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 (12/31/97) COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX
12/31/97 NAV $12.83	Total Return Last 3 mos.	Average Annual Total Return* Through 12/31/97 From Fund Inception 9/30/92
The Oakmark International Fund	-13.7%	14.2%
Morgan Stanley World ex U.S. w/inc.**	-7.7%	10.2%
Morgan Stanley EAFE w/inc**	-7.8%	10.0%
Lipper Analytical International Fund Index**	-7.7%	12.3%
*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 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 Index 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:

Our performance for the fiscal first quarter 1998 was down -13.7% which compares with the Morgan Stanley EAFE index return of -7.8%. More important, over the longer term your Fund has achieved an annualized return of 14.2% since inception, compared to a 10.0% return for Morgan Stanley EAFE and a 12.3% return for the Lipper International Index of diversified international funds.

PERFORMANCE ANALYSIS

As part of our calendar year-end exercise, we want to discuss the investments that have helped and hurt the Fund the most over the last twelve months. These are the stocks that had the biggest absolute dollar impact on the Fund's performance (as opposed to the biggest percentage price movement).

THE WINNERS. . .

Our discipline and long-term orientation paid off with our investment in Telmex, up over 50 percent for the Fund. We sold our entire position earlier in the year after the stock hit our sell price target. The success of Telmex two years after Mexico's devaluation is a good lesson to remember in light of the current confusion in the Asian markets. As investors and the media continue to be dominated by widespread after-the-fact-bearishness from Wall Street strategists on the future, we must point out that it sounds very similar to what these people had to say in the first quarter of 1995 about Latin America. With most Asian markets down over 50 percent (some down over 80 percent!!) sometimes you have to wonder if strategists ever factor price into their buy/sell recommendations.

Guinness was involved in a significant corporate action in 1997 and proved a profitable investment for the Fund, up 25 percent. Diageo, the new moniker for the merged UK giants Guinness and Grand Metropolitan, possesses a powerful portfolio of global brands, dominant market shares, and strong, shareholder-oriented management. Nestle also had good price performance in 1997, up 50 percent, as a weaker Swiss franc helped highlight to the market the Company's significantly undervalued portfolio of consumer brands.

The share price of Banco Espirito Santos surged along with the profitability of the Portuguese financial sector. The shares returned over 75 percent in US dollars for the Fund as a number of international investors warmed up to big cap stocks in the Portuguese market.

YPF Sociedad, the Argentinean oil giant, was another example of the benefits of long-term value investing. The shares returned over 35 percent this year before hitting our sell target of US$33. We significantly added to our position around $20 while most investors were still worried about short-term problems in Latin America. Good management and an attractive asset base gave us confidence in the long-term value of the Company.

AND THE LOSERS . . .

A number of stocks cut into the Fund's performance this year. The worst was Malaysian cellular telecom provider Technology Resources, down nearly 70 percent in 1997 in US dollars, similar to the performance of the devastated Kuala Lumpur market. Despite the short-term problems Malaysia now faces, we believe the Company remains undervalued and have added to the Fund's position at these lower prices. It remains at a significant discount to global comparable companies while having more attractive growth prospects.

In Italy, Fila Holdings was another poor performer for the Fund, dropping 65 percent. The Company continues to improve its product mix, rebounding from last year's poor product lineup, with an emphasis on performance rather than fashion. We have been actively buying shares at current prices and are convinced of substantial long-term value.

One Latin American investment that did not fare well in 1997 was Brazilian steel giant Usiminas, down 30 percent. Worries about a slowing domestic economy and weak product prices caused share price weakness. Currently at a PE of 5 and with a 7 percent dividend yield, the share price for this high-quality, low-cost producer with bright long-term growth prospects is trading substantially below its economic value.

Another steel stock that performed poorly this year was Avesta-Sheffield of Sweden, down 35 percent. Management has been disappointing in the task of restructuring the cost side of the business. We sold the entire position before the end of the quarter.

Japan was one of the developed world's poorest performers in 1997 (-20 percent), and our investment in Sankyo was unfortunately true to that trend. The Fund's investment was down 50 percent, including the 11 percent decline in the value of the Yen. We continue to believe that this cash-rich, high return business is undervalued.

PROSPECTS FOR 1998

As calendar year 1998 begins, we continue to find interesting value throughout the world. One of our favorite markets is the United Kingdom, which at 26.2 percent of assets, remains the Fund's largest single country weighting due to the excellent values we have found. We also continue to find good value in selected situations in continental Europe.

In Latin America, we see great value in our Brazilian investments and in Quilmes, a brewer based in Argentina. While we continue to look in Mexico, it has become more difficult to find values since the market run-up over the past eighteen months.

Over the past few months we have spent a great deal of time sifting through the wreckage of the Asian markets looking for long-term values, and we think we have found quite a few, and this will certainly continue as 1998 progresses.

DAVID HERRO
Portfolio Manager
72242.772@compuserve.com

MICHAEL J. WELSH
Co-Portfolio Manager
102521.2142@compuserve.com
January 8, 1998

% of Fund Net Assets				% of Fund Net Assets
	Europe	52.6%			Pacific Rim	23.8%
	Great Britain	26.2%			Hong Kong	8.3%
	France	9.7%			New Zealand	6.4%
	Italy	4.2%			Japan	3.2%
	Sweden	3.9%			Korea	1.7%
	Switzerland	3.9%			Australia	1.5%
	Netherlands	3.2%			Malaysia	1.4%
	Finland	1.0%			Singapore	1.1%
	Germany	0.3%			Thailand	0.2%
	Spain	0.2%
	Latin America	17.5%			Other Countries	1.3%
	Brazil	10.0%			Israel	1.3%
	Argentina	5.4%
	Panama	2.1%

(a) Non-income producing security.

(b) American Depository Receipt.

(c) Global Depository Receipt.