% 13.2% 14.1%
Health Care 17.1% 3.3% 13.0%
Producer Durables 3.9% 6.3% 4.1%
Cash & Other 3.9% 3.0% 4.9%
Consumer Staples 3.5% 4.2% 7.7%
Utilities 2.4% 11.8% 6.9%
Technology 0.0% 8.8% 14.9%
Materials & Processing 0.0% 8.4% 3.4%
Other Energy 0.0% 3.5% 1.7%
Autos & Transportation 0.0% 3.1% 2.4%
Integrated Oils 0.0% 1.7% 4.4%
</Table>
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 2004 (ASSUMES REINVESTMENT OF
DIVIDENDS AND CAPITAL GAINS)*
<Table>
<Caption>
1ST QUARTER YTD 1 YEAR 3 YEAR 5 YEAR 10 YEAR LIFE OF FUND
- --------------------------------------------------------------------------------------------------------------------
Ariel Appreciation Fund +3.72% +3.72% +46.14% +11.59% +10.27% +14.71% +13.38%
Russell Midcap Value Index +5.35% +5.35% +51.60% +11.71% +10.57% +13.96% +13.20%
Russell Midcap Index +5.14% +5.14% +50.83% +9.18% +8.42% +13.08% +12.80%
S&P 500 Index +1.69% +1.69% +35.12% +0.63% -1.20% +11.68% +10.98%
</Table>
Total return does not reflect a maximum 4.75% sales load charged prior to
7/15/94.
[CHART]
THE VALUE OF A $10,000 INVESTMENT IN ARIEL APPRECIATION FUND
<Table>
<Caption>
APPREC FUND RUSSELL MIDCAP VALUE S&P 500
12/31/89 10,054 10,119 10,240
12/31/90 9,902 8,492 9,923
12/31/91 13,185 11,712 12,947
12/31/92 14,930 14,251 13,933
12/31/93 16,115 16,478 15,334
12/31/94 14,763 16,127 15,537
12/31/95 18,330 21,761 21,375
12/31/96 22,678 26,169 26,283
12/31/97 31,283 35,163 35,053
12/31/98 37,399 36,951 45,070
12/31/99 35,982 36,910 54,559
12/31/00 42,755 43,989 49,580
12/31/01 49,694 45,012 43,689
12/31/02 44,546 40,671 34,034
12/31/03 58,344 56,153 43,796
03/31/04 60,514 59,155 44,538
</Table>
TOP TEN HOLDINGS (AS OF MARCH 31, 2004)
1 BAXTER INTERNATIONAL, INC.
Diversified healthcare manufacturer
2 NORTHERN TRUST CORP.
Preeminent personal and institutional trust company
3 MBIA, INC.
Prominent insurer of municipal bonds
4 IMS HEALTH, INC.
Leading provider of healthcare data
5 ACCENTURE LTD.
Leading information and technology consultant
6 PITNEY BOWES, INC.
Top manufacturer of mailing equipment
7 MBNA CORP.
Prominent issuer of bank credit cards
8 CENDANT CORP.
Global provider of consumer and business services
9 INTERPUBLIC GROUP OF COS., INC.
Leading global advertising conglomerate
10 ROUSE CO.
Retail mall developer
*The graph and performance table do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
The S&P 500 is a broad market-weighted index dominated by large cap stocks. The
Russell Midcap Index measures the performance of mid-sized companies. The
Russell Midcap Value Index measures the performance of mid-sized, value-oriented
companies with lower price-to-earnings ratios. All indices are unmanaged, and an
investor cannot invest directly in an index.
15
<Page>
ARIEL APPRECIATION FUND SCHEDULE OF INVESTMENTS
<Table>
<Caption>
NUMBER OF SHARES COMMON STOCKS--96.18% COST MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY & SERVICES--28.74%
4,807,200 Accenture Ltd. * $ 79,325,619 $ 119,218,560
1,017,900 Black & Decker Corp. 39,806,786 57,959,226
1,513,850 Carnival Corp. 35,347,675 67,987,003
4,062,295 Cendant Corp. 55,133,412 99,079,375
2,300,675 Harte-Hanks, Inc. 37,178,018 53,881,809
5,844,400 Interpublic Group of Cos., Inc. * 103,485,425 89,886,872
761,800 McClatchy Co. 35,581,952 54,118,272
801,200 Omnicom Group Inc. 52,235,670 64,296,300
2,747,895 ServiceMaster Co. 34,823,279 33,002,219
1,503,925 Tribune Co. 67,141,862 75,857,977
2,244,800 Yum! Brands, Inc. * 57,467,482 85,279,952
--------------------------------------------
597,527,180 800,567,565
--------------------------------------------
CONSUMER STAPLES--3.53%
1,318,472 Clorox Co. 53,774,680 64,486,465
1,011,540 McCormick & Co., Inc. 17,584,125 33,906,821
--------------------------------------------
71,358,805 98,393,286
--------------------------------------------
FINANCIAL SERVICES--40.53%
2,176,425 Banknorth Group, Inc. 68,410,232 74,085,507
1,022,500 Certegy Inc. 29,636,258 35,807,950
1,505,872 Dun & Bradstreet Corp. * 49,023,668 80,564,152
2,287,150 Equifax, Inc. 52,552,703 59,054,213
1,402,600 Franklin Resources, Inc. 57,477,793 78,096,768
4,197,800 Janus Capital Group Inc. 52,218,070 68,759,964
1,988,692 MBIA, Inc. 88,766,439 124,690,988
3,606,037 MBNA Corp. 77,243,137 99,634,802
2,827,000 Northern Trust Corp. 104,003,221 131,709,930
1,648,000 Rouse Co. 48,164,321 88,332,800
1,850,300 St. Paul Travelers Cos., Inc. 63,319,468 74,030,503
3,149,265 SunGard Data Systems, Inc. * 82,551,261 86,289,861
1,140,750 T. Rowe Price Group, Inc. 42,920,887 61,406,573
876,200 XL Capital Ltd. 68,171,817 66,626,248
--------------------------------------------
884,459,275 1,129,090,259
--------------------------------------------
HEALTH CARE--17.09%
2,782,995 Apogent Technologies, Inc. * 55,789,560 85,382,287
4,334,150 Baxter International, Inc. 110,497,656 133,881,893
5,167,960 IMS Health, Inc. 88,096,811 120,206,750
1,583,100 Omnicare, Inc. 47,503,918 70,178,823
4,097,800 Schering-Plough Corp. 68,710,138 66,466,316
--------------------------------------------
370,598,083 476,116,069
--------------------------------------------
PRODUCER DURABLES--3.88%
2,536,000 Pitney Bowes, Inc. 94,815,803 108,058,960
--------------------------------------------
UTILITIES--2.41%
2,447,700 CenturyTel, Inc. 73,973,668 67,287,273
--------------------------------------------
Total Common Stocks 2,092,732,814 2,679,513,412
--------------------------------------------
<Caption>
PRINCIPAL AMOUNT REPURCHASE AGREEMENTS--4.65% COST MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------------
$ 129,525,019 State Street Bank & Trust Co., 0.45%, dated
3/31/2004, due 4/1/2004, repurchase price
$129,526,638 (collateralized by U. S. Treasury
Bonds, 8.125%-8.75% due 5/15/2020-5/15/2021) 129,525,019 129,525,019
--------------------------------------------
Total Repurchase Agreements 129,525,019 129,525,019
--------------------------------------------
Total Investments-100.83% $ 2,222,257,833 2,809,038,431
===============
Liabilities less Other Assets-(0.83)% (23,029,250)
---------------
NET ASSETS-100.00% $ 2,786,009,181
===============
</Table>
*Non-income producing.
The accompanying notes are an integral part of the financial statements.
16
<Page>
ARIEL APPRECIATION FUND STATISTICAL SUMMARY MARCH 31, 2004 (UNAUDITED)
<Table>
<Caption>
52-WEEK RANGE EARNINGS PER SHARE P/E CALENDAR
---------------- ------------------- ------------------
2003 2004 2003 2004 MARKET
TICKER PRICE ACTUAL ESTIMATED ACTUAL ESTIMATED CAP.
COMPANY SYMBOL 3/31/04 LOW HIGH CALENDAR CALENDAR P/E P/E ($MM)
Harte-Hanks, Inc. HHS 23.42 17.19 23.42 0.98 1.09 23.9 21.5 2,050
Certegy Inc. CEY 35.02 24.22 35.24 1.42 1.75 24.7 20.0 2,253
Apogent Technologies, Inc. AOT 30.68 14.45 31.23 1.36 1.64 22.6 18.7 2,717
McClatchy Co. MNI 71.04 52.70 72.05 3.06 3.27 23.2 21.7 3,291
ServiceMaster Co. SVM 12.01 8.97 12.10 0.56 0.62 21.4 19.4 3,531
Equifax, Inc. EFX 25.82 19.51 27.59 1.31 1.60 19.7 16.1 3,561
Dun & Bradstreet Corp. DNB 53.50 34.00 57.01 2.56 2.93 20.9 18.3 3,834
CenturyTel, Inc. CTL 27.49 26.20 36.76 2.38 2.34 11.6 11.7 3,911
Janus Capital Group Inc. JNS 16.38 11.33 19.00 0.90 0.82 18.2 20.0 3,923
Black & Decker Corp. BDK 56.94 33.89 57.23 4.02 4.42 14.2 12.9 4,467
Omnicare, Inc. OCR 44.33 24.52 47.80 2.01 2.61 22.1 17.0 4,579
McCormick & Co., Inc. MKC 33.52 23.69 33.61 1.44 1.57 23.3 21.4 4,604
IMS Health, Inc. RX 23.26 13.68 26.80 1.05 1.14 22.2 20.4 5,460
Rouse Co. RSE 53.60 34.15 53.60 3.85 4.15 13.9 12.9 5,488
Banknorth Group, Inc. BNK 34.04 21.09 34.45 2.18 2.38 15.6 14.3 5,543
Interpublic Group of Cos., Inc. IPG 15.38 9.19 17.31 -1.19 0.70 NM 22.0 6,431
T. Rowe Price Group, Inc. TROW 53.83 26.20 56.93 1.77 2.55 30.4 21.1 6,775
SunGard Data Systems, Inc. SDS 27.40 20.00 31.65 1.27 1.41 21.6 19.4 7,924
MBIA, Inc. MBI 62.70 38.22 67.34 4.80 5.26 13.1 11.9 9,053
St. Paul Travelers Cos., Inc. SPC 40.01 31.51 43.63 2.55 4.60 15.7 8.7 9,166
Pitney Bowes, Inc. PBI 42.61 31.60 43.78 2.41 2.48 17.7 17.2 9,908
Northern Trust Corp. NTRS 46.59 30.22 51.35 1.98 2.30 23.5 20.3 10,269
Clorox Co. CLX 48.91 41.40 50.95 2.42 2.68 20.2 18.3 10,278
XL Capital Ltd. XL 76.04 67.05 88.87 2.12 9.20 35.9 8.3 10,496
Yum! Brands, Inc. YUM 37.99 22.94 39.02 2.06 2.28 18.4 16.7 11,058
Franklin Resources, Inc. BEN 55.68 32.84 62.10 2.20 3.05 25.3 18.3 13,887
Omnicom Group Inc. OMC 80.25 53.01 88.82 3.59 4.01 22.4 20.0 15,290
Tribune Co. TRB 50.44 44.28 53.00 2.12 2.41 23.8 20.9 16,654
Baxter International, Inc. BAX 30.89 18.18 32.16 1.85 1.85 16.7 16.7 18,915
Accenture Ltd. ACN 24.80 13.45 26.95 1.05 1.14 23.6 21.8 23,315
Schering-Plough Corp. SGP 16.22 14.16 20.92 0.31 0.04 52.3 405.5 23,863
Cendant Corp. CD 24.39 12.53 24.26 1.41 1.66 17.3 14.7 24,577
Carnival Corp. CCL 44.91 23.67 46.30 1.31 2.12 34.3 21.2 28,359
MBNA Corp. KRB 27.63 14.52 29.05 1.79 2.04 15.4 13.5 35,302
</Table>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items.
Rouse Co. estimates are before depreciation and deferred taxes. Harte-Hanks and
ServiceMaster estimates are before amortization.
NM=Not Meaningful.
All estimates of future earnings per share shown in this table are prepared by
Ariel Capital Management research analysts.
P/E ratios are based on earnings stated and 3/31/04 stock price.
17
<Page>
ARIEL PREMIER GROWTH FUND INVESTOR CLASS: APGFX
INSTITUTIONAL CLASS: APGRX
MANAGEMENT DISCUSSION
Q: HOW DID ARIEL PREMIER GROWTH FUND PERFORM AGAINST ITS BENCHMARK?
A: For the quarter ended March 31, 2004, Ariel Premier Growth Fund, Investor
Class gained +0.87% and the Institutional Class rose +1.08%. These results
were in line with the return of the Russell 1000 Growth Index at +0.79%.
Q: WHAT DROVE ARIEL PREMIER GROWTH FUND'S PERFORMANCE?
A: During the most recent quarter, the Fund's Health Care holdings performed
well with Forest Laboratories (NYSE: FRX), Boston Scientific (NYSE: BSX),
Teva (NASDAQ: TEVA) and Aetna (NYSE: AET) posting positive returns. BJ
Services (NYSE: BJS), an Energy company, was also a positive contributor.
In the Financial Services sector, MBNA Corp. (NYSE: KRB) and SLM Corp.
(NYSE: SLM) each produced double-digit gains. Conversely, Media and
Communication holdings created a drag on the Fund's results.
Q: WHAT STOCKS DID ARIEL PREMIER GROWTH FUND BUY OR SELL DURING THE QUARTER?
A: During the past quarter, the Fund purchased shares of Cisco Systems
(NASDAQ: CSCO) and Federal National Mortgage Corp. (Fannie Mae) (NYSE:
FNM). On the sell side, the Fund eliminated two previously meaningful
positions, Forest Laboratories (NYSE: FRX) and Nokia (NYSE: NOK).
Q: WHAT IS ARIEL PREMIER GROWTH FUND'S LONGER-TERM RECORD?
A: Ariel Premier Growth Fund has existed for just over two years (inception
date: 2/1/02), which has been a difficult period for growth stocks. The
Fund has returned -3.49% for the Investor Class and -3.01% for the
Institutional Class since inception, versus a return of -1.87% for the
Russell 1000 Growth Index.
18
<Page>
ARIEL PREMIER GROWTH FUND PERFORMANCE SUMMARY INCEPTION: FEBRUARY 1, 2002
ABOUT THE FUND
Ariel Premier Growth Fund pursues long-term capital appreciation by investing in
a small number of large companies which it believes to have exceptional growth
prospects. The Fund generally invests in companies with market capitalizations
greater than $10 billion at the time of investment, with an emphasis on large
capitalization (large cap) stocks.
