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 (9/30/97) AS COMPARED TO THE RUSSELL 2000 INDEX

9/30/97 NAV $20.34 Total Return
Last 2 mos.		 Average Annual Total Return*
Through 9/30/97
From Fund Inception
11/1/95
The Oakmark Small Cap Fund 8.6% 44.8%
Lipper Small Cap Fund Index** 9.0% 21.9%
Russell 2000 w/inc** 9.8% 26.8%
S&P Small Cap 600 w/inc** 9.3% 30.3%

*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 Small Cap Fund Index is comprised of 30 Small Cap Funds. The Russell 2000 Index measures the performance of smaller companies, and represents approximately 10% of the total value of publicly traded companies in the U.S. The S&P 600 Index measures the performance of selected U.S. stocks with small market capitalization. Past performance is no guarantee of future results.

OAKMARK SMALL CAP FUND HAS SMALL YEAR???

September 30, 1997 marked the end of the shortened 1997 fiscal year. The Oakmark Small Cap Fund, as well as the entire Oakmark Family of Funds, changed from an October to a September fiscal year. This aligns your Fund's quarterly reporting periods with most of the industry. In as much as the duration of the fiscal year was a little bit on the "small" side, the events that took place this year were anything but small. For the eleven month fiscal year ended September 30, 1997, The Oakmark Small Cap Fund gained 54.2%, which was large compared to the relevant indices. For the two-month fiscal quarter, your Fund slightly lagged with the relevant indices with a gain of 8.6%, hardly small in absolute terms. 1997 was truly an outstanding year for your Fund and we are happy to be able to share these results with you.

During the latter part of the fiscal year the shares of small companies performed better than the shares of large companies. I have been asked numerous times for an explanation of why this occurred. I have several responses to this. The first is that as patient long-term investors we are focused on the individual values of each of our investments and are much less concerned with overall market trends or events. The second is that the raging equatorial currents of El Niño washed a little of Alan Greenspan's "irrational exuberance" onto the shores of the small company investment universe. Last, quite honestly, the shares of small companies have lagged those of large companies for so long that it was about time that they finally caught up a little.

PHILOSOPHY AND PEOPLE

Looking back at the past year I was pleasantly surprised to see how well so many of our investments had done. Nine of your Fund's holdings had appreciated over 100% during the past year. Even more pleasing was that we avoided making any large mistakes. The key to our success lies in a sound investment philosophy, but it is only effective when supported by capable professionals. We are very fortunate to have a truly outstanding group of experienced investment professionals. I want to thank all of them for their contribution to this past year's investment results. Simply put Philosophy + People = Performance (of course, a little good luck does not hurt).

As the new fiscal year begins, we are encouraged by the investment opportunities we see and continue to be able to invest the Fund's assets in a prudent manner. Although the Fund is considerably larger than a year ago, our long-term investment horizon and emphasis on low turnover allows us to manage a larger asset base. We are not uncomfortable with the current asset size or the flow of money in (and out) of the Fund, but will continue to monitor this situation. We are committed to remaining consistent in the implementation of our investment philosophy.

Last year I referred to a major financial periodical that listed their 100 most attractive small company investments. I noted that not one of our holdings in the Fund was a part of that list. I am pleased to see, and take comfort in knowing, that list was published again recently and not one of our holdings was included. We continue to seek out the unknown, undiscovered, and underfollowed investment opportunities.

