Letter from the President . . .

	Victor A. Morgenstern,
	President

* The Oakmark Fund's average annual total returns for the twelve months ended September 30, 1996 and for the period August 5, 1991 (inception) through September 30, 1996 were 15.5% and 29.5%, respectively. The Oakmark Small Cap Fund's total return for November 1, 1995 (inception) through September 30, 1996 was 32.5%.
The Oakmark Balanced Fund's total return for November 1, 1995 (inception) through September 30, 1996 was 11.1%.
** Annualized.
The Oakmark International Fund's average annual total returns for the twelve months ended September 30, 1996 and for the period September 30, 1992 (inception) through September 30, 1996 were 18.3% and 16.4%, respectively. The Oakmark International Emerging Value Fund's total return for November 1, 1995 (inception) through September 30, 1996 was 15.9%. The Funds' past performances are no guarantee of future results. Share prices and investment returns will vary, so you may have a gain or loss when you sell shares.

The Oakmark Fund Report from Robert J. Sanborn, Portfolio Manager

The value of a $10,000 investment in The Oakmark Fund from its inception (8/5/91) to present (10/31/96) as compared to the Standard & Poor's 500 index

Annual Portfolio Update

The Oakmark Fund's fiscal year ended October 31, 1996 was eerily reminiscent of our 1995 fiscal year. As Yogi Berra might say, "It's deja vu all over again." A very similar macroeconomic environment—slow, steady growth; continued low inflation, with the price of gold down again; long-term interest rates down again—provided a good context for equities. As in fiscal 1995, your Fund generated strong absolute returns but lagged those of the Standard & Poor's 500.

More than half of this relative gap is attributable to our investments in cable companies. Increased competition and very heavy required capital expenditures have combined to retard value growth in this industry. Our estimate of the underlying value of Tele-Communications Inc. (TCOMA), for example, has been stagnant for a few years. This is contrary to our expectations of a few years ago, and explains the disappointing stock performance. Like my weekly hoops game at the 'Y' where you call your own fouls, this has been my bad.

While these stocks have been poor performers of late, this does not mean that we are sick of them, or embarrassed by them, or need to sell them to gain perspective. Our long-time shareholders know that investments in this industry have been very kind to us over the long term. At current prices, we find our cable holdings—TCOMA, U.S. West Media Group, and TCI Liberty Media—extremely undervalued.

In general, as in fiscal 1995, the rest of our holdings' businesses performed at least as well as our expectations. In fact, the discount to underlying value in the portfolio is greater today than a year ago.

While we, as always, make our investments one by one, two sectors—consumer non-durable companies (Philip Morris, Knight Ridder, Black & Decker, Heinz, Anheuser-Busch, and American Brands, et. al.) and financial services (First USA, Mellon, Torchmark, and Ambac, et. al.)—comprise almost one-half and one-quarter of the value of your Fund, respectively.

At the risk of repetition, I want to comment briefly on our consumer holdings. These companies are well above-average, with high barriers to entry, dominant market shares, loyal customers, and good international prospects. These characteristics tend to produce well-above-average returns on assets and very high free cash flow, which many of our holdings are using to repurchase their own shares. Still, the market is not yet rewarding these above-average businesses with the above-average valuations they deserve.

It is common for us to agree on the facts with market participants, yet reach different investment conclusions. It reminds me of the scene in Annie Hall in which Alvie Singer and Annie are having sessions with their respective psychoanalysts. In the scene, each character states that the couple's love life is a source of frustration. The analysts ask each how often they make love. "Oh, all the time," answers Annie; "Hardly ever," responds Alvie. Then in unison they each add, "Three times a week."

So it is with our consumer stocks. Yet, rather than waste any time trying to anticipate when the market will value these stocks appropriately, we patiently wait for price and value to converge. In the meantime, the superior value growth that we expect these holdings to produce should benefit your Fund. In fact, we continue to find additional candidates for investment in this sector.

Your Fund continues its high concentration and low portfolio turnover. Our twenty largest holdings comprise over 70 percent of our value, up from 67 percent last year. Our five largest holdings comprise over 26 percent of our holdings. As I have stated before, we believe in putting our absolute best ideas in your Fund, and have no interest in becoming a closet index fund. I characterize our portfolio as diversified without being overdiversified.

We are long-term investors who buy ownership pieces of companies for the long term. Given that our holdings have produced strong business results, yet below-average stock price performance, it should be no surprise that our portfolio turnover was quite low last year. In fact, we sold only one (Federated Department Stores) of our twenty largest holdings last year. However, we sold several other holdings—Clorox, Interstate Bakeries, Zale, and St. Jude Medical, et. al.—as they approached our estimate of value.