PORTFOLIO COMPOSITION
<Table>
<Caption>
ARIEL RUSSELL
PREMIER 1000 S&P
GROWTH GROWTH 500
FUND INDEX INDEX
Technology 26.0% 22.4% 14.9%
Health Care 21.5% 24.2% 13.0%
Consumer Discretionary & Services 16.5% 17.7% 14.1%
Financial Services 10.6% 10.8% 22.5%
Other Common Stock 9.3% 6.9% 4.9%
Producer Durables 5.6% 3.5% 4.1%
Consumer Staples 4.9% 8.8% 7.7%
Cash & Other 2.8% 0.0% 0.0%
Other Energy 1.5% 1.2% 1.7%
Utilities 1.3% 1.6% 6.9%
Autos & Transportation 0.0% 1.6% 2.4%
Materials & Processing 0.0% 1.3% 3.4%
Integrated Oils 0.0% 0.0% 4.4%
</Table>
*The graph and performance table do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
The S&P 500 is a broad market-weighted index dominated by blue-chip stocks. The
Russell 1000 Growth Index is a broad market-weighted index dominated by
large-sized companies believed to have higher projected growth prospects. All
indexes are unmanaged, and an investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 2004 (ASSUMES REINVESTMENT OF
DIVIDENDS AND CAPITAL GAINS)*
<Table>
<Caption>
1ST QUARTER YTD 1 YEAR 3 YEAR 5 YEAR LIFE OF FUND
- -----------------------------------------------------------------------------------------------------------
Ariel Premier Growth Fund, Investor +0.87% +0.87% +26.85% - - -3.49%
Ariel Premier Growth Fund, Institutional +1.08% +1.08% +27.52% - - -3.01%
Russell 1000 Growth Index +0.79% +0.79% +32.18% - - -1.87%
S&P 500 Index +1.69% +1.69% +35.12% - - +1.58%
</Table>
[CHART]
THE VALUE OF A $10,000 INVESTMENT IN ARIEL PREMIER GROWTH FUND, INVESTOR CLASS
<Table>
<Caption>
ARIEL PREMIER GROWTH FUND
RUSSELL 1000
As of: INVESTOR CLASS GROWTH INDEX S&P 500
02/28/02 9,580 9,585 9,807
03/31/02 10,110 9,917 10,176
04/30/02 9,250 9,107 9,559
05/31/02 9,040 8,887 9,489
06/30/02 8,240 8,065 8,813
07/31/02 7,680 7,621 8,126
08/31/02 7,720 7,644 8,179
09/30/02 6,900 6,851 7,290
10/31/02 7,540 7,480 7,932
11/30/02 7,890 7,886 8,399
12/31/02 7,340 7,341 7,905
01/31/03 7,180 7,163 7,698
02/28/03 7,210 7,130 7,583
03/31/03 7,300 7,263 7,656
04/30/03 7,760 7,800 8,287
05/31/03 7,950 8,189 8,724
06/30/03 8,040 8,302 8,835
07/31/03 8,260 8,509 8,991
08/31/03 8,500 8,720 9,166
09/30/03 8,290 8,627 9,069
10/31/03 8,810 9,111 9,582
11/30/03 8,930 9,207 9,666
12/31/03 9,180 9,525 10,173
01/31/04 9,350 9,720 10,360
02/29/04 9,350 9,782 10,504
03/31/04 9,260 9,600 10,345
</Table>
[CHART]
THE VALUE OF A $1,000,000 INVESTMENT IN ARIEL PREMIER GROWTH FUND, INSTITUTIONAL
CLASS
<Table>
<Caption>
ARIEL PREMIER GROWTH FUND
RUSSELL 1000
As of: INSTITUTIONAL CLASS GROWTH INDEX S&P 500
02/28/02 958,000 958,501 980,716
03/31/02 1,012,000 991,653 1,017,604
04/30/02 926,000 910,719 955,909
05/31/02 905,000 888,686 948,867
06/30/02 825,000 806,479 881,281
07/31/02 770,000 762,142 812,578
08/31/02 775,000 764,421 817,910
09/30/02 692,000 685,128 729,018
10/31/02 757,000 747,976 793,186
11/30/02 792,000 788,602 839,871
12/31/02 737,000 734,129 790,534
01/31/03 721,000 716,315 769,824
02/28/03 725,000 713,026 758,273
03/31/03 734,000 726,296 765,636
04/30/03 780,000 779,996 828,704
05/31/03 800,000 818,929 872,363
06/30/03 810,000 830,206 883,487
07/31/03 832,000 850,864 899,066
08/31/03 856,000 872,026 916,597
09/30/03 836,000 862,690 906,870
10/31/03 888,000 911,146 958,162
11/30/03 901,000 920,685 966,591
12/31/03 926,000 952,525 1,017,291
01/31/04 944,000 971,978 1,035,962
02/29/04 944,000 978,153 1,050,357
03/31/04 936,000 960,008 1,034,511
</Table>
TOP TEN HOLDINGS (AS OF MARCH 31, 2004)
1 CISCO SYSTEMS, INC.
World's #1 provider of internet hardware
2 MICROSOFT CORP.
World's #1 software company
3 GENERAL ELECTRIC CO.
Diversified manufacturer and financial services company
4 PFIZER, INC.
Leading pharmaceutical company
5 LIBERTY MEDIA CORP.
Diversified media company
6 INTEL CORP.
Foremost provider of computer chips and other components
7 TAIWAN SEMICONDUCTOR MFG. CO., LTD.
Manufacturer of semiconductors
8 DANAHER CORP.
Preeminent industrial and consumer product provider
9 PROCTER & GAMBLE CO.
Country's top producer of household products
10 LOWE'S COS., INC.
Leading U.S. home improvement chain
19
<Page>
ARIEL PREMIER GROWTH FUND SCHEDULE OF INVESTMENTS
<Table>
<Caption>
NUMBER OF SHARES COMMON STOCKS--97.23% COST MARKET VALUE
- ----------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY & SERVICES--16.53%
12,500 Accenture Ltd. * $ 258,249 $ 310,000
2,900 Autozone, Inc. * 220,491 249,313
5,600 Bed Bath & Beyond, Inc. * 214,000 233,856
1,900 Chico's FAS, Inc. * 39,683 88,160
2,500 Home Depot, Inc. 81,183 93,400
3,000 InterActiveCorp * 105,937 94,770
3,900 Kohl's Corp. * 210,611 188,487
69,826 Liberty Media Corp. * 768,400 764,595
9,300 Lowe's Cos., Inc. 375,916 522,009
3,200 Pier 1 Imports, Inc. 61,894 75,840
3,600 Staples, Inc. * 85,012 91,404
4,000 Viacom, Inc., Class B 147,498 156,840
5,300 Wal-Mart Stores, Inc. 276,852 316,357
--------------------------------
2,845,726 3,185,031
--------------------------------
CONSUMER STAPLES--4.94%
1,700 Colgate-Palmolive Co. 95,859 93,670
6,200 PepsiCo, Inc. 318,330 333,870
5,000 Procter & Gamble Co. 445,319 524,400
--------------------------------
859,508 951,940
--------------------------------
FINANCIAL SERVICES--10.59%
3,800 American International Group, Inc. 281,023 271,130
3,500 Bank of America Corp. 284,934 283,430
5,300 Citigroup, Inc. 262,203 274,010
1,200 Countrywide Financial Corp. 99,299 115,080
4,600 Fannie Mae 357,356 342,010
1,500 Goldman Sachs Group, Inc. 130,963 156,525
5,400 MBNA Corp. 89,709 149,202
2,800 Morgan Stanley 132,059 160,440
6,900 SLM Corp. 270,165 288,765
--------------------------------
1,907,711 2,040,592
--------------------------------
HEALTH CARE--21.48%
2,970 Aetna, Inc. 172,836 266,468
6,100 Alcon, Inc. 345,986 386,130
6,700 AmerisourceBergen Corp. 367,962 366,356
3,100 Amgen, Inc. * 196,055 180,327
2,400 Biogen Idec, Inc. * 138,813 133,440
10,200 Boston Scientific Corp. * 382,451 432,276
900 Genentech, Inc. * 94,900 95,238
1,700 Gilead Sciences, Inc. * 94,345 94,809
5,200 Guidant Corp. 331,794 329,524
5,500 Johnson & Johnson 292,870 278,960
2,000 Merck & Co., Inc. 96,366 88,380
21,900 Pfizer, Inc. 694,413 767,595
8,200 Teva Pharmaceutical Industries Ltd., ADR 445,159 519,962
3,100 UnitedHealth Group, Inc. 192,192 199,764
--------------------------------
3,846,142 4,139,229
--------------------------------
</Table>
20
<Page>
MARCH 31, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER OF SHARES COMMON STOCKS--97.23% (CONT'D) COST MARKET VALUE
- ----------------------------------------------------------------------------------------------------------
OTHER--9.25%
5,200 3M Co. $ 307,586 $ 425,724
2,200 Deere & Co. 122,930 152,482
27,300 General Electric Co. 818,945 833,196
4,700 Illinois Tool Works, Inc. 325,225 372,381
--------------------------------
1,574,686 1,783,783
--------------------------------
OTHER ENERGY--1.50%
6,700 BJ Services Co. * 216,670 289,909
--------------------------------
PRODUCER DURABLES--5.64%
6,100 Danaher Corp. 374,934 569,557
6,000 United Technologies Corp. 431,857 517,800
--------------------------------
806,791 1,087,357
--------------------------------
TECHNOLOGY--25.98%
7,700 Analog Devices, Inc. 360,098 369,677
43,900 Cisco Systems, Inc. * 815,232 1,032,528
6,000 Dell, Inc. * 191,823 201,720
27,800 Intel Corp. 621,384 756,160
11,700 Jabil Circuit, Inc. * 248,144 344,331
3,500 Maxim Integrated Products, Inc. 122,940 164,815
4,700 Mercury Interactive Corp. * 227,060 210,560
36,100 Microsoft Corp. 928,968 901,417
23,500 Oracle Corp. * 280,552 282,235
62,000 Taiwan Semiconductor Mfg. Co., Ltd., ADR * 683,082 647,280
2,000 Yahoo!, Inc. * 93,165 97,180
--------------------------------
4,572,448 5,007,903
--------------------------------
UTILITIES--1.32%
9,100 Comcast Corp., Class A * 217,798 253,708
--------------------------------
Total Common Stocks 16,847,480 18,739,452
--------------------------------
<Caption>
PRINCIPAL AMOUNT REPURCHASE AGREEMENT--2.63% COST MARKET VALUE
- ----------------------------------------------------------------------------------------------------------
$ 507,516 State Street Bank & Trust Co., 0.45%, dated
3/31/2004, due 4/1/2004, repurchase price $507,522
(collateralized by U. S. Treasury Bond, 8.75%,
5/15/2017) 507,516 507,516
--------------------------------
Total Repurchase Agreement 507,516 507,516
--------------------------------
Total Investments-99.86% $ 17,354,996 19,246,968
==============
Other Assets less Liabilities-0.14% 25,868
--------------
NET ASSETS-100.00% $ 19,272,836
==============
</Table>
* Non-income producing.
ADR after the name of a holding stands for American Depositary Receipt
representing foreign securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of the financial statements.
21
<Page>
ARIEL PREMIER GROWTH FUND STATISTICAL SUMMARY
<Table>
<Caption>
52-WEEK RANGE EARNINGS PER SHARE P/E CALENDAR
---------------- ------------------- --------------------
2003 2004 2003 2004 MARKET
TICKER PRICE ACTUAL ESTIMATED ACTUAL ESTIMATED CAP.
COMPANY SYMBOL 3/31/04 LOW HIGH CALENDAR CALENDAR P/E P/E ($MM)
Pier 1 Imports, Inc. PIR 23.70 15.70 26.19 1.50 1.68 15.8 14.1 2,093
Mercury Interactive Corp. MERQ 44.80 30.85 54.00 1.07 1.31 41.8 34.2 4,018
Chico's FAS, Inc. CHS 46.40 19.18 47.35 1.47 1.80 31.7 25.7 4,062
Jabil Circuit, Inc. JBL 29.43 17.68 32.35 1.03 1.30 28.5 22.7 5,907
AmerisourceBergen Corp. ABC 54.68 50.28 73.30 4.13 4.54 13.2 12.0 6,136
BJ Services Co. BJS 43.27 30.90 45.73 1.62 1.93 26.7 22.5 6,877
AutoZone, Inc. AZO 85.97 72.20 103.53 6.51 7.38 13.2 11.6 7,329
Gilead Sciences, Inc. GILD 55.45 41.34 69.99 1.40 1.94 39.7 28.6 11,825
Bed Bath & Beyond, Inc. BBBY 41.90 35.48 43.80 1.54 1.81 27.2 23.1 12,502
Staples, Inc. SPLS 25.32 18.25 27.77 1.33 1.57 19.0 16.1 12,640
Accenture Ltd. ACN 24.80 14.06 26.66 1.15 1.28 21.7 19.4 12,648
Aetna, Inc. AET 89.72 47.03 89.91 6.77 7.79 13.2 11.5 13,684
Danaher Corp. DHR 93.37 65.00 95.36 4.09 4.60 22.8 20.3 14,349
Maxim Integrated Products, Inc. MXIM 46.97 33.85 55.99 1.18 1.54 39.8 30.4 15,407
Kohl's Corp. KSS 48.33 41.20 64.49 2.15 2.62 22.5 18.4 16,439
Deere & Co. DE 69.31 40.19 69.94 4.04 4.78 17.2 14.5 17,116
Teva Pharmaceutical Industries Ltd. TEVA 63.37 44.04 67.20 2.55 3.01 24.8 21.0 17,325
Countrywide Financial Corp. CFC 63.93 29.05 64.37 7.14 7.34 9.0 8.7 17,693
Analog Devices, Inc. ADI 48.01 26.92 51.39 1.46 2.01 32.9 23.9 17,945
Biogen Idec, Inc. BIIB 55.60 30.07 59.21 1.48 1.79 37.6 31.1 18,371
SLM Corp. SLM 41.85 35.70 42.76 2.15 2.49 19.4 16.8 18,536
Alcon, Inc. ACL 63.30 40.64 64.98 2.17 2.52 29.2 25.1 19,529
Guidant Corp. GDT 63.37 35.51 72.61 2.45 2.78 25.9 22.8 19,579
InterActiveCorp IACI 31.63 25.10 42.74 0.93 1.16 34.1 27.2 22,004
Illinois Tool Works, Inc. ITW 79.23 61.52 84.78 3.88 4.41 20.4 18.0 24,453
Yahoo!, Inc. YHOO 48.47 22.87 49.74 0.54 0.76 90.1 64.0 28,833
Colgate-Palmolive Co. CL 55.10 49.13 60.88 2.63 2.92 21.0 18.9 29,407
Liberty Media Corp. L 10.95 9.60 12.32 -0.03 -0.03 NM NM 31,612
Boston Scientific Corp. BSX 42.38 20.63 44.12 1.71 2.34 24.7 18.1 35,017
MBNA Corp. KRB 27.63 15.50 28.78 2.07 2.35 13.3 11.7 35,300
UnitedHealth Group, Inc. UNH 64.44 44.76 64.44 3.74 4.34 17.2 14.9 37,569
Taiwan Semiconductor Mfg. Co., Ltd. TSM 10.44 6.83 12.92 0.57 0.69 18.2 15.2 42,232
Lowe's Cos., Inc. LOW 56.13 39.00 60.05 2.66 3.31 21.1 17.0 44,174
United Technologies Corp. UTX 86.30 58.75 97.50 5.22 5.82 16.5 14.8 44,364
Goldman Sachs Group, Inc. GS 104.35 71.91 109.05 7.94 7.89 13.1 13.2 50,372
Genentech, Inc. DNA 105.82 34.99 113.27 1.54 2.06 68.7 51.3 55,528
Oracle Corp. ORCL 12.00 11.17 14.89 0.49 0.55 24.3 21.7 62,340
Morgan Stanley MWD 57.30 41.43 62.22 4.18 4.46 13.7 12.9 62,896
3M Co. MMM 81.87 60.76 85.48 3.60 4.03 22.8 20.3 64,032
Comcast Corp. CMCSA 28.76 28.00 36.13 0.40 0.70 71.8 41.3 64,750
Viacom, Inc. VIA.B 39.21 37.00 47.45 1.62 1.83 24.2 21.5 68,014
</Table>
22
<Page>
MARCH 31, 2004 (UNAUDITED)
<Table>
<Caption>
52-WEEK RANGE EARNINGS PER SHARE P/E CALENDAR
---------------- ------------------- --------------------
2003 2004 2003 2004 MARKET
TICKER PRICE ACTUAL ESTIMATED ACTUAL ESTIMATED CAP.