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 10, 1997

The Oakmark Small Cap Fund

Schedule of Investments—September 30, 1997

Shares Held Market Value

Common Stocks—91.9%

Food & Beverage—6.3%
Ralcorp Holdings, Inc. (a) (c) 3,000,000 $ 56,062,500
International Multifoods Corporation (c) 1,032,000 30,637,500
M & F Worldwide Corp. (a) 917,600 8,717,200
95,417,200
Retail—4.5%
Cole National Corporation (a) (c) 1,000,000 $ 41,562,500
Carson Pirie Scott & Company (a) 511,500 20,172,281
Ugly Duckling Corporation (a) 375,000 5,718,750
67,453,531
Other Consumer Goods & Services—8.5%
Triarc Companies, Inc. (a) (c) 1,650,500 $ 33,216,312
Scotsman Industries, Inc. (c) 1,050,000 27,037,500
First Brands Corporation 1,000,000 26,750,000
GC Companies, Inc. (a) 310,000 13,330,000
Standard Motor Products, Inc. 511,400 11,953,975
Barry (R.G.) Corporation (a) (c) 588,700 8,278,594
USA Detergents, Inc. (a) 413,200 5,319,950
Justin Industries 207,400 2,786,938
128,673,269
Banks—8.3%
People's Bank of Bridgeport, Connecticut 2,840,000 $ 91,057,500
BankAtlantic Bancorp, Inc., Class A 926,700 14,363,850
Northwest Savings Bank 295,000 7,559,375
Harbor Federal Savings Bank 100,000 5,600,000
Pocahontas Federal Savings and Loan Association (c) 140,000 4,620,000
Savings Bank of the Finger Lakes (c) 94,000 2,256,000
125,456,725
Insurance—13.2%
RenaissanceRe Holdings Limited (c) 1,421,800 $ 62,470,337
Financial Security Assurance Holdings Ltd. 871,700 40,534,050
PXRE Corporation (c) 1,186,000 37,433,125
Chartwell Re Corporation (c) 900,000 31,950,000
Highlands Insurance Group, Inc. (a) (c) 1,100,000 26,812,500
199,200,012
Other Financial—0.6%
Duff & Phelps Credit Rating Company (c) 296,800 $ 9,497,600
Broadcasting & Publishing—7.4%
Cablevision Systems Corporation (a) 650,600 $ 40,825,150
TCI Satellite Entertainment, Inc., Class A (a) (c) 3,800,000 28,737,500
Ascent Entertainment Group, Inc. (a) (c) 1,650,000 18,975,000
Lee Enterprises, Inc. 500,000 14,187,500
Granite Broadcasting Corporation (a) 800,000 9,500,000
112,225,150
Telecommunications—0.0%
UNR Industries, Inc. 95,000 $ 475,000
Data Storage—2.9%
Imation Corporation (a) 1,641,300 $ 43,802,194
Aerospace & Defense—2.5%
Tracor, Inc. (a) 1,236,000 $ 38,007,000
Machinery & Metal Processing—6.2%
The Carbide/Graphite Group, Inc. (a) (c) 800,000 $ 27,200,000
Essex International, Inc. (a) 400,000 15,400,000
Atchison Casting Corporation (a) (c) 710,400 15,096,000
Northwest Pipe Company (a) (c) 520,000 14,040,000
Matthews International Corporation, Class A 333,500 13,256,625
DT Industries, Inc. 190,500 6,286,500
Wolverine Tube, Inc. (a) 88,300 2,770,413
94,049,538
Building Materials & Construction—2.9%
NVR Inc. (a) (c) 1,000,000 $ 26,000,000
Dal-Tile International Inc. (a) 881,600 13,224,000
Triangle Pacific Corporation (a) 146,100 5,076,975
44,300,975
Oil & Natural Gas—2.4%
Titan Exploration, Inc. (a) (c) 3,000,000 $ 36,000,000
Other Industrial Goods & Services—12.7%
MagneTek, Inc. (a) (c) 2,400,000 $ 53,700,000
SPX Corporation (c) 900,000 52,762,500
Gardner Denver Machinery, Inc. (a) (c) 900,000 30,318,750
Zurn Industries, Inc. (c) 682,000 23,614,250
Columbus McKinnon Corporation (c) 808,400 21,220,500
Binks Sames Corporation (c) 222,000 9,657,000
Binks Sames Corporation, Restricted Shares (c) 28,000 1,071,840
192,344,840
Commercial Real Estate—6.9%
Catellus Development Corporation (a) 3,383,000 $ 70,197,250
Castle & Cooke, Inc. (a) (c) 1,440,000 28,260,000
Wellsford Real Properties Inc. (a) 397,100 6,353,600
104,810,850
Diversified Conglomerates—6.6%
U.S. Industries, Inc. 3,432,500 $ 99,542,500
Total Common Stocks (Cost: $1,082,594,870) 1,391,256,384



Principal Value Market Value

Fixed Income—0.2%

Corporate Bonds—0.2%

Recreation & Entertainment—0.2%
Harrah's Jazz Bonds, 14.25% due 11/15/2001(b) $ 6,700,000 $ 2,604,625
Total Fixed Income (Cost: $3,304,413) 2,604,625

Short Term Investments—7.8%

U.S. Government Bills—2.0%
United States Treasury Bills, 1.00%­5.34% due 10/9/1997­3/5/1998 $30,000,000 $ 29,728,421
Total U.S. Government Bills 29,728,421
Commercial Paper—5.3%
American Express Credit Corp., 5.52%­5.56% due 10/1/1997­10/3/1997 $30,000,000 $ 30,000,000
Ford Motor Credit Corp., 5.54%­5.60% due 10/6/1997­10/7/1997 20,000,000 20,000,000
General Electric Capital Corporation, 5.56%­5.67% due 10/1/1997­10/3/1997 30,000,000 30,000,000
Total Commercial Paper 80,000,000
Repurchase Agreements—0.5%
State Street Repurchase Agreement, 5.95% due 10/1/1997 8,212,000 $ 8,212,000
Total Repurchase Agreements 8,212,000
Total Short Term Investments (Cost: $117,940,192) 117,940,421
Total Investments (Cost $ 1,203,839,475)–99.9% (d) 1,511,801,430
Other assets in excess of other liabilities–0.1% 1,594,210
Total Net Assets–100% $ 1,513,395,640

(a) Non-income producing security.

(b) This bond is currently in default, and the fund is no longer accruing interest.

(c) See footnote number six in the Notes of Financial Statements regarding transactions in affiliated issuers.

(d) At September 30, 1997, net unrealized appreciation of $307,961,955 for federal income tax purposes consisted of gross unrealized appreciation of $314,125,673 and gross unrealized depreciation of $6,163,718.

See accompanying notes to financial statements.