Professional investors too often mistake trading activity for investment activity. The correct level of trading is that which optimizes returns. This reminds me of a scene from another movie, Amadeus. The young Mozart is playing a new composition for Salieri and the King. Finishing, he seeks the King's approval. After offering tepid enthusiasm, the King adds, "There are too many notes." Of couse, Mozart knows that the work has the exact number of notes to convey what he is trying to communicate. No more, no less. So it is with our trading.

We are fortunate to have the services of Harris Associates' crack trading team—Connie Twomey, Tony Sinople, newlywed John Tansey, and Betsy Burns. We could not have a more reliable, professional, and experienced group implementing our philosophy. (And, except for John, no one even vaguely resembles any character on Lifetime TV's "Traders".)

What is ahead for 1997? On the one hand, anecdotal evidence indicates a frothy market; on the other hand, I like our quality portfolio a lot, and would much prefer owning it than cash over the next five years. As the curtain falls on another year, I want to thank you again for your support and confidence over the past five-plus years.

The Crash of 1987 Revisited

A little over nine years ago, on October 19, 1987, the most singular day of my investment career occurred. On "Black Monday," the Dow dropped 508 points, a decline of 22.6 percent, the biggest one-day drop in history. In fact, the drop was actually worse than that, since the more-liquid S&P 500 futures index declined by over 29 percent that day. By contrast, the worst single-day percentage decline in the 1929 market crash was "only" 12.8 percent.

At the time, I was working for a large pension fund in Columbus, Ohio. Some colleagues, other investment friends and I met at a tavern to lick our wounds. As I recall, the consensus was that we had all seen it coming (of course), that the Crash would have profound negative effects on the economy and the market, and also on our careers.

The consensus was wrong.

Next year, there will be a lot of tenth anniversary observations about The Crash of 1987. Let's beat them all by a year, and ask ourselves, what was the cause of the Crash and what is its legacy? And, what can we learn from it?

Many explanations for THE cause have been offered: a confrontation between Iran and the US, an SEC ruling that would chill the corporate acquisition market, an increase in inflationary expectations. These are all unsatisfactory, however. In my estimation, the biggest cause of the Crash was complacency on the part of institutional investors who had convinced themselves that they had protected their portfolios from any significant downside. This delusion was fostered by the growing use of something called "dynamic hedging," or, more commonly, "portfolio insurance."

Portfolio insurance was based on the beguiling notion that it's better to own more stocks when the market is going up than when it's going down. An investor would simply buy more stocks in a rising market and sell stocks in a declining market. (Some of you may recognize the "stop-loss" trading technique in this strategy. You are correct—but "dynamic hedging" sounded a lot better and more sophisticated when the purveyors of portfolio insurance made their sales calls.)

One of the problems with portfolio insurance was that it required orderly, liquid markets to implement. Another problem was that it required participants to sell more and more stock into declining markets, thus exacerbating any price weakness. The SEC concluded that the relatively small $200 million of portfolios being managed with portfolio insurance at the market peak of 1987 mushroomed to as high as $90 billion after the Crash.

The Crash had little to no effect on the economy, and did not scare individual investors away from the stock market. The greatest growth in individual participation in the US equity market occurred after the Crash. If one had bought the Dow after the Crash, and held until today, he would have earned about 17.5 percent annually. If one had bought the day BEFORE the Crash, he would still have earned over 14.5 percent. The key investment decision has never been when to buy equities, but rather to allocate the majority of your long-term assets to equities.

The importance of a long-term investment time-horizon is the most crucial lesson from the Crash of 1987. Stocks in the US have significantly outperformed bonds, cash, and inflation over the past 70 years. For example, from 1926 to 1996, stocks have generated annual returns of 10 percent, vs. 5 percent for bonds, 3 percent for cash, and 3 percent for inflation. The longer one's holding period, the more compelling the case for stocks. In the years 1926 to 1995, for example, stocks have outperformed bonds 61 percent of the years; however, as the holding period rises to 5, 10, and 20 years, stocks outperform 77%, 89%, and 98%, respectively.

While there is, of course, no assurance that these relationships will persist, I suspect they will. There is evidence of froth in today's market: record issuance of IPOs, dramatic growth in mutual fund and personal investing media coverage, record attendance at the Schwab advisors' conference. Nevertheless, I have no intention of trying to time the market, and I am very comfortable with the absolute and relative value of our holdings. Prepare yourself for the occasional Crash, and regard it as part of the price for growing your wealth in the long run.