COMPANY SYMBOL 3/31/04 LOW HIGH CALENDAR CALENDAR P/E P/E ($MM)
Fannie Mae FNM 74.35 60.40 79.88 8.00 8.91 9.3 8.3 72,120
Amgen, Inc. AMGN 58.15 57.60 71.54 2.38 2.82 24.5 20.6 74,647
Home Depot, Inc. HD 37.36 25.75 37.52 2.09 2.41 17.9 15.5 84,322
Dell, Inc. DELL 33.62 28.01 36.98 1.24 1.47 27.1 22.8 85,933
PepsiCo, Inc. PEP 53.85 38.17 53.85 2.30 2.57 23.4 21.0 91,814
Merck & Co., Inc. MRK 44.19 40.60 63.24 3.13 3.36 14.1 13.1 98,180
Bank of America Corp. BAC 80.98 69.19 83.53 7.15 7.86 11.3 10.3 117,056
Procter & Gamble Co. PG 104.88 86.70 105.98 4.59 5.08 22.8 20.7 135,547
Johnson & Johnson JNJ 50.72 48.73 58.41 2.95 3.26 17.2 15.6 150,536
Cisco Systems, Inc. CSCO 23.57 13.04 29.13 0.72 0.83 32.8 28.3 162,209
Intel Corp. INTC 27.20 16.68 34.24 1.23 1.47 22.1 18.6 176,446
American International Group, Inc. AIG 71.35 52.50 75.12 4.48 5.13 15.9 13.9 186,113
Wal-Mart Stores, Inc. WMT 59.69 50.74 61.05 2.37 2.71 25.2 22.1 257,324
Citigroup, Inc. C 51.70 36.52 51.94 3.90 4.34 13.2 11.9 266,614
Pfizer, Inc. PFE 35.05 29.55 38.85 2.11 2.39 16.6 14.7 267,396
Microsoft Corp. MSFT 24.93 23.67 29.96 1.19 1.28 20.9 19.5 268,970
General Electric Co. GE 30.52 27.05 34.19 1.57 1.77 19.4 17.3 307,126
</Table>
Note: All earnings per share numbers are fully diluted. Such numbers are from
continuing operations and are adjusted for non-recurring items.
NM=Not Meaningful.
All estimates of future earnings per share shown in this table are prepared by
Lincoln Equity Management, LLC and represent consensus earnings per share
expectations.
P/E ratios are based on earnings stated and 3/31/04 stock price.
23
<Page>
ARIEL PREMIER BOND FUND
INVESTOR CLASS: APBRX
INSTITUTIONAL CLASS: APBFX
MANAGEMENT DISCUSSION
Q: HOW DID ARIEL PREMIER BOND FUND PERFORM AGAINST ITS BENCHMARK?
A: For the first quarter ended March 31, 2004, Ariel Premier Bond Fund,
Investor Class returned +2.38% and the Institutional Class posted +2.58%.
The results of both classes fell slightly short of the Lehman Brothers
Aggregate Bond Index, which returned +2.66% for the quarter.
Q: WHAT DROVE ARIEL PREMIER BOND FUND'S PERFORMANCE?
A: Since our views were fairly consistent with market consensus, Ariel Premier
Bond Fund was positioned to closely mirror the risk profile of the Lehman
Brothers Aggregate Bond Index. This strategy resulted in the Fund
essentially tracking the benchmark for the three-month period ending March
31, 2004.
Q: HOW IS ARIEL PREMIER BOND FUND POSITIONED CURRENTLY? HAVE THERE BEEN ANY
CHANGES IN STRATEGY OVER THE QUARTER?
A: We made two significant changes to Ariel Premier Bond Fund's strategy this
quarter. In early March, interest rates declined in response to another
weak employment report, so we shortened the Fund's duration. Additionally,
we significantly reduced the Fund's mortgage exposure relative to the
benchmark as we believe mortgage-backed securities are fairly priced today.
The Fund now holds only 11.5% in mortgage-backed securities compared to a
weighting of 34.9% in the Lehman Brothers Aggregate Bond Index. Beyond
these two moves, the Fund's corporate exposure was modestly increased and
agency holdings further reduced.
Q: HOW HAS ARIEL PREMIER BOND FUND PERFORMED OVER THE LONG TERM?
A: Over the past three years, Ariel Premier Bond Fund has produced an average
annual rate of return of +6.63% for the Investor Class and +7.09% for the
Institutional Class versus +7.44% for the Lehman Brothers Aggregate Bond
Index. We attribute this performance to three factors--our duration
strategy, sector weightings and issue selection. Since inception, Ariel
Premier Bond Fund, Investor Class returned +6.49% and the Institutional
Class gained +6.65%. Both classes fell slightly short of the Lehman
Brothers Aggregate Bond Index, which returned +7.52% and +7.31% since
inception of the Investor Class and Institutional Class, respectively.
24
<Page>
ARIEL PREMIER BOND FUND PERFORMANCE SUMMARY
INVESTOR CLASS INCEPTION: FEBRUARY 1, 1997
INSTITUTIONAL CLASS INCEPTION: OCTOBER 1, 1995
ABOUT THE FUND
Ariel Premier Bond Fund seeks to maximize total return through a combination of
income and capital appreciation by investing in high-quality fixed income
securities. The Fund may invest in investment-grade bonds including U.S.
Government (and government agency) securities, corporate bonds, mortgage-related
securities and asset-backed securities. Under normal conditions, at least 80% of
the Fund's assets will be invested in fixed income securities rated A or better
by the recognized rating agencies. Ariel Premier Bond Fund will not invest in
"junk bonds" or other low-rated securities.
PORTFOLIO COMPOSITION
<Table>
<Caption>
LEHMAN
ARIEL BROTHERS
PREMIER AGGREGATE
BOND BOND
FUND INDEX
Government & Agency 32.2% 34.5%
Cash & Other 24.0% 0.0%
Corporate 23.1% 26.3%
Mortgage-Backed 11.5% 34.9%
Asset-Backed 6.8% 1.6%
Commercial Mortgage-Backed 2.4% 2.7%
</Table>
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 2004 (ASSUMES REINVESTMENT OF
DIVIDENDS AND CAPITAL GAINS)*
<Table>
<Caption>
1ST QUARTER YTD 1 YEAR 3 YEAR 5 YEAR LIFE OF FUND
- -----------------------------------------------------------------------------------------------------------------
Ariel Premier Bond Fund, Investor +2.38% +2.38% +5.07% +6.63% +6.20% +6.49%
Ariel Premier Bond Fund, Institutional +2.58% +2.58% +5.49% +7.09% +6.62% +6.65%
Lehman Bros. Aggregate Bond Index, Inv. Cl +2.66% +2.66% +5.40% +7.44% +7.29% +7.52%
Lehman Bros. Aggregate Bond Index, Inst. Cl +2.66% +2.66% +5.40% +7.44% +7.29% +7.31%
</Table>
[CHART]
THE VALUE OF A $10,000 INVESTMENT IN ARIEL PREMIER BOND FUND, INVESTOR CLASS
<Table>
<Caption>
LEHMAN BROS.
BOND FUND - INV AGG BOND INDEX
12/31/97 10,838 10,932
12/31/98 11,621 11,882
12/31/99 11,509 11,784
12/31/00 12,631 13,154
12/31/01 13,516 14,265
12/31/02 14,758 15,728
12/31/03 15,322 16,373
03/31/04 15,687 16,808
</Table>
[CHART]
THE VALUE OF A $1,000,000 INVESTMENT IN ARIEL PREMIER BOND FUND, INSTITUTIONAL
CLASS
<Table>
<Caption>
LEHMAN BROS.
BOND FUND - INSTIT AGG BOND INDEX
12/31/95 1,035,133 1,042,614
12/31/96 1,067,769 1,080,464
12/31/97 1,165,610 1,184,777
12/31/98 1,254,775 1,287,697
12/31/99 1,247,639 1,277,112
12/31/00 1,373,277 1,425,587
12/31/01 1,476,722 1,545,968
12/31/02 1,618,818 1,704,506
12/31/03 1,685,819 1,774,462
03/31/04 1,729,260 1,821,641
</Table>
* The graph and performance table do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
The Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. An investor cannot invest directly in an index.
25
<Page>
ARIEL PREMIER BOND FUND SCHEDULE OF INVESTMENTS
<Table>
<Caption>
PAR VALUE ASSET-BACKED SECURITIES--6.78% COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
$ 173,350 ABSC NIMs Trust, 2003-HE7 A, 7.00%, 12/15/2033+ $ 171,036 $ 173,350
149,104 ABSC NIMs Trust, 2004-HE1 A, 7.00%, 1/17/2034 147,465 149,104
140,000 Argent NIM Trust, 2004-WN4 A, 4.459%, 3/25/2034+ 140,000 140,000
125,000 Argent NIM Trust, 2004-WN2 A, 4.55%, 4/25/2034+ 124,993 124,994
90,000 Argent NIM Trust, 2004-WN2 B, 6.75%, 4/25/2034+ 88,227 88,227
1,205,000 Bank One Auto Securitization, 2003-1 A4, 2.43%, 3/22/2010 1,213,076 1,208,152
1,250,000 Bank One Issuance Trust, 2003-C3 C3, 4.77%, 2/16/2016 1,249,783 1,247,077
330,000 Capital One Multi-Asset Execution Trust, 2004-C1 C1, 3.40%, 11/16/09 329,930 336,118
1,055,000 Carmax Auto Owner Trust, 2003-2 A3, 2.36%, 10/15/2007 1,057,690 1,061,753
110,000 Chase Funding Mortgage Loan Asset-Backed Certificates,
2001-4 1B, 7.383%, 11/25/2031 114,327 114,168
54,508 Chase Funding Net Interest Margin, 2003-5A, 5.75%, 11/27/2034+ 54,443 54,476
274,769 Chase Funding Net Interest Margin, 2003-6A, 5.00%, 1/27/2035+ 274,405 274,439
1,030,000 Chase Manhattan Auto Owner Trust, 2003-C A4, 2.94%, 6/15/10 1,029,735 1,046,281
35,774 Chase Manhattan Auto Owner Trust, 2001-B A3, 3.09%, 11/15/05 35,768 35,840
845,000 Chevy Chase Auto Receivables Trust, 2001-2 A4, 4.44%, 4/16/07 844,933 860,994
930,000 Citibank Credit Card Issuance Trust, 2002-C2 C2, 6.95%, 2/18/14 927,980 1,057,258
1,565,000 Citibank Credit Card Issuance Trust, 2003-C4 C4, 5.00%, 6/10/15 1,563,498 1,582,254
274,844 Continental Airlines, Inc., 1997-4 A, 6.90%, 1/2/2018 275,527 274,058
128,771 Countrywide Asset-Backed Certificates, 2003-5NF NF, 6.75%, 2/25/2034+ 128,631 129,923
482,509 Equifirst Mortgage Loan Trust, 2003-2 3A3, 2.47%, 6/25/2033 482,509 486,556
230,000 Green Tree Financial Corp., 1995-5 M1, 7.65%, 9/15/2026 259,863 250,480
215,609 GSAMP Trust, 2004-FM1N, 5.25%, 11/25/2033+ 215,326 215,394
1,720,000 Honda Auto Receivables Owner Trust, 2003-5 A4, 2.96%, 4/18/09 1,720,000 1,749,380
140,316 Merrill Lynch Mortgage Investors, Inc., 2003-OP1N N1, 7.25%, 9/25/2034+ 139,968 141,660
210,744 Merrill Lynch Mortgage Investors, Inc., 2004-WM1N N1, 4.50%, 10/25/2034+ 209,804 210,744
60,000 National City Auto Receivables Trust, 2002-A A4, 4.83%, 8/15/09 59,993 62,414
293,859 Novastar NIM Trust, 2004-N1, 4.458%, 2/26/2034+ 293,859 293,859
1,250,000 Permanent Financing PLC, 1 2A, 4.20%, 6/10/2007 1,249,858 1,291,775
36,583 Railcar Trust, 1992-1 A, 7.75%, 6/1/2004 36,637 37,004
110,687 Renaissance NIM Trust, 2003-D, 6.657%, 3/26/2034+ 110,687 111,655
124,910 Saxon Net Interest Margin Trust, 2003-A A, 6.656%, 8/25/2033+ 124,910 125,847
297,489 Sharp SP I LLC Net Interest Margin Trust, 2003-OP1N NA, 4.45%, 12/25/2033+ 297,473 297,460
117,082 Sharp SP I LLC Net Interest Margin Trust, 2004-FM1N N, 6.16%, 9/25/2034+ 117,074 117,082
410,000 WFS Financial Owner Trust, 2004-1 D, 3.17%, 8/22/2011 409,998 412,123
505,000 Whole Auto Loan Trust, 2002-1 A3, 2.60%, 8/15/2006 504,988 510,096
--------------------------------
Total Asset-Backed Securities 16,004,394 16,271,995
--------------------------------
<Caption>
PAR VALUE COMMERCIAL MORTGAGE-BACKED SECURITIES--2.37% COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
668,412 Chase Commercial Mortgage Securities Corp., 2000-3 A1, 7.093%, 10/15/2032 698,630 745,180
1,330,000 Chase Commercial Mortgage Securities Corp., 2000-3 A2, 7.319%, 10/15/2032 1,333,037 1,574,887
215,541 Freddie Mac, 1364 K, 5.00%, 9/15/2007 219,483 219,950
260,000 Newcastle CDO I Ltd., 2004-4A 3FX, 5.1098%, 6/24/2039+ 259,844 260,000
2,485,000 Prudential Securities Secured Financing Corp., 1999-C2 A2,
7.193%, 6/16/2031 2,730,742 2,893,538
--------------------------------
Total Commercial Mortgage-Backed Securities 5,241,736 5,693,555
--------------------------------
</Table>
26
<Page>
MARCH 31, 2004 (UNAUDITED)
<Table>
<Caption>
PAR VALUE CORPORATE DEBT--23.06% COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
1,230,000 America Movil SA de CV, 5.50%, 3/1/2014+ $ 1,224,305 $ 1,226,217
765,000 ANZ Capital Trust I, 5.36%, 12/29/2049+ 764,970 786,546
745,000 AT&T Corp., 8.75%, 11/15/2031 888,759 878,777
290,000 AT&T Wireless Services, Inc., 7.35%, 3/1/2006 289,952 318,045
535,000 AT&T Wireless Services, Inc., 7.875%, 3/1/2011 603,315 638,008
