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

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (3/31/98) AS COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX
3/31/98 NAV $9.59	Total Return Last 3 mos.	Average Annual Total Return* Through 3/31/98 From Fund Inception 11/1/95
The Oakmark International Small Cap Fund	18.5%	5.7%
Morgan Stanley World ex U.S. w/inc.**	14.7%	12.9%
Lipper Analytical International Small Cap Fund Average**	18.0%	14.3%
Micropal International Small Co. Fund Index**	17.2%	13.6%
*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 indexes or funds whose composition is different from the Fund. The Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Lipper International Small Cap Fund Average includes 48 mutual funds that invest in securities whose primary markets are outside the United States. The Micropal Int'l Small Co. Fund Index sector average is an unweighted index comprised of all funds within the international small company fund sector. Past performance is no guarantee of future results.

FELLOW SHAREHOLDERS:

For the second fiscal quarter ended March 31, 1998, The International Small Cap Fund achieved its best ever quarterly return of 18.5%. This compares favorably with returns of 14.7% for the Morgan Stanley World ex-U.S. index and 17.2% for the Micropal International Small Cap Index.

World equity markets have bounced back strongly from a difficult ending in 1997. European markets have been especially buoyant, though a stronger dollar has trimmed some of the gains for US investors. In addition, the bombed out markets of emerging Asia have started the year strongly. This is especially true of Korea and Thailand, which were both up over 40% in US dollars.

Conversely, the Japanese equity market continues its dramatic underperformance of the rest of the world's developed markets. The equity markets, especially for small capitalization companies, continue to be sold down due to near-universal negative sentiment and to frustration with the paralysis of the country's politicians. While the short term remains uncertain, we believe that Japanese small caps currently are at some of the cheapest valuations in the world.

In summary, although many overseas markets have performed well recently, we still see excellent value opportunities throughout the world, and remain especially excited by the prospects for the companies in your portfolio.

LONG-TERM INVESTING

As you know, we invest the Fund's assets using a disciplined, long-term value approach. One of the many advantages of this approach is the ability to capitalize on the market's fixation with short run factors. Consistently, history has shown that the best investment opportunities arrive when the situation looks the most bleak (or, as John Templeton calls it, "at the point of maximum pessimism"). While many will pay lip service to this concept, very few investors have the discipline to implement it.

In our last quarterly letter we described in great detail the specific company investments which had the biggest impact on the Fund's net asset value for the calendar year 1997. The five stocks with the largest negative impacts were all in Asia and each one experienced huge downward price volatility in the fourth quarter. As prices continued to plunge, we continued to buy as market prices reflected larger and larger discounts to underlying intrinsic value.

Now, three months later, the picture has changed dramatically for 1997's five worst performers. These companies—Woonjin Publishing (Korea), Hite Brewery (Korea), Matichon (Thailand), Daimon (Japan), and JCG Holdings (Hong Kong)—were up an impressive 60% on average for the quarter. And from their fourth quarter lows, their share prices were up nearly 100% on average in US dollar terms.

In times of panic like the fourth quarter of 1997 in Asia, great investment opportunities emerge. As stock pickers, our job is to evaluate all the opportunities markets around the world have to offer, and to invest in those which meet our demanding value criteria. This is exactly the philosophy we used in the fourth quarter when many investors decided they simply wanted out of Asia regardless of price.

ASIA THREE MONTHS LATER

Make no mistake, neither the flow of negative news nor the short-term volatility in Asia are over. It appears, however, that at least the panic selling in the markets and the currencies has ended. There has even been an increasing trickle of positive news, mainly political in nature. The new leadership in Thailand and Korea have shown very encouraging signs of jettisoning the discredited ways of the past, freeing up their economies and implementing IMF reforms. Developments in China have also been positive, as we detail in this quarter's letter for The Oakmark International Fund.

Conversely, politicians and the entrenched bureaucracy in Japan seem intent on continuing to play Nero, fiddling while their economy and financial system burn. Their time to dither appears to be running out and the positive changes we are seeing in the corporate sector (closer attention to returns, share buybacks, restructuring) should eventually translate into changes in the way the country is governed. Regardless, even considering pessimistic scenarios, the Fund's investments in Japan trade at significant discounts to underlying business value.

While most Asian markets have snapped back from the lows, we are still very excited about the values we are finding for The Oakmark International Small Cap Fund. Your Fund's investments in the region represent 45% of the total portfolio and are composed of 8.1% in Hong Kong, 7.3% in South Korea, 11.5% in Japan, 13.1% in Australia and New Zealand, 2.7% in Thailand, and 1.9% in the Philippines. These businesses all trade at significant discounts to business value and are run by shareholder-oriented managements.

DAVID G. HERRO
Portfolio Manager
72242.772@compuserve.com

MICHAEL J. WELSH
Co-Portfolio Manager
102521.2142@compuserve.com
April 2, 1998

% of Fund Net Assets				% of Fund Net Assets
	Pacific Rim	44.6%			Europe	35.1%
	Japan	11.5%			Great Britain	19.2%
	Hong Kong	8.1%			Germany	5.6%
	Korea	7.3%			Italy	3.1%
	New Zealand	6.9%			France	3.1%
	Australia	6.2%			Netherlands	2.8%
	Thailand	2.7%			Turkey	1.3%
	Philippines	1.9%
	Latin America	5.4%			Other	2.6%
	Brazil	4.7%			Canada	2.6%
	Panama	0.7%

(a) Non-income producing security.

(b) Represents an American Depository Receipt.

(c) Includes transaction hedges.

(d) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers.

(e) At March 31, 1998, net unrealized depreciation of $7,699,659, for federal income tax purposes consisted of gross unrealized appreciation of $6,775,502 and gross depreciation of $14,475,161.