Robert J. Sanborn
Portfolio Manager
harjs@aol.com
November 6, 1996

The Oakmark Fund

Schedule of Investments—October 31, 1996

See accompanying notes to financial statements.

The aggregate cost and value of investments in these companies at October 31, 1996 was $424,717,809 and $573,880,675 respectively, which represents 14.6% of the total net assets. During the year ended October 31, 1996, dividends received from these companies was $3,642,783.

The Oakmark Small Cap Fund Report from Steven J. Reid, Portfolio Manager

The value of a $10,000 Investment in The Oakmark Small Cap Fund from its Inception (11/1/95) to Present (10/31/96) as compared to the Russell 2000

Trick or Treat!!!

On Halloween, October 31, 1996, your Fund completed its first fiscal year of operation. It was truly an outstanding year. We as shareholders were treated to gains of 31.9% for the year and 11.5% for the fourth quarter. Our results were significantly better than the relevant indices.

As the Fund's fiscal year ended, so did the beautiful fall weather in the Midwest. The abrupt change in temperatures for Halloween was a frosty surprise for many trick-or-treaters. As one of the many thousands who were able to participate in this year's quest for candy, the change in weather was a very mean trick.

What Happened

I have been asked numerous times to explain the results of The Oakmark Small Cap Fund. My one word answer is philosophy. We at Harris Associates and The Oakmark Funds wholeheartedly embrace a value-oriented investment philosophy. Over the long term our philosophy of investing has rewarded our shareholders. However, it would be remiss on my part not to acknowledge the unique performance of several of the Fund's holdings and highlight some of the characteristics we look for in our investment process.

Catellus Development Corporation, SPX Corporation, and U.S. Industries, Inc. are the Fund's three largest holdings. All of these companies have performed well and have earned their place at the top of the heap in the portfolio. In particular, SPX Corp. stands out as a shining example of what we look for when we invest in a stock for your Fund. Henry Berghoef sourced this idea, and our hats are off to you Henry!

SPX Corporation is a long-established Muskegon, Michigan-based company that operates a group of very fine businesses. The company had lost focus in the last several years, and as a result its performance and stock price had deteriorated significantly. SPX came to our attention when it was announced that a new management team would be brought in to revitalize the company. Soon after that John Blystone was selected as the new President and Chief Executive Officer. John's mission was two-fold. First, he needed to reshape the culture of the company. This meant providing proper incentives related to the performance of the individual business units and giving employees at all levels the opportunity and responsibility to improve results. Second, it required rationalizing several aspects of the business. As John told us, "I probably have to grow by shrinking." After careful analysis, management decided that several business units would be sold to repay debt that the company had incurred over the years, thus allowing management to focus on the core remaining businesses.

It is worth noting that while all of this was taking place Wall Street remained skeptical. This provided the opportunity for us to purchase shares at an attractive valuation for your Fund. Both the performance of the operating businesses of SPX and shares of the stock have improved. We still see tremendous potential and have noted that Wall Street has begun to catch on. In the meantime, we wish John and his management team continued success.

Outlook

As you may know, we don't make forecasts regarding the stock market, the economy, or interest rates. We adhere to a bottom-up approach to investing. Every security is researched and evaluated on its own merit. In a recent issue of a major financial periodical they listed their 100 most attractive small company investments. I was pleased to see, and take comfort in knowing, that not one of our holdings in the Fund was a part of this list. We still see excellent opportunities for investing and are elated that other people are not seeing what we do.

Once again, I would like to thank everyone involved, especially our shareholders, for your support of The Oakmark Small Cap Fund.

Steven J. Reid
Portfolio Manager
sreid@oakmark.com
October 31, 1996

The Oakmark Small Cap Fund

Schedule of Investments—October 31, 1996

The Oakmark Balanced Fund Report from Clyde S. McGregor, Portfolio Manager

The value of a $10,000 investment in The Oakmark Balanced Fund from its inception (11/1/95) to present (10/31/96) as compared to the Lipper Balanced Fund Index

*Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The Lipper Balanced Fund Index Composite is comprised of 30 Balanced Funds. The Lehman Govt./Corp. Bond Index includes the Lehman Government and Lehman Corporate indices. The S&P 500 is a broad market-weighted average dominated by blue-chip stocks. Past performance is no guarantee of future results.

