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 (9/30/97) COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX
9/30/97 NAV $18.77	Total Return Last 2 mos.	Average Annual Total Return* Through 9/30/97 From Fund Inception 9/30/92

The Oakmark International Fund	1.4%	18.4%
Morgan Stanley World ex U.S. w/inc**	-2.2%	12.5%
Morgan Stanley EAFE w/inc**	-2.3%	12.3%
Lipper Analytical International Fund Average**	-1.3%	14.8%
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 or funds whose composition is different from the Fund. The Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Morgan Stanley EAFE Free Index refers to Europe, Asia and the Far East and includes 18 country sub-indexes. The Lipper International Fund Average includes 30 mutual funds that invest in securities whose primary markets are outside the United States. Past performance is no guarantee of future results.

FELLOW SHAREHOLDERS,

We are pleased to be able to present our annual and five-year report with such positive results. First, The Oakmark International Fund has earned a five-year average annual rate of return of 18.4% compared to 14.8% for The Lipper Analytical International Fund Average and 12.5% for The Morgan Stanley World ex U.S. index. This return puts it in the top 10 percent of all diversified international funds. Furthermore, for the eleven-month fiscal year ended September 30, 1997, the fund was up 27.2%, also comparing well to Morgan and Lipper which were up 13.8% and 22.7%, respectively. Finally, Morningstar has rated your fund a 5 star fund, their highest rating given to mutual funds.

HOW WE DID IT...

During the past five years, international investors have been subjected to all kinds of volatility: devaluations, revaluations, market surges, market crashes, etc, etc. For some, this would make the international market place unattractive. As bona fide long-term investors, however, we view the volatility of the environment as positive. For it is this volatility which is responsible for giving us long-term investment opportunity!

As you have heard numerous times, we are disciplined value investors. We search for companies that are selling at discounts to their underlying economic value and that have managements that are proven value builders who are committed to continue adding value. We are successful because we stick to this philosophy through thick and thin. We do not believe in "stock of the day", "country of the day" or "currency of the day". We do believe in spending countless hours analyzing what is analyzable: the value of a business. We are also big believers in the quality of our research... if we like an idea, it can easily become 3-5% of our fund. There will be periods during which we will soar and periods in which we will lag, but over time we remain very confident that our approach will continue to yield solid, long-term results.

THE WORLD WE LIVE IN...

Though international equities have under-performed domestic equities recently, we still believe the environment is positive for higher returns in the future. The "owner oriented revolution" that hit the American board room in the 80's and 90's is spreading throughout the globe. This is extremely positive for international investors. In Europe, for example, where the word "profit" was a four letter word, there is a growing belief in the obvious: that companies are owned by shareholders and that they should be managed for the owners' benefit. Simple concept as it is, it took a long time for the industrial titans of Europe to come to this realization. In fact, sadly, their Japanese counterparts are becoming believers at a much slower pace.

NEW LABOUR, NO DANGER?

The clearest example of the nouveau capitalist revolution is what has happened/is happening in the United Kingdom. It was only 20 years ago that most of the major industry in Britain was owned by the government. From steel to airlines to banks to aerospace companies the "British" before their names meant it was owned by the government. Under Prime Minister Thatcher, it all changed and today, as a direct result of the free market reforms instituted over the years, Britain has both the most attractive stock market and economy in Europe. Even though Thatcher's party lost the last election and is now out of government, the new Labour government headed by Tony Blair has abandoned its socialist past and seemingly has embraced the notion that it is the private sector, not the public, that creates societies' wealth. Blair has courageously stood up to some of the dinosaurs in his own party to implement a new, free market type of attitude within the government.

ASIAN UPDATE

Prompted by the recent collapse of share and currency prices, we have spent the last three weeks in Asia meeting with dozens of companies. As part of our usual investigations, we were interested in the various managements' views on the current macroeconomic situation. We came away convinced that although the short-term will continue to be very volatile, there are significant long-term value opportunities in the region.

On the ground, it was apparent to us that the difficulties in the various financial sectors, particularly in Malaysia and Korea, would not significantly adversely impact the long-term prosperity of many of the companies we met with.

Foreign investor sentiment has turned uniformly bearish: Many so-called market experts have recently put a "sell" on the region, after being giddily bullish at much higher prices and valuation levels. Many companies, especially in Hong Kong, are viewing the current situation as an opportunistic time to purchase their own shares.

To reiterate what we say constantly (and even earlier in this letter!), short-term volatility often provides long-term opportunity.

FINALLY, THANKS!

We would like to end by saying "thank you" to our shareholders by entrusting us with your hard-earned money. We will continue to work hard to grow it in a meaningful way and we do believe that current investment values will mean another 5 good years.

DAVID HERRO

Portfolio Manager
72242.772@compuserve.com

MICHAEL J. WELSH

Co-Portfolio Manager
102521.2142@compuserve.com

October 16, 1997