985,000 AT&T Wireless Services, Inc., 8.75%, 3/1/2031 1,248,208 1,277,548
700,000 AXA, 8.60%, 12/15/2030 768,016 920,350
450,000 Bank One Corp., 5.25%, 1/30/2013 445,589 472,249
245,000 Boeing Co., 6.125%, 2/15/2033 248,907 254,315
360,000 Boeing Co., 6.875%, 10/15/2043 323,619 400,888
390,000 British Telecommunications PLC, 8.375%, 12/15/2010 466,698 481,944
465,000 Burlington Resources Finance Co., 6.68%, 2/15/2011 465,000 531,401
345,000 Cadbury Schweppes US Finance LLC, 3.875%, 10/1/2008+ 344,082 351,336
1,975,000 Citigroup, Inc., 7.25%, 10/1/2010 2,301,442 2,352,150
355,000 Comcast Cable Communications Holdings, Inc., 9.455%, 11/15/22 475,987 481,653
310,000 Comcast Corp., 7.05%, 3/15/2033 338,048 344,459
460,000 Corp. Andina de Fomento CAF, 7.375%, 1/18/2011 458,719 536,090
985,000 Countrywide Home Loans, Inc., 3.25%, 5/21/2008 984,281 987,772
655,000 Credit Suisse First Boston USA, Inc., 5.125%, 1/15/2014 652,503 674,209
345,000 DaimlerChrysler NA Holding Corp., 6.40%, 5/15/2006 343,521 371,222
935,000 Deutsche Telekom International Finance BV, 8.75%, 6/15/2030 1,109,306 1,225,815
395,000 Duke Energy Field Services LLC, 7.875%, 8/16/2010 456,925 472,497
460,000 Duke Energy Field Services LLC, 6.875%, 2/1/2011 516,899 525,298
1,105,000 Enterprise Products Partners LP, 6.875%, 3/1/2033 1,119,087 1,163,098
550,000 EOP Operating LP, 6.80%, 1/15/2009 594,804 629,478
595,000 Exelon Generation Co. LLC, 5.35%, 1/15/2014+ 594,785 613,271
1,745,000 Ford Motor Credit Co., 7.375%, 10/28/2009 1,827,917 1,915,389
500,000 France Telecom, 9.00%, 3/1/2011 607,658 610,654
790,000 France Telecom, 9.75%, 3/1/2031 1,035,729 1,067,841
250,000 General Electric Capital Corp., 6.00%, 6/15/2012 248,385 279,348
750,000 General Electric Capital Corp., 6.75%, 3/15/2032 768,236 866,375
885,000 General Electric Co., 5.00%, 2/1/2013 917,832 926,664
865,000 General Motors Acceptance Corp., 6.125%, 9/15/2006 909,651 924,839
420,000 General Motors Acceptance Corp., 7.25%, 3/2/2011 418,941 466,107
705,000 General Motors Acceptance Corp., 6.875%, 9/15/2011 771,664 764,862
1,690,000 General Motors Acceptance Corp., 8.00%, 11/1/2031 1,812,263 1,870,584
510,000 General Motors Corp., 8.375%, 7/15/2033 575,015 578,524
470,000 Goldman Sachs Group, Inc., 6.345%, 2/15/2034 470,000 483,237
325,000 Household Finance Corp., 5.75%, 1/30/2007 328,396 353,969
275,000 Household Finance Corp., 7.00%, 5/15/2012 276,292 322,709
720,000 International Paper Co., 4.00%, 4/1/2010 719,377 718,065
460,000 JP Morgan Chase & Co., 5.75%, 1/2/2013 468,818 499,985
425,000 Kinder Morgan, Inc., 7.25%, 3/1/2028 492,101 484,455
525,000 Kraft Foods, Inc., 4.00%, 10/1/2008 522,964 540,215
2,660,000 Liberty Media Corp., 3.50%, 9/25/2006 2,647,837 2,708,691
185,000 Merrill Lynch Mortgage Investors Inc., 4.50%, 1/25/2005+ 184,499 184,499
460,000 Mizuho Financial Group Cayman Ltd., 5.79%, 4/15/2014+ 459,780 471,894
</Table>
27
<Page>
<Table>
<Caption>
PAR VALUE CORPORATE DEBT--23.06% (CONT'D) COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
$ 495,000 Morgan Stanley, 5.30%, 3/1/2013 $ 502,951 $ 519,569
2,485,000 Morgan Stanley, 4.75%, 4/1/2014 2,463,365 2,444,249
600,000 News America, Inc., 7.625%, 11/30/2028 549,370 713,228
385,000 Pacific Gas & Electric Co., 4.80%, 3/1/2014 384,412 386,823
340,000 Pacific Gas & Electric Co., 6.05%, 3/1/2034 338,341 343,891
100,000 PSEG Power LLC, 7.75%, 4/15/2011 111,908 119,800
670,000 PSEG Power LLC, 6.95%, 6/1/2012 717,347 771,635
915,000 Raytheon Co., 6.75%, 8/15/2007 1,022,932 1,028,667
395,000 Republic of Chile, 5.50%, 1/15/2013 391,747 417,436
600,000 Simon Property Group LP, 4.875%, 3/18/2010 598,374 636,737
415,000 SLM Corp., 5.125%, 8/27/2012 412,486 435,181
510,000 Sprint Capital Corp., 6.125%, 11/15/2008 550,887 562,168
1,100,000 Sprint Capital Corp., 8.75%, 3/15/2032 1,241,128 1,390,289
315,000 Telefonica Europe BV, 7.75%, 9/15/2010 315,187 380,418
710,000 Telefonos de Mexico SA de CV, 4.50%, 11/19/2008+ 708,562 724,271
615,000 Time Warner Entertainment Co. LP, 8.375%, 7/15/2033 772,758 783,816
555,000 Time Warner, Inc., 6.875%, 5/1/2012 638,162 634,928
1,720,000 United Mexican States, 8.375%, 1/14/2011 1,789,705 2,090,660
480,000 Univision Communications, Inc., 3.50%, 10/15/2007 479,050 492,353
630,000 US Bancorp, 3.125%, 3/15/2008 629,020 635,124
405,000 Viacom, Inc., 6.40%, 1/30/2006 436,603 437,294
705,000 Vornado Realty Trust, 4.75%, 12/1/2010 704,116 723,379
755,000 Wachovia Corp., 4.95%, 11/1/2006 803,617 807,542
540,000 Washington Mutual Financial Corp., 6.875%, 5/15/2011 537,499 636,500
720,000 Weyerhaeuser Co., 6.125%, 3/15/2007 733,280 787,685
435,000 Zurich Capital Trust I, 8.376%, 6/1/2037+ 463,256 503,687
--------------------------------
Total Corporate Debt 52,787,145 55,360,872
--------------------------------
<Caption>
PAR VALUE MORTGAGE-BACKED SECURITIES--11.52% COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
509,044 Fannie Mae, 6.00%, 11/1/2015 527,426 536,853
26,190,000 Fannie Mae, 5.50%, 4/1/2034^ 26,828,381 26,754,709
360,535 Freddie Mac, Gold, 6.50%, 11/1/2025 342,300 380,506
--------------------------------
Total Mortgage-Backed Securities 27,698,107 27,672,068
--------------------------------
</Table>
28
<Page>
<Table>
<Caption>
PAR VALUE U.S. GOVERNMENT & AGENCY--32.19% COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURIES--29.36%
$ 8,220,000 U.S. Treasury Bond, 7.25%, 5/15/2016 $ 10,309,027 $ 10,612,793
175,000 U.S. Treasury Bond, 6.00%, 2/15/2026 196,180 202,890
145,000 U.S. Treasury Bond, 6.125%, 8/15/2029 168,431 171,882
1,430,000 U.S. Treasury Bond, 6.25%, 5/15/2030 1,694,023 1,726,446
5,295,000 U.S. Treasury Bond, 5.375%, 2/15/2031 5,531,917 5,771,550
11,875,000 U.S. Treasury Note, 1.875%, 9/30/2004 11,926,192 11,925,564
11,875,000 U.S. Treasury Note, 2.125%, 10/31/2004 11,949,980 11,950,145
11,875,000 U.S. Treasury Note, 2.00%, 11/30/2004 11,950,144 11,948,756
125,000 U.S. Treasury Note, 6.625%, 5/15/2007 142,361 142,231
5,675,000 U.S. Treasury Note, 6.00%, 8/15/2009 6,407,586 6,549,529
920,000 U.S. Treasury Note, 6.50%, 2/15/2010 1,020,911 1,090,703
980,000 U.S. Treasury Note, 4.00%, 11/15/2012 988,796 1,004,960
660,000 U.S. Treasury Strip, 0.00%, 8/15/2014 422,376 425,816
5,015,000 U.S. Treasury Strip, 0.00%, 5/15/2018 2,490,285 2,555,980
6,350,000 U.S. Treasury Strip, 0.00%, 11/15/2021 2,172,384 2,609,793
4,720,000 U.S. Treasury Strip, 0.00%, 2/15/2023 1,595,313 1,801,308
--------------------------------
68,965,906 70,490,346
--------------------------------
U.S. AGENCY ISSUES--2.83%
2,060,000 Fannie Mae, 1.75%, 6/16/2006 2,026,830 2,048,917
4,730,000 Freddie Mac, 6.00%, 5/25/2012 4,717,226 4,763,143
--------------------------------
6,744,056 6,812,060
--------------------------------
Total U.S. Government & Agency 75,709,962 77,302,406
--------------------------------
</Table>
29
<Page>
<Table>
<Caption>
PAR VALUE ASSET-BACKED FLOATERS**--33.04% COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
$ 1,803,000 Access Group, Inc., 2002-1 A1, 1.24%, 6/25/2009 $ 1,803,495 $ 1,803,718
1,970,000 American Express Credit Account Master Trust,
2001-1 A, 1.23%, 9/15/2008 1,974,291 1,974,455
865,000 Argent Securities, Inc., 2004-W3 A1, 1.21%, 3/25/2034 865,000 864,615
590,000 BMW Floorplan Master Owner Trust,
2003-1A A, 1.14%, 10/17/2008+ 590,000 590,059
2,350,000 Capital Auto Receivables Asset Trust,
2003-3 A1B, 1.14%, 1/15/2006 2,350,000 2,350,813
2,255,000 Capital One Prime Auto Receivables Trust,
2003-2 A3, 1.17%, 9/17/2007 2,255,000 2,257,313
425,000 Capital One Prime Auto Receivables Trust,
2004-1 A4, 1.16%, 8/17/2009 425,000 425,377
213,785 Centex Home Equity, 2003-A AV1, 1.37%, 3/25/2033 213,785 214,010
370,000 Chalet Finance PLC, 2A A1, 1.00%, 11/26/2013+ 370,000 370,148
2,495,000 Chase Credit Card Master Trust, 2003-1 A, 1.14%, 4/15/2008 2,495,711 2,496,712
252,678 Chase Funding Mortgage Loan Asset-Backed Certificates,
2004-1 1A1, 1.20%, 11/25/2018 252,678 252,678
626,011 Chase Funding Mortgage Loan Asset-Backed Certificates,
2004-1 2A1, 1.20%, 9/25/2021 626,011 626,011
473,411 Chase Funding Mortgage Loan Asset-Backed Certificates,
2002-2 2A1, 1.34%, 5/25/2032 473,701 474,119
385,000 Chase Funding Mortgage Loan Asset-Backed Certificates,
2004-1 2A2, 1.32%, 12/25/2033 385,000 385,000
202,441 Chesapeake Funding LLC, 2002-1 A1, 1.30%, 6/7/2007 202,441 202,505
1,455,000 Chesapeake Funding LLC, 2003-1 A1, 1.35%, 8/7/2008 1,455,000 1,458,429
344,985 Citifinancial Mortgage Securities, Inc.,
2003-4 AF1, 1.26%, 10/25/2033 344,985 345,055
965,000 College Loan Corp. Trust, 2003-2 A2, 1.26%, 1/25/2012 965,000 966,004
1,049,227 Collegiate Funding Services Education Loan Trust I,
2003-B A1, 1.29172%, 9/30/2013 1,049,227 1,049,227
315,000 Conseco Finance, 2001-D M2, 2.84%, 11/15/2032 319,636 317,143
413,306 Countrywide Asset-Backed Certificates,
2003-S2 A1, 1.26%, 12/25/2018 413,306 413,343
865,000 Countrywide Asset-Backed Certificates,
2004-3 3A1, 1.18%, 6/25/2022 865,000 865,000
446,180 Countrywide Asset-Backed Certificates,
2003-5 AF1B, 1.27%, 8/25/2022 446,180 446,075
365,000 Countrywide Asset-Backed Certificates,
2004-2 3A1, 1.17%, 4/25/2023 365,000 365,000
361,789 Countrywide Asset-Backed Certificates,
2004-1 3A, 1.37%, 4/25/2034 361,789 362,172
557,277 Countrywide Home Loans, Inc.,
2003-42 2A1, 1.22%, 10/25/2033 557,277 557,276
342,228 Credit-Based Asset Servicing and Securitization,
2004-CB1 AV2, 1.27%, 2/25/2034 342,228 342,177
765,000 Credit-Based Asset Servicing and Securitization CBO Ltd.,
9A A1, 1.47%, 4/8/2039+ 765,000 765,000
470,000 Crusade Global Trust, 2004-1 A1, 1.27%, 1/16/2035 470,000 469,998
775,000 Discover Card Master Trust I,
2000-2 A, 1.27375%, 9/18/2007 776,472 776,345
1,000,000 Discover Card Master Trust I,
2000-5 A, 1.27375%, 11/15/2007 1,002,679 1,002,041
2,115,000 Education Funding Capital Trust I, 2003-3 A2, 1.27%, 12/17/2012 2,115,000 2,118,828
302,813 Equifirst Mortgage Loan Trust, 2004-1 2A1, 1.19%, 1/25/2034 302,813 302,813
</Table>
30
<Page>
<Table>
<Caption>
PAR VALUE ASSET-BACKED FLOATERS**--33.04% (CONT'D) COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
$ 290,090 Fannie Mae Grantor Trust, 2002-T5 A1, 1.21%, 5/25/2032 $ 290,090 $ 290,565
1,750,291 Fannie Mae Grantor Trust, 2003-T3 1A, 1.21%, 6/25/2033 1,750,290 1,750,290
929,157 Fannie Mae Whole Loan, 2003-W5 A, 1.20%, 4/25/2033 929,157 931,425
211,291 Fannie Mae Whole Loan, 2003-W13 AF1, 1.16%, 10/25/2033 211,291 211,381
405,435 Fannie Mae Whole Loan, 2003-W13 AV1, 1.16%, 10/25/2033 405,435 405,534
500,737 Fannie Mae Whole Loan, 2003-W16 AF1, 1.18%, 11/25/2033 500,737 500,935
407,457 Fannie Mae Whole Loan, 2003-W16 AV1, 1.24%, 11/25/2033 407,457 407,457
1,820,000 First Franklin Mortgage Loan Asset Backed Certificates,
2004-FFH1 A2, 1.17%, 3/25/2034 1,820,000 1,820,000
500,000 First National Master Note Trust,
