The Oakmark International Small Cap Fund

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/99) AS COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX
6/30/99 NAV $12.54	Total Return Last 3 mos.	Average Annual Total Return* Through 6/30/99 From Fund Inception 11/1/95
The Oakmark International Small Cap Fund	16.8%	12.3%
Morgan Stanley World ex U.S. w/inc.**	2.9%	10.7%
Lipper Analytical International Small Cap Fund Average**	13.0%	13.4%
Micropal Equity International Small Cap Index**	12.8%	13.3%
*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 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 69 mutual funds that invest in securities whose primary markets are outside the United States. The Micropal Equity International Small Cap Index 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,

The Oakmark International Small Cap Fund was up 16.8% in the past quarter, and is up 45.5% since the beginning of the calendar year. The quarterly return compares very favorably with the 13% increase of the Lipper International Small Cap Fund Average and the 9.2% rise in the Morgan Stanley World-ex U.S. index. More importantly, your Fund's annualized return since inception is up 12.3% compared to increases of 13.4% and 10.7% for the Lipper and Morgan Stanley indices.

Nine months ago we wrote in our quarterly letter: "We strongly assert that current prices of this Fund's underlying investments do not come close to reflecting their true fundamental value. Over time, value and price have always converged and we have no reason to believe it won't happen again this time."

Happily, some of that gap between price and value has closed pretty quickly. While it has been an extraordinary period of return for the Fund since we wrote that statement—up 86.5% assuming reinvested dividends—we continue to believe the companies in the portfolio represent terrific value at current prices. We have sold those companies that have reached full value and are redeploying the cash in attractive opportunities, in both new and existing ideas.

PORTFOLIO CHANGES

The largest change in geographic weighting in the Fund that you will notice from last quarter is Japan—it has dropped from almost 13% of total assets at the end of March to around 4% currently. This is strictly a function of our stocks hitting their sell targets, and is a reflection of the tremendous run Japanese small caps have had this year. The Japan small cap market indices—the TOPIX, the JASDAQ, and the Nikkei OTC—are all up between 70% and 90% so far in 1999.

In selling our fully-valued Japanese investments, we sold the last share of one of our favorite ideas of the past few years, the software developer Enix Corporation. As we highlighted in a prior quarterly, Enix represented everything we love in a company: high return business, tremendous free cash flow generation, significant insider ownership, and a management team that is excellent from an operational and capital allocation standpoint. Enix was also one of the first Japanese companies to ever announce and, surprisingly, complete a significant share buyback program.

Shareholders of the Fund have benefited handsomely from the efforts of one of our analysts, Rob Taylor, who knew Enix like the back of his hand long before other investors and brokers got on the bandwagon. Melancholy sometimes accompanies the selling of a company like Enix, but we must remain disciplined in selling when the market price fully reflects underlying business value. This happened with Enix during the quarter.

VOLATILITY IS GOOD FOR LONG TERM INVESTORS

This is a point we keep making in our correspondence with you, but it deserves to be repeated, especially given the period of volatility the Fund has recently gone through. We firmly believe that long-term risk represents the possibility of permanent loss of capital, either from overpaying for or misanalyzing a business in which you invest.

Volatility, on the other hand, is simply a measure of the degree of short-term fluctuation in market sentiment. For us, greater volatility creates larger and more frequent discrepancies between current share prices and long-term business value. The Fund has benefited in the past from taking advantage of incidents of shortsighted maximum pessimism, most recently in emerging markets. We do not believe that risk is suddenly greater because there have been huge price declines in a given market.

Without this periodic volatility created by panic sellers, we would not be given these opportunities to buy good companies at fire-sale prices. These buying opportunities translate into long-term investment performance for the long-term investor. Some recent examples from the last 12 months include:

• We purchased Giordano International in Hong Kong for the Fund for as little as HK$0.94 cents/share and sold the position during the quarter for over HK$4.00;

• We purchased Elevadores Atlas in Brazil for the Fund for as little as BR11.50/share and sold the position during the quarter for over BR24.00; and

• We purchased Hite Brewery in South Korea for the Fund for as little as KW7,200/share and its current share price is over KW40,000/share.

Value investors with a long-term investment horizon should welcome short-term volatility for the bargains they create!

THANK YOU FOR YOUR SUPPORT

We want to again thank all of you, our shareholders, for your confidence and support.

DAVID HERRO
Portfolio Manager
dherro@cs.com

MICHAEL WELSH
Portfolio Manager
102521.2142@compuserve.com
July 2, 1999

THE OAKMARK INTERNATIONAL SMALL CAP FUND International Diversification—June 30, 1999

THE OAKMARK INTERNATIONAL SMALL CAP FUND Schedule of Investments—June 30, 1999 (Unaudited)

(a) Non-income producing security.