Fiscal Year-End Review

The Oakmark Balanced Fund is now a one-year old, and I would like to thank my fellow shareholders for their support as well as their insightful questions and comments in the inaugural year. While not without nervous moments, the year was a successful beginning for the Fund. Oakmark Balanced returned 12.9% for the fiscal year, 5.9% for the fourth fiscal quarter. One of our goals for the Balanced Fund is to produce returns that are more consistent and less volatile than those exhibited by funds which invest only in stocks. Given that goal, I am particularly pleased that in the Fund's first year of existence each quarter produced a positive result.

Deals/Acquisitions

Recently, announcements of large acquisitions and mergers have dominated the financial news. Deals such as the bidding war for Conrail or the MCI/British Telecom merger get most of the media coverage, but they are merely representative of the high level of activity. Shareholders sometimes assume that we invest with the expectation that our holdings will be taken over. While our portfolios do occasionally experience such pleasant surprises, they benefit more from our ability to derive useful valuation tools from publicly announced transactions.

For example, in September, A.H. Belo announced that it would acquire the Providence Journal Company. While we did not own shares in either Belo or Providence Journal, we studied the transaction for what it might tell us about the value of Lee Enterprises, your Fund's third largest equity holding.

Providence and Lee both own newspapers and television stations. If we look at the pricing of the media properties in the Providence acquisition and apply similar valuations to Lee's properties, we find that Lee's current market price is approximately one-half of the company's value to a possible purchaser.

We own Lee Enterprises shares not in anticipation of the company's acquisition but because we have determined that the company has irreplaceable media properties, a strong balance sheet, and a management team which is both competent and shareholder-oriented. We expect that this combination of assets and management will produce substantial growth in business value over time. An acquisition of the company would be at best a mixed blessing.

Implicit in corporate transactions like the Providence Journal acquisition are clues to understanding the economics of a business and how consolidation can add to value. We will continue to study mergers and acquisitions because they offer an insightful look into how people in an industry value companies.

Corporate Restructuring

In corporate America today it seems that everything is in flux. Mergers and acquisitions receive the lion's share of media attention, but companies which restructure their operations are even more common. Restructured companies have been a fertile source of investment ideas for Harris Associates since our establishment more than 20 years ago. We have found that companies which restructure are often mispriced in the stock market. At the same time, the restructuring often better aligns the interests of management with their shareholders.

Many of the companies in which your Fund has invested have significantly changed their composition in the last two years. For example, Premark International spun off its Tupperware division, US Industries was itself spun off from its English parent, Associates First Capital was partially divested by Ford Motor, and Dun & Bradstreet split itself into three parts in November. In each of these restructured companies we have discovered undervaluation as well as new management focus, incentive, and initiative.

We expect the high level of corporate restructuring which we observe today to continue. If so, we know where we will find many of our ideas in the future.

Mighty Oaks Awards

My partner Robert Sanborn created the Oak Leaf Cluster Award for the person who contributes an idea which has the greatest positive impact on The Oakmark Fund. Believing this to be a good idea, I have considered a variety of titles for an award specific to the Balanced Fund. (The Balance Beam Award? This sounds like a leftover from the Olympics, and I would never be confused with a gymnast.)

I finally settled on the Mighty Oaks Award because that is the name of our firm's softball team. For the award, I will give the recipients t-shirts that are already made up for the team (as a value investor, I am always looking for ways to minimize costs).

This year we have two winners, one for fixed income and one for stocks. In my last quarterly report I wrote at some length about Everen Capital Preferred, which Bill Nygren, our Director of Research and manager of the new Select Fund, recommended for The Balanced Fund. In view of this holding's 38% return to the Fund, Bill is the winner of the first fixed income award.

On the equity side, the winner is Steve Reid (the manager of the Small Cap Fund). Steve's recommendation of US Industries achieved an 80% return for the Fund. Mentioned above in the section on restructuring, US Industries is a fine example of how an unwanted business unit can generate newfound profitability once separated from its corporate parent.

My best wishes for a happy holiday season and a prosperous 1997 accompany this report. Please write or E-mail me with your questions or comments.

Clyde S. McGregor
Portfolio Manager
hacsm@aol.com
November 5, 1996

The Oakmark Balanced Fund

The Oakmark International Fund Report from David G. Herro and Michael J. Welsh, Portfolio Managers

The value of a $10,000 investment in The Oakmark International Fund from its inception (9/30/92) to present (10/31/96) as compared to the Morgan Stanley World ex U.S. Index

Fellow shareholders

Our fiscal year ends with your Fund up 24.9%! This performance compares very favorably to other international funds as represented by the Lipper International Index and to all the recognized international indices. For example, over the same period the Lipper International and Morgan Stanley World-ex US indices were up only 12.7% and 11.2%, respectively.