2003-1 A, 1.19375%, 8/15/2008 500,000 500,784
730,000 Fleet Credit Card Master Trust II,
2002-A A, 1.14375%, 10/15/2007 729,884 730,383
267,452 Ford Credit Auto Owner Trust,
2001-A A5, 1.21%, 4/15/2005 267,452 267,476
2,505,000 Ford Credit Floorplan Master Owner Trust,
2001-1 A, 1.18375%, 7/17/2006 2,506,444 2,506,251
267,272 GMAC Mortgage Corp. Loan Trust,
2003-HE2 A1, 1.19%, 12/25/2015 267,232 267,264
570,000 GMAC Mortgage Corp. Loan Trust,
2003-HE1 A1, 1.18%, 4/25/2033 570,000 570,284
288,500 GMAC Mortgage Corp. Loan Trust,
2003-AR1 A1, 1.25%, 10/19/2033 288,500 286,234
630,822 GMAC Mortgage Corp. Loan Trust,
2003-AR2 2A1, 1.28%, 12/19/2033 630,822 629,227
345,000 GMAC Mortgage Corp. Loan Trust,
2004-HE1 A1, 1.17%, 1/25/2034 345,000 345,217
570,000 Granite Mortgages PLC, 2003-2 1A2, 1.28%, 7/20/2020 571,258 570,114
348,994 GSAMP Trust, 2003-AHL A2A, 1.29%, 10/25/2033 348,994 349,393
637,809 GSAMP Trust, 2004-FM1 A2A, 1.32%, 11/25/2033 637,809 637,809
1,555,000 GSAMP Trust, 2004-FM2 A3A, 1.22%, 1/25/2034 1,555,000 1,555,000
66,130 GSRPM Mortgage Loan Trust, 2003-1 A1, 1.34%, 1/25/2032 66,130 66,146
465,000 Holmes Financing PLC, 2004-8 1C, 1.73%, 7/15/2040 465,000 465,000
3,625,000 Household Affinity Credit Card Master Note Trust I, 2003-3
A, 1.15%, 8/15/2008 3,625,000 3,625,000
563,616 Indymac Loan Trust, 2003-L1 A1, 1.47%, 11/25/2008+ 563,616 563,616
529,168 Interstar Millennium Trust, 2003-5G A2, 1.37%, 1/20/2036 529,168 529,581
435,000 Interstar Millennium Trust, 2004-2G A, 1.3019%, 3/14/2036 435,000 435,000
195,429 Long Beach Asset Holdings Corp., 2003-1 N, 1.47%, 2/25/2008+ 195,429 195,593
43,594 Long Beach Mortgage Loan Trust, 2003-4 AV2, 1.16%, 8/25/2033 43,594 43,596
630,990 Long Beach Mortgage Loan Trust, 2004-1 A4, 1.22%, 3/25/2034 630,990 630,721
255,000 Master Asset-Backed Securities Trust,
2004-OPT1 A3, 1.35%, 1/25/2034 255,000 255,000
2,310,000 MBNA Master Credit Card Trust USA,
1997-J A, 1.2138%, 2/15/2007 2,311,684 2,311,289
390,000 MBNA Master Credit Card Trust USA,
1997-K A, 1.21375%, 4/15/2008 390,390 390,701
485,000 Medallion Trust, 2004-1G A1, 1.23%, 5/25/2035 485,000 485,000
162,791 Merit Securities Corp., 11PA 2A3, 1.54%, 9/28/2025+ 162,982 163,177
244,285 Merrill Lynch Mortgage Investors, Inc.,
2003-WMC1 A2, 1.45%, 11/25/2033 244,285 244,991
527,677 Merrill Lynch Mortgage Investors, Inc.,
2004-WMC1 A2, 1.39%, 10/25/2034 527,677 528,191
</Table>
31
<Page>
<Table>
<Caption>
PAR VALUE ASSET-BACKED FLOATERS**--33.04% (CONT'D) COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
$ 314,482 Morgan Stanley ABS Capital I,
2003-NC10 A2, 1.29%, 9/26/2033 $ 314,482 $ 314,752
681,632 Morgan Stanley ABS Capital I,
2004-HE1 A3, 1.25%, 2/25/2034 681,632 681,685
520,000 Mound Financing PLC, 2A A2, 1.33%, 11/8/2007+ 520,763 520,447
674,234 MSDWCC Heloc Trust, 2003-2 A, 1.35%, 4/25/2016 674,234 676,875
260,000 Navistar Financial Corp. Owner Trust,
2003-B A3, 1.29375%, 4/15/2008 260,000 260,129
495,000 Nelnet Education Loan Funding, Inc.,
2004-1A A1A, 1.19%, 5/25/2019+ 495,000 495,153
1,000,000 Nelnet Student Loan Trust,
2003-2 A2, 1.19063%, 10/25/2013 1,000,000 1,000,219
545,000 Nissan Auto Lease Trust, 2003-A A3A, 1.23%, 6/15/2009 545,000 545,971
1,250,000 Nissan Master Owner Trust Receivables,
2003-A A1, 1.15%, 9/15/2008 1,250,000 1,250,922
290,000 Northstar Ed Fin Inc Del, 2004-1 A1, 1.16%, 1/28/2011 290,000 290,000
640,000 Novastar Home Equity Loan, 2004-1 A3A, 1.18%, 6/25/2034 640,000 640,000
635,000 NPF XII, Inc., 2002-1A A, 1.00%, 5/2/2005+ 634,625 44,450
266,677 Option One Mortgage Loan Trust,
2001-4 A, 1.39%, 1/25/2032 267,005 267,019
311,784 Option One Mortgage Loan Trust,
2002-2 A, 1.36%, 6/25/2032 311,976 312,479
471,666 Option One Mortgage Loan Trust,
2003-1 A2, 1.51%, 2/25/2033 471,666 474,328
211,933 Option One Mortgage Securities Corp. NIM Trust,
2003-6A, 1.31%, 10/26/2010+ 211,933 212,132
600,000 Permanent Financing PLC, 4 2A, 1.8288%, 3/10/2009 600,000 600,000
500,000 Permanent Financing PLC, 3 2A, 1.29%, 9/10/2010 500,000 500,365
655,000 Permanent Financing PLC, 4 2C, 1.8288%, 6/10/2042 655,000 655,000
223,359 Residential Asset Mortgage Products, Inc.,
2003-RS4 AI1, 1.18%, 11/25/2020 223,359 223,332
525,293 Residential Asset Mortgage Products, Inc.,
2004-RS2 AI1, 1.22%, 1/25/2024 525,293 525,256
204,790 Residential Asset Mortgage Products, Inc.,
2002-RS5 AII, 1.46%, 9/25/2032 204,790 205,320
351,248 Residential Asset Mortgage Products, Inc.,
2003-RS1 AII, 1.48%, 2/25/2033 351,248 352,622
347,813 Residential Asset Mortgage Products, Inc.,
2003-RS2 AII, 1.43%, 3/25/2033 347,813 348,683
479,259 Residential Asset Mortgage Products, Inc.,
2003-RS4 AIIB, 1.42%, 5/25/2033 479,259 480,355
305,267 Residental Asset Mortgage Products, Inc.,
2004-RS2 AIIB, 1.34%, 2/25/2034 305,267 305,417
266,022 Residential Asset Securities Corp.,
2003-KS2 AI1, 1.19%, 7/25/2019 266,022 266,014
257,946 Residential Asset Securities Corp.,
2003-KS9 AI1, 1.25%, 3/25/2021 257,946 258,045
266,836 Residential Asset Securities Corp.,
2002-KS3 A1B, 1.34%, 5/25/2032 267,052 267,077
229,117 Residential Asset Securities Corp.,
2003-KS1 A2, 1.46%, 1/25/2033 229,117 229,790
175,514 Residential Funding Mortgage Securities II,
2003-HI1 A1, 1.19%, 4/25/2010 175,514 175,514
</Table>
32
<Page>
<Table>
<Caption>
PAR VALUE ASSET-BACKED FLOATERS**--33.04% (CONT'D) COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
$ 48,208 Saxon Asset Securities Trust, 2001-3 AV2, 1.37%, 8/25/2031 $ 48,229 $ 48,236
410,000 Saxon Asset Securities Trust, 2002-1 M1, 1.74%, 1/25/2032 411,851 412,309
36,892 Saxon Asset Securities Trust, 2001-1 AV1, 1.32%, 3/25/2032 36,899 36,946
435,746 Saxon Asset Securities Trust, 2003-1 AV1, 1.40%, 6/25/2033 435,746 436,821
475,033 Saxon Asset Securities Trust, 2004-1 A, 1.36%, 2/25/2035 475,033 475,253
280,000 Securitized Asset Backed Receivables LLC Trust,
2004-OP1 A2, 1.34%, 2/25/2034 280,000 280,000
549,786 SLM Student Loan Trust, 2003-12 A1, 1.12%, 6/15/2009 549,786 549,786
975,000 SLM Student Loan Trust, 2003-8 A2, 1.15%, 6/15/2011 974,695 974,999
705,000 SLM Student Loan Trust, 2003-11 A2, 1.16%, 3/15/2013 705,000 705,290
490,000 SLM Student Loan Trust, 2004-2 A2, 1.1272%, 4/25/2013 490,000 489,999
515,000 SLM Student Loan Trust, 2004-A A1, 1.18%, 3/15/2017 515,000 515,000
239,383 Specialty Underwriting & Residential Finance,
2003-BC1 A, 1.43%, 1/25/2034 239,383 239,914
290,000 Specialty Underwriting & Residential Finance,
2004-BC1 A2, 1.32%, 2/25/2035 290,000 290,000
324,429 Structured Asset Securities Corp.,
2003-BC1 A, 1.59%, 5/25/2032 324,429 325,671
415,000 Triad Auto Receivables Owner Trust,
2003-A A3, 1.28%, 7/12/2007 415,000 415,136
585,000 Wachovia Asset Securitization, Inc.,
2003-HE3 A, 1.34%, 11/25/2033 585,000 584,622
2,635,000 Wachovia Credit Card Master Trust,
2000-1 A, 1.24%, 12/17/2007 2,640,948 2,640,131
1,005,000 William Street Funding Corp.,
2003-1 A, 1.42%, 4/23/2006+ 1,006,155 1,006,455
845,000 World Omni Master Owner Trust,
2004-1 A, 1.16438%, 12/15/2008 845,000 845,914
--------------------------------
Total Asset-Backed Floaters 79,886,652 79,326,917
--------------------------------
<Caption>
PRINCIPAL AMOUNT REPURCHASE AGREEMENT--1.73% COST MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
4,154,700 State Street Bank & Trust Co., 0.45%, dated 3/31/2004,
due 4/1/2004, repurchase price $4,154,752
(collateralized by U. S. Treasury Bond, 9.00%, 11/15/2018) 4,154,700 4,154,700
--------------------------------
Total Repurchase Agreement 4,154,700 4,154,700
--------------------------------
Total Investments-110.69% $ 261,482,696 265,782,513
==============
Liabilities less Other Assets-(10.69)% (25,676,105)
--------------
NET ASSETS-100.00% $ 240,106,408
==============
</Table>
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from registration
normally to qualified institutional buyers.
^ When-issued security.
** Floating rate securities are securities whose yields vary with a designated
market index or market rate. These securities are shown at their current
rates as of March 31, 2004.
The accompanying notes are an integral part of the financial statements.
33
<Page>
STATEMENT OF ASSETS & LIABILITIES MARCH 31, 2004 (UNAUDITED)
<Table>
<Caption>
ARIEL ARIEL ARIEL
ARIEL APPRECIATION PREMIER GROWTH PREMIER BOND
FUND FUND FUND FUND
-------------------------------------------------------------------------------
ASSETS:
Investments in unaffiliated securities, at value
(cost $1,464,566,897, $2,092,732,814,
$16,847,480, and $257,327,996, respectively) $ 2,023,458,478 $ 2,679,513,412 $ 18,739,452 $ 261,627,813
Investments in affiliated securities, at value
(cost $314,890,591) 357,134,042 -- -- --
Repurchase agreements, at value
(cost $329,251,865, $129,525,019,
$507,516, and $4,154,700, respectively) 329,251,865 129,525,019 507,516 4,154,700
Cash -- -- -- 103,886
Receivable for fund shares issued 10,441,988 8,717,334 24,116 425,145
Receivable for securities sold 14,125,381 -- -- 1,238,846
Dividends and interest receivable 963,103 2,562,260 8,229 1,498,346
Receivable from Advisor -- -- 36,396 --
Prepaid and other assets 126,753 113,637 21,019 --
-------------------------------------------------------------------------------
Total assets 2,735,501,610 2,820,431,662 19,336,728 269,048,736
-------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 26,464,186 30,663,699 -- 28,707,233
Payable for shares redeemed 2,741,443 1,264,060 766 140,128
Accrued management fee 1,291,756 1,564,518 -- 94,459
Accrued distribution fee 54,364 56,286 294 508
Other liabilities 850,889 873,918 62,832 --
-------------------------------------------------------------------------------
Total liabilities 31,402,638 34,422,481 63,892 28,942,328
-------------------------------------------------------------------------------
NET ASSETS $ 2,704,098,972 $ 2,786,009,181 $ 19,272,836 $ 240,106,408
===============================================================================
NET ASSETS CONSIST OF:
Paid-in-capital $ 2,087,025,865 $ 2,228,889,502 $ 19,312,624 $ 232,587,047
Undistributed net investment income (loss) 4,468,974 584,726 (29,405) 36,037
Accumulated net realized gain (loss) on
investment transactions 11,469,101 (30,245,645) (1,902,355) 3,183,507
Net unrealized appreciation on investments 601,135,032 586,780,598 1,891,972 4,299,817
-------------------------------------------------------------------------------
Total net assets $ 2,704,098,972 $ 2,786,009,181 $ 19,272,836 $ 240,106,408
===============================================================================
Shares outstanding (no par value) 56,147,620 62,035,003
Investor Class 1,576,384 2,350,306
Institutional Class 500,108 20,364,071
Net asset value, offering and redemption
price per share $ 48.16 $ 44.91
Investor Class $ 9.26 $ 10.56
Institutional Class $ 9.36 $ 10.57
</Table>
The accompanying notes are an integral part of the financial statements.
