The Oakmark Small Cap Fund

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (3/31/99) AS COMPARED TO THE RUSSELL 2000 INDEX
3/31/99 NAV $13.47	Total Return Last 3 mos.	Average Annual Total Return* Through 3/31/99 From Fund Inception 11/1/95
The Oakmark Small Cap Fund	-8.8%	14.9%
Lipper Small Cap Fund Index**	-4.7%	8.0%
Russell 2000 w/inc**	-5.4%	10.5%
S&P Small Cap 600 w/inc**	-9.0%	11.4%
*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 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.

I THOUGHT 1998 WAS ENOUGH!!!

Just when it seemed it was safe to go outside, the door slammed shut. The shares of small cap companies, as well as value investing, remain under pressure. Redemptions from small cap funds have caused the liquidation of the shares of small companies, which results in selling pressure in the market for small cap stocks. According to Lipper, investors redeemed $1.9 billion and $3.5 billion from small cap funds in January and February, respectively. At the same time the vast majority of value managers are also lagging the market indices as growth companies, particularly the larger ones, are seeing their shares appreciate. While this may sound like a vicious circle of events, it also creates investment opportunity. I believe that The Oakmark Small Cap Fund's portfolio of stocks is more undervalued now than at anytime in the Fund's existence. As the portfolio manager and one of the Fund's largest individual investors, this has been a frustrating period. For the second fiscal quarter ended March 31, 1999, the Fund declined 8.8%, reducing the fiscal year return to 7.3%. Rather than offer excuses for the Fund's results, I am putting my money where my mouth is. The Oakmark Small Cap Fund represents the majority of my investable assets and I made a significant additional investment in the Fund's shares today!

Believe it or not you can be struck by lightning and not get burned!

In the last quarterly report I highlighted the recent purchase of the shares of Paymentech, Inc. (PTI). At the time of purchase, the shares were trading in the mid-teens. Our rationale for the investment in PTI was that the shares were currently undervalued and that over time the underlying value of PTI would grow. We also believed that consolidation in the credit card processing industry would be a logical business outcome. On March 22, Pam Patsley, President & CEO of Paymentech, and Ric Duques, Chairman & CEO of First Data Corporation (FDC), announced that FDC would acquire the publicly traded shares of PTI for $25.50 in cash. We wish Pam and Ric success in their new venture and will continue to monitor their efforts. Since the announcement of the merger we have reduced our position in PTI and have redeployed the proceeds into other investments. In this case, a little lightning did not hurt.

OPPORTUNITIES

I know that many of you are tired of being reminded of the opportunities we are seeing in small cap companies. However, you should be made aware of our new holdings and know that we are doing everything we can to create the most attractive portfolio for your hard earned assets. During the quarter, we added seven new companies to the Fund; some are household names, some are not.

Del Monte Foods (DLM): This company is a lot more than creamed corn. New management took over DLM and re-energized the company. We expect to see an increase in operating efficiency as recent capital spending aids future profitability. DLM is the largest producer of packaged fruits and vegetables sold under the Del Monte and Contadina brand names. New marketing, packaging, and promotional efforts should increase sales and profits.

Fruit of the Loom, Inc. (FTL): FTL is the largest, low-cost producer of underwear and basic knit wear. The stock has declined from $46 five years ago to less than $11 a share. The shares are trading at about six times this year's earnings and management owns 12% of the outstanding shares. These characteristics made FTL an attractive addition to our portfolio.

Golden State Bancorp, Inc. (GSB): This is one of the few remaining independent bank franchises in California. It was created out of the merger of CalFed, Glenfed, and, the West Coast franchise, First Nationwide. Not only do we think the shares are undervalued, but we are very impressed with management's vision and commitment to building shareholder value.

Michaels Stores, Inc. (MIKE): Michaels is the largest arts and crafts retailer in the country. This is the only company in the arts and crafts industry that has sophisticated point-of-sale systems to manage and control inventory. We expect continued double-digit growth in earnings over the next several years and find the shares to be attractive.

PMI Group, Inc. (PMA): PMA is one of the top providers of mortgage insurance for home buyers that do not meet federal agency financial requirements for conforming mortgages. This is a well-run company that we have known for years. The compelling attraction to PMA is its valuation. The shares trade around stated book value, seven times this year's earnings, and at a healthy discount to liquidating value.

Trammel Crow Co. (TCC): TCC is the largest U.S. property manager. They provide real estate property management, infrastructure management, and brokerage and development services. The company generates very high free cash flow and management owns over 40% of the shares.

UCAR International, Inc. (UCR): This is not a household name or product. UCAR produces graphite electrodes which are essentially the consumable burner tips in electric arc steel furnaces. UCAR has the leading share in a near oligopoly. New management is busy improving the operations and the practices of the previous leadership. We view this as a very cheap stock.

OUTLOOK

Obviously, I don't have a crystal ball to predict the future. Value investing has a history of being in and out of favor, but over the long term it has produced excellent returns. Several pundits have suggested that value investing is dead. I wholeheartedly disagree. The current market is in a very lopsided state with a relatively small number of companies enjoying the irrational exuberance of inflated valuations. Two factors are working in our favor. First, the stocks we own are irrationally cheap and will not remain so over time. Second, there is evidence of consolidation taking place among small companies as we have seen with PTI and First Brands. It is reasonable to expect that consolidation will continue. The Oakmark Small Cap Fund is managed with a forward-looking vision, patience, and adherence to our value-oriented investment philosophy.

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
April 7, 1999

THE OAKMARK SMALL CAP FUND Schedule of Investments—March 31, 1999 (Unaudited)

(a) Non-income producing security.

(b) Represents foreign domiciled corporation.

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

(d) At March 31, 1999, net unrealized depreciation of $20,810,230, for federal income tax purposes consisted of gross unrealized appreciation of $43,456,425 and gross unrealized depreciation of $64,266,655.