While the performance of the Fund for the last twelve months has been outstanding, we are more heartened by our long-term performance. The Oakmark International Fund has returned 16.0% on an annualized basis since inception, while the Lipper International and Morgan Stanley World-ex US have returned 12.6% and 11.9%, respectively, over the same period.

Performance Analysis

For our fourth annual report (really our fifth, but our first fiscal year was only a little over a month), let's look at those companies that helped and hurt us the most over the last twelve months. These are the stocks that had the biggest absolute dollar impact (as opposed to the biggest percentage movers) on the Fund's performance.

The Winners...

Rolls-Royce and British Aerospace performed exceptionally well, up 65% and 64%, respectively. Rolls was rewarded by the market for receiving a rash of new orders for its new Trent aircraft engines from Boeing and Airbus. British Aerospace continued its remarkable run as investors continued to recognize its preeminence in the consolidating European defense industry. We have owned British Aerospace since the Fund's inception and it clearly has been one of our single best ideas.

Chargeurs, prompted by a lack of market understanding of its assets, pioneered the idea of the de-merger in France. The company split itself into two entities to unlock value which had been hidden by its former holding company structure. The shares were up 59% for the fiscal year.

Telefonica de España was up 52% over the last twelve months. With Telefonica, the market began to recognize the value of some of its assets in Latin America and the gains in efficiency that management has made over the past several years in Spain.

Cordiant, another long-term holding, came storming back in 1996 with a new chairman and a renewed sense of purpose. Cordiant's shares were up 20% for the fiscal year and the company remains substantially undervalued compared to other advertising firms of similar size and quality.

and the...

Losers were fewer and of smaller portfolio impact. The Israeli company Scitex, which comprised 2% of the portfolio in January, had the biggest negative impact on the portfolio, with its shares dropping 43%. Initially, we were attracted to Scitex for its cheap valuation and market leader position which we thought compensated for other weaknesses. They didn't.

EVC International (down 5%) and Asia Pulp and Paper (down 4%) felt the pain of lower commodity prices. We still are very happy with these investments on a long-term horizon. EVC remains extremely cheap on trend earnings, sits at 2/3rds of book value (and at 25% of replacement cost), has solid shareholder-oriented management, and yields 6.4%. Asia Pulp, with its Indonesian production base, remains one of the world's lowest cost producers, is moving up the value-added chain in terms of products, and is located in the fastest growing area of consumption in the world.

Although the share price is down 31% from where we first starting buying, it is still too early to judge the success of our investment in Technology Resources, a Malaysian cellular operator. Our loss in Kvaerner (down 10%) was due in part to company management spending more time looking to buy new businesses rather than running the ones they already had. The result was recurring earnings disappointments in its core operations. We have since sold our entire position.

Going Forward

We had an excellent fiscal year 1996 and we remain optimistic about overseas markets going forward. Valuations in many cases are very attractive and we continue to find excellent opportunities.

Our continued optimism is reflected in the substantial changes from last year in our top twenty holdings. Seven of the top twenty are new positions: National Australia Bank, Telefonica de España, Guinness, Saurer, Bezeq, Pakhoed, and Kyocera. As you know, we believe in structuring our portfolio with fewer positions so that our best ideas can have a more meaningful impact on the Fund's net asset value. The presence of many new names in the top twenty holdings reflects our optimism in finding substantial new opportunities for The Oakmark International Fund.

David G. Herro

Michael J. Welsh
Portfolio Managers
72242.722@compuserv.com
oakix@aol.com
October 31, 1996

The Oakmark International Fund

International Diversification—October 31, 1996

		% of Fund Net Assets			% of Fund Net Assets
	Europe	51.8%		Pacific Rim	25.2%
	Great Britain	14.5%		Australia	6.8%
	Sweden	13.5%		Hong Kong	6.3%
	Netherlands	5.1%		New Zealand	2.9%
	Spain	5.1%		Indonesia	2.7%
	France	3.9%		Korea	2.4%
	Portugal	3.4%		Japan	1.9%
	Switzerland	2.5%		Malaysia	1.9%
	Italy	1.9%		Taiwan	0.3%
	Finland	1.4%
	Germany	0.5%
	Latin America	13.9%		Other Countries	3.9%
	Argentina	5.7%		Israel	3.1%
	Mexico	4.5%		Canada	0.8%
	Brazil	3.7%

The Oakmark International Fund

Schedule of Investments—October 31, 1996