34
<Page>
STATEMENT OF OPERATIONS YEAR ENDED MARCH 31, 2004 (UNAUDITED)
<Table>
<Caption>
ARIEL ARIEL ARIEL
ARIEL APPRECIATION PREMIER GROWTH PREMIER BOND
FUND FUND FUND FUND
-------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends(a) $ 16,419,975 $ 14,660,080 $ 65,321(b) $ --
Interest 593,321 202,365 550 3,511,288
-------------------------------------------------------------------------------
Total investment income 17,013,296 14,862,445 65,871 3,511,288
-------------------------------------------------------------------------------
EXPENSES:
Management fees 6,916,567 8,428,119 55,728 555,376
Distribution fees 2,973,440 3,097,353 17,492 31,254
Transfer agent fees and expenses 2,107,285 2,198,385 60,704 --
Printing and postage expenses 210,614 210,867 13,453 --
Federal and state registration fees 123,045 126,483 15,988 --
Trustees' fees and expenses 29,864 28,500 28,772 --
Custody fees and expenses 46,282 43,915 6,689 --
Professional fees 39,474 39,554 44,328 --
Miscellaneous expenses 97,751 104,543 1,883 --
-------------------------------------------------------------------------------
Total expenses before reimbursements 12,544,322 14,277,719 245,037 586,630
Expense reimbursements -- -- (149,761) --
-------------------------------------------------------------------------------
Net expenses 12,544,322 14,277,719 95,276 586,630
-------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 4,468,974 584,726 (29,405) 2,924,658
-------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments 16,573,659 13,875,216 1,204,151 4,651,244
Change in net unrealized appreciation/
depreciation on investments 359,981,212 318,215,588 795,479 (980,163)
-------------------------------------------------------------------------------
Net gain on investments 376,554,871 332,090,804 1,999,630 3,671,081
-------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 381,023,845 $ 332,675,530 $ 1,970,225 $ 6,595,739
-------------------------------------------------------------------------------
</Table>
(a) See Note Six for information on affiliated issuers.
(b) Net of $279 in foreign withholding taxes.
The accompanying notes are an integral part of the financial statements.
35
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
ARIEL FUND ARIEL APPRECIATION FUND
------------------------------------- --------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2004 YEAR ENDED MARCH 31, 2004 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2003 (UNAUDITED) SEPTEMBER 30, 2003
-------------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss) $ 4,468,974 $ (724,001) $ 584,726 $ (892,755)
Net realized gain (loss) on investments 16,573,659 (72,859) 13,875,216 (41,765,482)
Change in net unrealized appreciation/
depreciation on investments 359,981,212 266,226,820 318,215,588 390,151,576
-------------------------------------------------------------------------------
Net increase in net assets
from operations 381,023,845 265,429,960 332,675,530 347,493,339
-------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -- -- -- --
Capital gains -- (17,273,165) -- (5,480,997)
-------------------------------------------------------------------------------
Total distributions -- (17,273,165) -- (5,480,997)
-------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Shares sold 558,035,864 1,109,487,439 625,339,891 975,515,465
Shares issued to holders in reinvestment
of dividends -- 15,987,177 -- 5,188,858
Shares redeemed (242,828,297) (506,264,601) (236,889,459) (532,376,572)
-------------------------------------------------------------------------------
Net increase from share transactions 315,207,567 619,210,015 388,450,432 448,327,751
-------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 696,231,412 867,366,810 721,125,962 790,340,093
NET ASSETS:
Beginning of period 2,007,867,560 1,140,500,750 2,064,883,219 1,274,543,126
-------------------------------------------------------------------------------
End of period $ 2,704,098,972 $ 2,007,867,560 $ 2,786,009,181 $ 2,064,883,219
===============================================================================
Undistributed net investment income included
in net assets at end of period $ 4,468,974 -- $ 584,726 --
===============================================================================
</Table>
The accompanying notes are an integral part of the financial statements.
36
<Page>
<Table>
<Caption>
ARIEL PREMIER GROWTH FUND ARIEL PREMIER BOND FUND
------------------------------------- --------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2004 YEAR ENDED MARCH 31, 2004 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2003 (UNAUDITED) SEPTEMBER 30, 2003
-------------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss) $ (29,405) $ (27,447) $ 2,924,658 $ 7,035,569
Net realized gain (loss) on investments 1,204,151 (1,094,159) 4,651,244 7,676,480
Change in net unrealized appreciation/
depreciation on investments 795,479 3,660,747 (980,163) (2,380,420)
-------------------------------------------------------------------------------
Net increase in net assets
from operations 1,970,225 2,539,141 6,595,739 12,331,629
-------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -- -- (2,930,413) (7,033,718)
Capital gains -- -- (8,754,790) (3,420,239)
-------------------------------------------------------------------------------
Total distributions -- -- (11,685,203) (10,453,957)
-------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Shares sold 3,036,075 4,579,072 13,563,785 53,782,164
Shares issued to holders in reinvestment
of dividends -- 100 11,936,229 10,414,677
Shares redeemed (2,536,244) (1,680,695) (21,937,959) (42,303,933)
-------------------------------------------------------------------------------
Net increase from share transactions 499,831 2,898,477 3,562,055 21,892,908
-------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,470,056 5,437,618 (1,527,409) 23,770,580
NET ASSETS:
Beginning of period 16,802,780 11,365,162 241,633,817 217,863,237
-------------------------------------------------------------------------------
End of period $ 19,272,836 $ 16,802,780 $ 240,106,408 $ 241,633,817
===============================================================================
Undistributed net investment income (loss)
included in net assets at end of period $ (29,405) -- $ 36,037 $ 41,792
===============================================================================
</Table>
The accompanying notes are an integral part of the financial statements.
37
<Page>
FINANCIAL HIGHLIGHTS
ARIEL FUND
<Table>
<Caption>
SIX MONTHS ENDED
MARCH 31, 2004 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2003 2002
------------------------------------------------------
Net asset value, beginning of period $ 40.84 $ 35.18 $ 33.58
Income from investment operations:
Net investment income (loss) 0.08 (0.02) (0.05)
Net realized and unrealized gains
on investments 7.24 6.20 2.29
------------------------------------------------------
Total from investment operations 7.32 6.18 2.24
Distributions to shareholders:
Dividends from net investment income -- -- (0.11)
Distributions from capital gains -- (0.52) (0.53)
------------------------------------------------------
Total distributions -- (0.52) (0.64)
------------------------------------------------------
Net asset value, end of period $ 48.16 $ 40.84 $ 35.18
======================================================
Total return 17.92% (b) 17.82% 6.62%
Supplemental data and ratios:
Net assets, end of period, in thousands $ 2,704,099 $ 2,007,868 $ 1,140,501
Ratio of expenses to average net assets 1.05% (c) 1.10% 1.19%
Ratio of net investment income (loss)
to average net assets .038% (c) (0.05)% (0.12)%
Portfolio turnover rate 5% (b) 4% 6%
<Caption>
YEAR ENDED SEPTEMBER 30,
2001 2000 1999 (a)
-------------------------------------------------
Net asset value, beginning of period $ 35.66 $ 37.99 $ 36.49
Income from investment operations:
Net investment income (loss) 0.18 0.21 0.10
Net realized and unrealized gains
on investments 3.74 3.58 5.20
-------------------------------------------------
Total from investment operations 3.92 3.79 5.30
Distributions to shareholders:
Dividends from net investment income (0.25) (0.08) (0.08)
Distributions from capital gains (5.75) (6.04) (3.72)
-------------------------------------------------
Total distributions (6.00) (6.12) (3.80)
-------------------------------------------------
Net asset value, end of period $ 33.58 $ 35.66 $ 37.99
=================================================
Total return 12.24% 13.63% 14.18%
Supplemental data and ratios:
Net assets, end of period, in thousands $ 409,499 $ 227,561 $ 215,145
Ratio of expenses to average net assets 1.19% 1.24% 1.25%
Ratio of net investment income (loss)
to average net assets 0.59% 0.65% 0.27%
Portfolio turnover rate 24% 48% 38%
</Table>
ARIEL APPRECIATION FUND
<Table>
<Caption>
SIX MONTHS ENDED
MARCH 31, 2004 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2003 2002
------------------------------------------------------
Net asset value, beginning of period $ 38.99 $ 31.49 $ 32.40
Income from investment operations:
Net investment income (loss) 0.01 (0.02) (0.02)
Net realized and unrealized gains
(losses) on investments 5.91 7.64 (0.12)
------------------------------------------------------
Total from investment operations 5.92 7.62 (0.14)
Distributions to shareholders:
Dividends from net investment income -- -- (0.06)
Distributions from capital gains -- (0.12) (0.71)
------------------------------------------------------
Total distributions -- (0.12) (0.77)
------------------------------------------------------
Net asset value, end of period $ 44.91 $ 38.99 $ 31.49
======================================================
Total return 15.18 (b) 24.29% (0.73)%
Supplemental data and ratios:
Net assets, end of period, in thousands $ 2,786,009 $ 2,064,883 $ 1,274,543
Ratio of expenses to average net assets 1.15% (c) 1.20% 1.26%
Ratio of net investment income (loss)
to average net assets 0.05% (c) (0.06)% (0.06)%
Portfolio turnover rate 8% (b) 32% 13%
<Caption>
YEAR ENDED SEPTEMBER 30,
2001 2000 1999
-------------------------------------------------
Net asset value, beginning of period $ 33.68 $ 33.84 $ 31.80
Income from investment operations:
Net investment income (loss) 0.10 0.08 0.04
Net realized and unrealized gains
(losses) on investments 2.69 2.95 5.50
-------------------------------------------------
Total from investment operations 2.79 3.03 5.54
Distributions to shareholders:
Dividends from net investment income (0.12) (0.04) (0.04)
Distributions from capital gains (3.95) (3.15) (3.46)
-------------------------------------------------
Total distributions (4.07) (3.19) (3.50)
-------------------------------------------------
Net asset value, end of period $ 32.40 $ 33.68 $ 33.84
=================================================
Total return 8.83% 10.35% 16.99%
Supplemental data and ratios:
Net assets, end of period, in thousands $ 564,288 $ 307,117 $ 352,841
Ratio of expenses to average net assets 1.26% 1.31% 1.26%
Ratio of net investment income (loss)
to average net assets 0.35% 0.25% 0.13%
Portfolio turnover rate 28% 31% 24%
</Table>
(a) Prior to February 1, 1999, the Ariel Fund was known as the Ariel Growth
Fund.
(b) Not annualized.
(c) Annualized.
The accompanying notes are an integral part of the financial statements.
38
<Page>
ARIEL PREMIER GROWTH FUND
<Table>
<Caption>
SIX MONTHS ENDED
MARCH 31, 2004 YEAR ENDED FEBRUARY 1, 2002(a) TO
(UNAUDITED) SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-------------------------------------------------------------------
INVESTOR CLASS
Net asset value, beginning of period $ 8.29 $ 6.90 $ 10.00
Income from investment operations:
Net investment (loss) (0.02) (0.02) (0.01)
Net realized and unrealized gains (losses) on investments 0.99 1.41 (3.09)
-----------------------------------------------------------------
Total from investment operations 0.97 1.39 (3.10)
Distributions to shareholders:
Dividends from net investment income -- -- --
Distributions from capital gains -- -- --
-----------------------------------------------------------------
Total distributions -- -- --
-----------------------------------------------------------------
Net asset value, end of period $ 9.26 $ 8.29 $ 6.90
=================================================================
Total return 11.70%(b) 20.14% (31.00)%(b)
Supplemental data and ratios:
Net assets, end of period, in thousands $ 14,593 $ 12,622 $ 7,902
Ratio of expenses to average net assets, including waivers 1.15%(c) 1.15% 1.15%(c)
Ratio of expenses to average net assets, excluding waivers 2.50%(c) 3.37% 3.47%(c)
Ratio of net investment loss to average net assets,
including waivers (0.44)%(c) (0.33)% (0.37)%(c)
Ratio of net investment loss to average net assets,
excluding waivers (1.79)%(c) (2.55)% (2.69)%(c)
Portfolio turnover rate 62%(b) 88% 59%(b)
INSTITUTIONAL CLASS
Net asset value, beginning of period $ 8.36 $ 6.92 $ 10.00
Income from investment operations:
Net investment income (loss) --(d) 0.01 (0.01)
Net realized and unrealized gains (losses) on investments 1.00 1.43 (3.07)
-----------------------------------------------------------------
Total from investment operations 1.00 1.44 (3.08)
Distributions to shareholders:
Dividends from net investment income -- -- --
Distributions from capital gains -- -- --
-----------------------------------------------------------------
Total distributions -- -- --
-----------------------------------------------------------------
Net asset value, end of period $ 9.36 $ 8.36 $ 6.92
=================================================================
Total return 11.96%(b) 20.81% (30.80)%(b)
Supplemental data and ratios:
Net assets, end of period, in thousands $ 4,680 $ 4,181 $ 3,463
Ratio of expenses to average net assets, including waivers 0.65%(c) 0.65% 0.65%(c)
Ratio of expenses to average net assets, excluding waivers 3.07%(c) 3.23% 3.55%(c)
Ratio of net investment income (loss) to average
net assets, including waivers 0.06%(c) 0.17% 0.13%(c)
Ratio of net investment loss to average net assets,
excluding waivers (2.36)%(c) (2.41)% (2.75)%(c)
Portfolio turnover rate 62%(b) 88% 59%(b)
</Table>
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents less than $0.005 per share.
The accompanying notes are an integral part of the financial statements.
39
<Page>
ARIEL PREMIER BOND FUND
<Table>
<Caption>
SIX MONTHS ENDED
MARCH 31, 2004 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2003 2002
-------------------------------------------------------
INVESTOR CLASS
Net asset value, beginning of period $ 10.80 $ 10.72 $ 10.45
Income from investment operations:
Net investment income 0.11 0.28 0.39
Net realized and unrealized gains
(losses) on investments 0.16 0.24 0.37
-------------------------------------------------------
Total from investment operations 0.27 0.52 0.76
Distributions to shareholders:
Dividends from net investment income (0.11) (0.28) (0.39)
Distributions from capital gains (0.40) (0.16) (0.10)
-------------------------------------------------------
Total distributions (0.51) (0.44) (0.49)
-------------------------------------------------------
Net asset value, end of period $ 10.56 $ 10.80 $ 10.72
=======================================================
Total return 2.58%(a) 5.01% 7.56%
Supplemental data and ratios:
Net assets, end of period, in thousands $ 24,825 $ 26,122 $ 22,291
Ratio of expenses to average net assets 0.85%(b) 0.85% 0.85%
Ratio of net investment income
to average net assets 2.09%(b) 2.63% 3.65%
Portfolio turnover rate 203%(a) 343% 333%
INSTITUTIONAL CLASS
Net asset value, beginning of period $ 10.81 $ 10.73 $ 10.45
Income from investment operations:
Net investment income 0.13 0.33 0.43
Net realized and unrealized
gains (losses) on investments 0.16 0.24 0.38
-------------------------------------------------------
Total from investment operations 0.29 0.57 0.81
Distributions to shareholders:
Dividends from net investment income (0.13) (0.33) (0.43)
Distributions from capital gains (0.40) (0.16) (0.10)
-------------------------------------------------------
Total distributions (0.53) (0.49) (0.53)
-------------------------------------------------------
Net asset value, end of period $ 10.57 $ 10.81 $ 10.73
=======================================================
Total return 2.78%(a) 5.43% 8.08%
Supplemental data and ratios:
Net assets, end of period, in thousands $ 215,281 $ 215,512 $ 195,572
Ratio of expenses to average net assets 0.45%(b) 0.45% 0.45%
Ratio of net investment income
to average net assets 2.49%(b) 3.04% 4.14%
Portfolio turnover rate 203%(a) 343% 333%
<Caption>
YEAR ENDED SEPTEMBER 30,
2001 2000 1999 (a)
-------------------------------------------------
INVESTOR CLASS
Net asset value, beginning of period $ 9.87 $ 9.91 $ 10.63
Income from investment operations:
Net investment income 0.51 0.56 0.53
Net realized and unrealized gains
(losses) on investments 0.58 (0.04) (0.60)
-------------------------------------------------
Total from investment operations 1.09 0.52 (0.07)
Distributions to shareholders:
Dividends from net investment income (0.51) (0.56) (0.53)
Distributions from capital gains -- -- (0.12)
-------------------------------------------------
Total distributions (0.51) (0.56) (0.65)
-------------------------------------------------
Net asset value, end of period $ 10.45 $ 9.87 $ 9.91
=================================================
Total return 11.27% 5.43% (0.65)%
Supplemental data and ratios:
Net assets, end of period, in thousands $ 9,801 $ 2,841 $ 2,624
Ratio of expenses to average net assets 0.85% 0.85% 0.85%
Ratio of net investment income
to average net assets 4.77% 5.70% 5.17%
Portfolio turnover rate 410% 492% 396%
INSTITUTIONAL CLASS
Net asset value, beginning of period $ 9.87 $ 9.91 $ 10.63
Income from investment operations:
Net investment income 0.55 0.60 0.57
Net realized and unrealized
gains (losses) on investments 0.58 (0.04) (0.60)
-------------------------------------------------
Total from investment operations 1.13 0.56 (0.03)
Distributions to shareholders:
Dividends from net investment income (0.55) (0.60) (0.57)
Distributions from capital gains - - (0.12)
-------------------------------------------------
Total distributions (0.55) (0.60) (0.69)
-------------------------------------------------
Net asset value, end of period $ 10.45 $ 9.87 $ 9.91
=================================================
Total return 11.71% 5.85% (0.25)%
Supplemental data and ratios:
Net assets, end of period, in thousands $ 213,160 $ 167,717 $ 161,495
Ratio of expenses to average net assets 0.45% 0.45% 0.45%
Ratio of net investment income
to average net assets 5.36% 6.10% 5.57%
Portfolio turnover rate 410% 492% 396%
</Table>
(a) Not annualized.
(b) Annualized.
The accompanying notes are an integral part of the financial statements.
40
<Page>
NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2004 (UNAUDITED)
NOTE ONE | ORGANIZATION
Ariel Investment Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (the "1940 Act"), as
amended, as an open-end management investment company. The Ariel Fund, Ariel
Appreciation Fund, Ariel Premier Growth Fund and Ariel Premier Bond Fund (the
"Funds" or "Ariel Mutual Funds") are diversified portfolios of the Trust. The
Ariel Premier Growth Fund and the Ariel Premier Bond Fund have an Investor Class
and an Institutional Class.
NOTE TWO | SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States, which require management to make
certain estimates and assumptions at the date of the financial statements.
Actual results may differ from such estimates.
INVESTMENT VALUATION - Securities for which market quotations are readily
available are valued at the last sale price on the national securities exchange
on which such securities are primarily traded and, in the case of securities
reported on the Nasdaq system, are valued based on the Nasdaq Official Closing
Price. If a closing price is not reported, equity securities for which reliable
bid and ask quotations are available are valued at the mean between bid and ask
price. Debt securities having a maturity over 60 days are valued at the yield
equivalent as obtained from a pricing source or one or more market makers for
such securities. Short-term securities having a maturity of 60 days or less are
valued at amortized cost which approximates market value. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Board of Trustees.
REPURCHASE AGREEMENTS - The Funds may enter into repurchase agreements with
recognized financial institutions and in all instances hold underlying
securities as collateral with a value at least equal to the total repurchase
price such financial institutions have agreed to pay.
FEDERAL INCOME TAXES - No provision for federal income taxes has been made since
the Funds have complied to date with the provisions of the Internal Revenue Code
available to regulated investment companies.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
accounted for on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date and interest income is recognized on an accrual
basis. Premiums and discounts on securities purchased are amortized using the
effective interest method.
The Ariel Premier Bond Fund may contract to purchase securities for a fixed
price at a future date beyond customary settlement time (a "forward commitment"
or "when-issued" transaction), so long as such transactions are consistent with
the Ariel Premier Bond Fund's ability to manage its investment portfolio and
meet redemption requests. The Ariel Premier Bond Fund may dispose of a forward
commitment or when-issued transaction prior to settlement if it is appropriate
to do so and realize short-term profits or losses upon such sale. When effecting
such transactions, liquid assets of the Ariel Premier Bond Fund in a dollar
amount sufficient to make payment for the securities to be purchased will be
designated on the Ariel Premier Bond Fund's records at the trade date and
maintained until the transaction is settled. Forward commitments and when-issued
transactions involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date or the other party to the transaction
fails to complete the transaction.
At March 31, 2004, the Ariel Premier Bond Fund had $26,754,709 in purchase
commitments outstanding (11% of net assets) for such securities, with a
corresponding amount of assets designated.
EXPENSES - The Funds are charged for those expenses that are directly
attributable to each portfolio. Expenses directly attributable to a class of
shares, such as Rule 12b-1 distribution fees, are charged to that class.
Expenses that are not directly attributable to a portfolio are typically
allocated among each portfolio in proportion to their respective net assets.
DISTRIBUTIONS TO SHAREHOLDERS - Dividends from net investment income are
declared and paid at least annually for the Ariel Fund, Ariel Appreciation Fund
and Ariel Premier Growth Fund and declared daily and paid monthly
41
<Page>
for the Ariel Premier Bond Fund. Distributions of net realized capital gains, if
any, are declared and paid at least annually for all Funds.
Distributions to shareholders are determined in accordance with federal income
tax regulations and are recorded on the ex-dividend date. The character of
distributions made during the year from net investment income or net realized
capital gains may differ from the characterization for federal income tax
purposes due to differences in the recognition of income, expense or gain items
for financial statement and tax purposes. Where appropriate, reclassifications
between net asset accounts are made for such differences that are permanent in
nature.
NOTE THREE | CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock were as follows:
<Table>
<Caption>
SIX MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------------------------------------
ARIEL PREMIER GROWTH FUND ARIEL PREMIER BOND FUND
----------------------------------------------------
ARIEL FUND ARIEL APPRECIATION FUND INVESTOR INSTITUTIONAL INVESTOR INSTITUTIONAL
-------------------------------------------------------------------------------------------
Shares Sold 12,337,419 14,600,378 332,457 -- 394,041 886,434
Shares issued to holders in
reinvestment of dividends -- -- -- -- 96,965 1,046,965
Shares redeemed (5,359,952) (5,517,920) (278,573) -- (560,174) (1,514,173)
-------------------------------------------------------------------------------------------
Net increase (decrease) 6,977,467 9,082,458 53,884 -- (69,168) 419,226
===========================================================================================
<Caption>
YEAR ENDED SEPTEMBER 30, 2003
-------------------------------------------------------------------------------------------
ARIEL PREMIER GROWTH FUND ARIEL PREMIER BOND FUND
----------------------------------------------------
ARIEL FUND ARIEL APPRECIATION FUND INVESTOR INSTITUTIONAL INVESTOR INSTITUTIONAL
--------------------------------------------------------------------------------------------
Shares Sold 30,242,583 28,059,333 594,954 -- 1,680,675 3,296,989
Shares issued to holders in
reinvestment of dividends 457,290 158,533 13 -- 83,790 892,633
Shares redeemed (13,951,514) (15,745,246) (217,269) -- (1,424,206) (2,472,674)
--------------------------------------------------------------------------------------------
Net increase 16,748,359 12,472,620 377,698 -- 340,259 1,716,948
============================================================================================
</Table>
Transactions in dollars of capital stock for each class of the Ariel Premier
Growth Fund and the Ariel Premier Bond Fund were as follows:
<Table>
<Caption>
SIX MONTHS ENDED MARCH 31, 2004
----------------------------------------------------------
ARIEL PREMIER GROWTH FUND ARIEL PREMIER BOND FUND
----------------------------------------------------------
INVESTOR INSTITUTIONAL INVESTOR INSTITUTIONAL
----------------------------------------------------------
Shares sold $ 3,036,075 -- $ 4,167,752 $ 9,396,033
Shares issued to holders in
reinvestment of dividends -- -- 1,010,326 10,925,903
Shares redeemed (2,536,244) -- (5,919,233) (16,018,726)
----------------------------------------------------------
Net increase (decrease) $ 499,831 -- $ (741,155) $ 4,303,210
==========================================================
<Caption>
YEAR ENDED SEPTEMBER 30, 2003
----------------------------------------------------------
ARIEL PREMIER GROWTH FUND ARIEL PREMIER BOND FUND
----------------------------------------------------------
INVESTOR INSTITUTIONAL INVESTOR INSTITUTIONAL
----------------------------------------------------------
Shares sold $ 4,579,072 -- $ 18,283,873 $ 35,498,291
Shares issued to holders in
reinvestment of dividends 100 -- 892,989 9,521,688
Shares redeemed (1,680,695) -- (15,463,542) (26,840,391)
----------------------------------------------------------
Net increase $ 2,898,477 -- $ 3,713,320 $ 18,179,588
==========================================================
</Table>
42
<Page>
NOTE FOUR | INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments and U.S.
government securities, for the six months ended March 31, 2004 are summarized
below:
<Table>
<Caption>
ARIEL FUND ARIEL APPRECIATION FUND ARIEL PREMIER GROWTH FUND ARIEL PREMIER BOND FUND
--------------------------------------------------------------------------------------------
Purchases $ 304,107,240 $ 537,501,732 $ 11,388,243 $ 407,875,349
Sales $ 107,729,672 $ 198,817,320 $ 11,439,827 $ 401,668,317
</Table>
Purchases and sales of U.S. government securities for the Ariel Premier Bond
Fund for the six months ended March 31, 2004 were $139,013,868 and $105,114,370,
respectively.
At March 31, 2004, the cost of securities on a book basis was $1,779,457,488,
$2,092,732,814, $16,847,480 and $257,327,996 for the Ariel Fund, Ariel
Appreciation Fund, Ariel Premier Growth Fund and Ariel Premier Bond Fund,
respectively. Gross unrealized appreciation and depreciation on securities based
on accounting records were as follows:
<Table>
<Caption>
ARIEL FUND ARIEL APPRECIATION FUND ARIEL PREMIER GROWTH FUND ARIEL PREMIER BOND FUND
--------------------------------------------------------------------------------------------
Unrealized appreciation $ 614,117,959 $ 612,676,001 $ 2,084,728 $ 5,043,823
Unrealized depreciation (12,982,927) (25,895,403) (192,756) (744,006)
--------------------------------------------------------------------------------------------
Net appreciation $ 601,135,032 $ 586,780,598 $ 1,891,972 $ 4,299,817
============================================================================================
</Table>
The tax character of distributions paid during the six months ended March 31,
2004 and the fiscal year ended September 30, 2003 were as follows:
<Table>
<Caption>
ARIEL FUND ARIEL APPRECIATION FUND ARIEL PREMIER GROWTH FUND ARIEL PREMIER BOND FUND
----------------------------------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------
Distributions paid from:
Net investment income $ -- $ 3,317,672 $ -- $ -- $ -- $ -- $ 2,930,413 $ 10,453,957
Long-term capital gains -- 13,955,493 -- 5,480,997 -- -- 8,754,790 --
----------------------------------------------------------------------------------------------------
Total distributions paid $ -- $ 17,273,165 $ -- $ 5,480,997 $ -- $ -- $ 11,685,203 $ 10,453,957
====================================================================================================
</Table>
For the fiscal year ended September 30, 2003, the Ariel Appreciation Fund and
Ariel Premier Growth Fund had federal income tax capital loss carryforwards of
$8,734,470 and $2,184,418, respectively. The entire federal income tax capital
loss carryforward for the Ariel Appreciation Fund and Ariel Premier Growth Fund
expires in 2011. To the extent future gains are offset by capital loss
carryforwards, such gains will not be distributed.
As of September 30, 2003, the Ariel Fund, Ariel Appreciation Fund and Ariel
Premier Growth Fund had $2,832,340, $31,292,667 and $677,188, respectively, of
post-October capital losses, which are deferred until 2004 for tax purposes. Net
capital losses incurred after October 31 and within the taxable year are deemed
to arise on the first day of the Fund's next taxable year.
43
<Page>
NOTE FIVE | INVESTMENT ADVISORY AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust has entered into an investment advisory and administrative services
agreement (the "Management Agreement") with Ariel Capital Management, LLC (the
"Adviser"). Pursuant to the Management Agreement, the Adviser is paid by the
Ariel Fund and Ariel Appreciation Fund, a monthly fee at the annual rate of
0.65% and 0.75% of the first $500 million of average daily net assets, 0.60% and
0.70% of the next $500 million of average daily net assets and 0.55% and 0.65%
of average daily net assets in excess of $1 billion, respectively. The Adviser
has agreed to reimburse the Ariel Fund and the Ariel Appreciation Fund for
operating expenses (exclusive of brokerage, interest, taxes, distribution plan
expenses and extraordinary items) exceeding, on a pro rata basis, 1.50% of the
first $30 million of each Fund's average daily net assets and 1.00% of such
assets in excess of $30 million.
The Trust has entered into an investment advisory agreement and an
administrative services agreement with the Adviser for the Ariel Premier Growth
Fund. Pursuant to the agreements, the Fund pays the Adviser an investment
advisory fee and administrative services fee based on the average daily net
assets of the Institutional Class and the Investor Class at the annual rate of
0.60% of average daily net assets less than $500 million; 0.575% of average
daily net assets between $500 million and $1 billion; and 0.55% of average daily
net assets more than $1 billion. The Adviser has agreed to reimburse the Ariel
Premier Growth Fund for operating expenses (exclusive of brokerage, interest,
taxes, distribution plan expenses and extraordinary items) exceeding, on a pro
rata basis, 1.25% of the average daily net assets of the Investor Class shares
and 0.65% of the average daily net assets of the Institutional Class shares. In
addition, the Adviser has agreed to limit the total annual operating expenses
for the Ariel Premier Growth Fund-Investor Class at 1.15% until September 30,
2004.
The Trust has entered into an investment advisory agreement and an
administrative services agreement with the Adviser for the Ariel Premier Bond
Fund. Pursuant to the agreements, the Fund pays the Adviser an investment
advisory fee and administrative services fee based on the average daily net
assets of the Institutional Class and the Investor Class at the annual rate of
0.35% and 0.10%, and 0.35% and 0.25%, respectively. Fees for these services are
reported as Management Fees on the Statement of Operations. For the six months
ended March 31, 2004, the Fund expensed $417,374 and $138,002 in investment
advisory and administrative services fees, respectively. Also pursuant to the
administrative services agreement, the Adviser pays all of the Ariel Premier
Bond Fund's expenses other than 12b-1 fees for the Investor Class, investment
advisory fees, administrative services fees, interest, taxes, brokerage
commissions and extraordinary expenses.
On January 31, 2003, Lincoln Capital Management Company ("Lincoln Capital"), the
former sub-adviser to both the Ariel Premier Growth Fund and the Ariel Premier
Bond Fund, completed the first part of a two-part transaction in which its fixed
income group was acquired by Lehman Brothers Holdings, Inc., a Delaware
corporation ("Lehman"), and began operations as Lincoln Capital Fixed Income
Management Company, LLC, a Delaware limited liability company and a wholly-owned
subsidiary of Lehman ("Lincoln Fixed Income"). On February 1, 2003, Lincoln
Capital completed the second part of the transaction when its former equity
group became an independent company, Lincoln Equity Management, LLC, a Delaware
limited liability company ("Lincoln Equity"). Lincoln Fixed Income is not
affiliated with Lincoln Equity. As a result of these transactions, the Board of
Trustees, including the Independent Trustees, approved new sub-advisory
agreements with each of Lincoln Equity and Lincoln Fixed Income. Both new
sub-advisory agreements were approved by the respective Fund's shareholders at a
Special Meeting on May 20, 2003. Lincoln Equity is serving as sub-adviser to the
Ariel Premier Growth Fund and Lincoln Fixed Income is serving as sub-adviser to
the Ariel Premier Bond Fund. These new sub-advisory agreements contain
substantially the same terms and conditions as both the original sub-advisory
agreements.
44
<Page>
Lincoln Equity and Lincoln Fixed Income manage the day-to-day investment
operations for the Funds. The Ariel Premier Growth Fund and Ariel Premier Bond
Fund pay no fees directly to Lincoln Equity or Lincoln Fixed Income. Lincoln
Equity earns fees from the Adviser for the Ariel Premier Growth Fund at the
annual rate of 0.47% of the average daily net assets up to $20 million, 0.35% of
the next $130 million, 0.25% of the next $350 million, 0.20% of the next $500
million, 0.15% of the next $1.5 billion and 0.10% of the remainder of the
average daily net assets. No fee shall be due or payable to Lincoln Equity in
respect to any day in which the net assets are less than $50 million. Lincoln
Fixed Income earns fees from the Adviser for the Ariel Premier Bond Fund at the
annual rate of 0.30% of the average daily net assets up to $50 million, 0.20% of
the next $50 million, 0.15% of the next $150 million and 0.10% of amounts in
excess of $250 million.
Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted a distribution
plan which permits the Ariel Fund, Ariel Appreciation Fund, Ariel Premier Growth
Fund-Investor Class and Ariel Premier Bond Fund-Investor Class to pay the Funds'
distributor and principal underwriter up to 25% annually of each Fund's average
daily net asset value for its services.
During the six months ended March 31, 2004, Ariel Distributors, Inc. ("the
Distributor") received $6,119,539. The Distributor paid out $4,102,461 to
broker-dealers who distribute fund shares. The balance was used for advertising,
the Distributor's services, and other distribution expenses.
Trustees' fees and expenses are fees paid to non-interested Trustees.
NOTE SIX | TRANSACTIONS WITH AFFILIATED COMPANIES
If a fund's holding represents ownership of 5% or more of the voting securities
of a company, the company is deemed to be an affiliate as defined in the 1940
Act. The Ariel Fund had the following transactions during the six months ended
March 31, 2004 with affiliated companies:
<Table>
<Caption>
SIX MONTHS ENDED
SHARE ACTIVITY MARCH 31, 2004
------------------------------------------------------- ---------------------------
DIVIDENDS GAIN (LOSS)
BALANCE BALANCE VALUE AT CREDITED TO REALIZED ON
SECURITY NAME SEPTEMBER 30, 2003 PURCHASE SALES MARCH 31, 2004 MARCH 31, 2004 INCOME SALE OF SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
Anixter International, Inc. 2,093,500 346,650 -- 2,440,150 $ 68,934,238 $ 3,438,375 $ --
Horace Mann Educators Corp. 3,266,175 50,000 -- 3,316,175 52,130,271 691,147 --
IDEX Corp. 1,795,600 304,900 -- 2,100,500 91,329,740 851,340 --
Jones Lang LaSalle, Inc. 2,368,300 -- -- 2,368,300 60,888,993 -- --
Valassis Communications, Inc. 2,518,700 239,550 -- 2,758,250 83,850,800 -- --
</Table>
Horace Mann and its affiliates distribute fund shares on terms comparable to
other distributors and receive sub-transfer agency fees from Ariel Fund and
12b-1 fees from the Distributor.
PROXY POLICY STATEMENT
For a copy of the complete proxy voting policy and procedures, please call
800-292-7435 or log on to our award-winning website, www.arielmutualfunds.com,
or visit the SEC's website at www.sec.gov.
ARIEL RESEARCH REPORTS
Please call us at 800-292-7435 to request a copy of a sample research report.
45
<Page>
BOARD OF TRUSTEES
<Table>
<Caption>
TERM OF OFFICE PRINCIPAL NUMBER OF
POSITION(S) AND LENGTH OF OCCUPATION(S) PORTFOLIOS IN OTHER DIRECTORSHIPS
NAME, ADDRESS AND AGE HELD WITH FUND TIME SERVED DURING PAST 5 YEARS COMPLEX OVERSEEN HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
BERT N. MITCHELL, CPA Independent Indefinite, until Chairman and CEO 4 BJ's Wholesale
200 East Randolph Dr. Chairman of the successor elected of Mitchell & Titus, LLP Club, Inc.
Suite 2900 Board of Trustees,
Chicago, IL 60601 Chairman of Served as a Trustee
Age: 65 Executive Committee, since 1986
Member of Management
Contracts Committee
MARIO L. BAEZA Trustee, Indefinite, until Chairman of TWC/Latin 4 Air Products and
200 East Randolph Dr. Member of successor elected America Partners, L.L.C., Chemicals, Inc.,
Suite 2900 Management Contracts Chairman and CEO of Channel
Chicago, IL 60601 and Governance Served as a Trustee Baeza Company Thirteen/WNET,
Age: 53 Committees since 1995 Hispanic
Federation, NAACP
Legal Defense and
Educational Fund,
New America
Alliance, New York
Philharmonic-
Symphony Society,
Pension Fund
Committee, U.S.
Commitee for the
United Nations
Population Fund,
U.S. Cuba Trade and
Economic Council,
Inc.
JAMES COMPTON Trustee, Chairman Indefinite, until President and CEO of 4 The Big Shoulders
200 East Randolph Dr. of Governance successor elected Chicago Urban League Fund, DePaul
Suite 2900 Committee, University, The
Chicago, IL 60601 Member of Audit Served as a Trustee Field Museum
Age: 65 Committee since 1997
WILLIAM C. DIETRICH, CPA Trustee, Chairman Indefinite, until Co-Executive Director 4
200 East Randolph Dr. of Audit Committee, successor elected and Senior Faculty
Suite 2900 Member of Member, Shalem
Chicago, IL 60601 Executive Served as a Trustee Institute for Spiritual
Age: 54 Committee since 1986 Formation
ROYCE N. FLIPPIN, JR. Trustee, Indefinite, until President of 4 Community of St.
200 East Randolph Dr. Member of successor elected Flippin Associates John Baptist, EVCI
Suite 2900 Management Contracts CAREER Colleges,
Chicago, IL 60601 and Governance Served as a Trustee Inc., Lakewood
Age: 69 Committees since 1986 Preparatory School,
Princeton Club of
New York, St.
Georges Episcopal
Church, TerraCycle,
Inc., Universal
Genesis LLC
</Table>
46
<Page>
<Table>
<Caption>
TERM OF OFFICE PRINCIPAL NUMBER OF
POSITION(S) AND LENGTH OF OCCUPATION(S) PORTFOLIOS IN OTHER DIRECTORSHIPS
NAME, ADDRESS AND AGE HELD WITH FUND TIME SERVED DURING PAST 5 YEARS COMPLEX OVERSEEN HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN G. GUFFEY, JR. Trustee, Chairman Indefinite, until Treasurer and 4 Calvert Foundation,
200 East Randolph Dr. of Management successor elected Director of Silby Calvert Mutual
Suite 2900 Contracts Committee, Guffey and Co., Inc. Funds
Chicago, IL 60601 Member of Audit Served as a Trustee
Age: 55 Committee since 1991
MELLODY L. HOBSON Trustee and Indefinite, until President of Ariel 4 Chicago Public
200 East Randolph Dr. President, successor elected Capital Management, LLC Education Fund,
Suite 2900 Member of Chicago Public
Chicago, IL 60601 Executive Served as a Trustee Library, The Field
Age: 35 Committee since 1993 Museum, Princeton
University,
Tellabs, Inc.
CHRISTOPHER G. KENNEDY Trustee, Indefinite, until President of 4 Cantilever
200 East Randolph Dr. Member of Audit successor elected Merchandise Mart Technologies,
Suite 2900 Committee Properties, Inc. Center for
Chicago, IL 60601 Served as a Trustee Disability and
Age: 40 since 1995 Elder Law,
Heartland Alliance,
Interface Floor
Covering Company,
Rehabilitation
Institute of
Chicago
MERRILLYN J. KOSIER Trustee and Indefinite, until Executive Vice President 4
200 East Randolph Dr. Vice President successor elected and Director of Mutual
Suite 2900 Fund Marketing of
Chicago, IL 60601 Served as a Trustee Ariel Capital
Age: 44 since 2003 Management, LLC
JOHN W. ROGERS, JR. Trustee Indefinite, until Chairman & CEO of 4 Aon Corporation,
200 East Randolph Dr. successor elected Ariel Capital Chicago Urban
Suite 2900 Management, LLC League, Exelon
Chicago, IL 60601 Served as a Trustee Corporation, The
Age: 46 since 2000 Investment Company
Institute, The
John S. and James
L. Knight
Foundation,
McDonald's Corp.
</Table>
47
<Page>
OFFICERS
<Table>
<Caption>
TERM OF OFFICE PRINCIPAL NUMBER OF
POSITION(S) AND LENGTH OF OCCUPATION(S) PORTFOLIOS IN OTHER DIRECTORSHIPS
NAME, ADDRESS AND AGE HELD WITH FUND TIME SERVED DURING PAST 5 YEARS COMPLEX OVERSEEN HELD BY OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES W. ATKINSON Vice President Indefinite, until Executive Vice 4 Financial Executives
200 East Randolph Dr. and Treasurer successor elected President and Chief International, La
Suite 2900 Financial Officer of Rabida Children's
Chicago, IL 60601 Served as Ariel Capital Hospital, La Rabida
Age: 53 Vice President Management, LLC Foundation
and Treasurer
since 1995
MELLODY L. HOBSON Trustee and Indefinite, until President of Ariel 4 Chicago Public
200 East Randolph Dr. President successor elected Capital Management, LLC Education Fund,
Suite 2900 Chicago Public
Chicago, IL 60601 Served as a Trustee Library, The Field
Age: 35 since 1993 and Museum, Princeton
President since 2002 University, Tellabs,
Inc.
MERRILLYN J. KOSIER Trustee and Indefinite, until Executive Vice President 4
200 East Randolph Dr. Vice President successor elected and Director of Mutual
Suite 2900 Fund Marketing of
Chicago, IL 60601 Served as a Trustee Ariel Capital
Age: 44 since 2003 and Vice Management, LLC
President since 1999
ERIK D. OJALA Vice President Indefinite, until Vice President, Assistant 4
200 East Randolph Dr. successor elected General Counsel of Ariel
Suite 2900 Capital Management, LLC.
Chicago, IL 60601 Served as Vice Prior to November 2003,
Age: 29 President since 2003 attorney with D'Ancona &
Pflaum LLC and Seyfarth
Shaw LLP, as successor
thereto.
SHELDON R. STEIN Vice President Indefinite, until Vice President, General 4
200 East Randolph Dr. successor elected Counsel of Ariel Capital
Suite 2900 Management, LLC; Of
Chicago, IL 60601 Served as Vice Counsel, D'Ancona &
Age: 75 President since 2002 Pflaum LLC and Seyfarth
Shaw LLP, as successor
thereto, since 2001.
Prior to 2001, Member,
D'Ancona & Pflaum LLC.
ROXANNE WARD Vice President Indefinite, until Vice President and 4 Illinois Facilities
200 East Randolph Dr. and Secretary successor elected Secretary of Ariel Fund, Safer
Suite 2900 Capital Management, LLC Foundation
Chicago, IL 60601 Served as Vice
Age: 49 President and
Secretary since 1999
Anita M. Zagrodnik Vice President, Indefinite, until Vice President, Fund 4
200 East Randolph Dr. Assistant Secretary, successor elected Administration of Ariel
Suite 2900 Assistant Treasurer Capital Management, LLC.
Chicago, IL 60601 Served as Vice From 1999 to 2003, served
Age: 44 President, Assistant as Principal of
Secretary and ideassociates, LLC. Prior
Assistant Treasurer to 1999, served as Vice
since 2003 President at UMB
Financial Services, Inc.
</Table>
The Ariel Mutual Funds' Statement of Additional Information (SAI) includes
additional information about the Funds' Trustees and Officers. The SAI is
available, without charge, upon request by calling toll free 800-292-7435 or
logging on to our website, www.arielmutualfunds.com.
48
<Page>
[ARIEL MUTUAL FUNDS LOGO]
ARIEL INVESTMENT TRUST
P.O. BOX 219121
KANSAS CITY, MISSOURI 64121-9121
800-292-7435
www.arielmutualfunds.com TPI 03/04
<Page>
ITEM 2. CODE OF ETHICS.
Not applicable. The information required by this Item is only required in an
annual report on Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable. The information required by this Item is only required in an
annual report on Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable. The information required by this Item is only required in an
annual report on Form N-CSR.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included as part of the report to shareholders filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Shareholders may submit suggested candidates for Independent Trustees to
Ariel Investment Trust's (the "Trust") Governance Committee (the
"Committee"). The Committee, and Independent Trustees as a whole, may
consider nominations from shareholders, any trustee and Ariel Capital
Management, and will not prefer any candidate based on the source of the
nomination. Any shareholder may submit the name of a candidate for
consideration by the Committee by submitting the recommendation in writing to
the Trust's Secretary. The Secretary will forward any such recommendation to
the Chairman of the Committee promptly upon receipt. The Board of Trustees of
the Trust adopted these procedures at their March 2004 Board meeting.
<Page>
ITEM 10. CONTROLS AND PROCEDURES.
(a) The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information relating to
the registrant is made known to them by others, particularly during the period
in which this report is being prepared. The registrant's certifying officers
have determined that the registrant's disclosure controls and procedures are
effective based on their evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 11. EXHIBITS.
(a) Certification for each principal executive and principal financial officer
of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2(a))
- - Filed as an attachment to this filing.
(b) Certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR
240.13a-14(b) or 240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350). A certification furnished pursuant to
this paragraph will not be deemed "filed" for purposes of Section 18 of the
Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that
section. Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Exchange Act, except to
the extent that the registrant specifically incorporates it by reference - Filed
as an attachment to this filing.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Ariel Investment Trust
By: /s/ Mellody L. Hobson
------------------------------------------------------------
Mellody L. Hobson
President and Principal Executive Officer
Date: May 7, 2004
------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Mellody L. Hobson
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Mellody L. Hobson
President and Principal Executive Officer
Date: May 7, 2004
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By: /s/ James W. Atkinson
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James W. Atkinson
Executive Vice President and Principal Financial Officer
Date: May 7, 2004
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