The Oakmark International Fund

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (6/30/99) COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX
6/30/99 NAV $15.02	Total Return Last 3 mos.	Average Annual Total Return* Through 6/30/99 From Fund Inception 9/30/92
The Oakmark International Fund	21.0%	15.0%
Morgan Stanley World ex U.S. w/inc.**	2.9%	11.3%
Morgan Stanley EAFE w/inc**	2.5%	11.3%
Lipper Analytical International Fund Index**	5.6%	12.5%
*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 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,

The Oakmark International Fund had an outstanding past quarter achieving an increase of 21.0%. This compares favorably to an increase of 2.5% in the Morgan Stanley EAFE Index and an increase of 5.5% in Lipper Analytical International Fund Index. More importantly, since inception on September 30, 1992 the Fund has generated an annualized total return of 15.0%, compared to an annualized total return of 11.3% in the EAFE Index and an annualized total return of 12.5% in the Lipper International Index.

"FUND FLOW REVERSION"

Although we spend 99% of our time analyzing stocks, we must mention an important macro-trend that has had a significant impact on international performance over the last two years:

An article in the June 9, 1999 edition of Financial Times highlighted the fact that US retail investors have become "less internationally minded." According to statistics obtained from the Investment Company Institute, from 1996 to 1998 net new international equity investment declined from approximately 21% of new mutual fund investment to approximately 3% of new mutual fund investment. During this same time horizon, international equity holdings declined from approximately 17% of equity fund holdings to approximately 13% of equity fund holdings. Excess capital that was not deployed abroad found a home in our domestic market, fueling the appreciation in US equity prices.

However, the unusually high returns achieved in the US will not continue indefinitely and funds will eventually return to the international arena. In most of these foreign markets, the combination of a limited number of large-cap securities, thinner market liquidity, and larger capital inflows should have a magnifying effect on security prices. This "fund flow impact" has already been witnessed in some international markets which had been decimated by currency turmoil, adding to the performance of the Fund during the second quarter.

HOW DID IT HELP? WELL...

Price volatility in the last year and a half, exacerbated by the large capital out flows from international markets discussed above, presented the Fund with unique opportunities to purchase high quality stocks at extremely cheap valuations. In times of economic distress, it is particularly important to find businesses with capable and focused management teams, strong market positions, solid balance sheets, and an ability to adapt quickly to a fluid environment. The Fund's effort and patience were rewarded in the last year as share prices began to re-converge with the intrinsic value of the underlying businesses.

THE BIG WINNERS WERE...

Giordano, a Hong Kong retailer that was highlighted in our last quarterly report, continued its strong performance in the second quarter. The company's management team relied on its liquid balance sheet to weather the severe downturn in the retail environment. In the second quarter of this year, profitability has improved following a significant cost-cutting initiative, cash flow has increased following a concerted effort to cut working capital and Giordano's Korean operations' net income has posted strong growth following a turn around in the local economy. Many investors who sat on the sidelines waiting for the stock's momentum to return missed Giordano's 129% appreciation in US dollar terms in the second quarter of this year.

South Korea was decimated by the Asian currency crisis, with the market declining 76% in US dollar terms from a recent peak in June of 1997. As a result, the country was forced to relax its foreign ownership restrictions to facilitate the inflow of foreign capital. The Fund, having been minimally invested in the country for some time, seized the opportunity to selectively add to its South Korean holdings at fire sale prices. Again, we sought companies with strong balance sheets and a historical track record of intelligent asset allocation decisions. We did not want companies engaged in fifty different operations; we wanted focused businesses with focused management. This "quality" discipline and long-term orientation reaped huge rewards for the Fund in the second quarter. On average, the Fund's eight Korean positions increased 81% in US dollar terms over the quarter.

First Pacific Group, an Asian holding company, increased 42% in US dollar terms in the second quarter. In the midst of the currency crisis, this business was trading at 50% of its net asset value, with 90% of the value in cash and listed securities. Management boasted a stellar track record—the last seven large investments each generated in excess of a 19% annualized return. Interestingly enough, First Pacific has employed a similar strategy to that of the Fund—it sold fully valued non-Asian assets and reinvested the proceeds in the Asian region. As the Asian markets rebounded, so did First Pacific's stock.

IS THERE MORE TO COME?

The Fund has found tremendous value in Latin America, mostly as a result of the same contagion that erupted in Asia. The Fund owns two large banks in the region, Unibanco and Bladex. Both of these companies are extremely conservative, cost-conscious operators that generate above-average returns and trade at or near book value. We've also found value in the "baby" telephone companies in Brazil. Many of the fixed-line and cellular operators trade at one-half the value of their international peers despite having world-renowned management and significantly better growth prospects. As often occurs, we are once again awaiting the outside world to realize the latent value in these businesses.

WE REMAIN CONFIDENT

While Asia and Latin America provide excellent illustrations of how the Fund deploys its resources, this same process of assessing companies is applied throughout the world. We are always looking for the hardest-hit companies with the best, most shareholder-oriented management teams—no matter where they are located outside the US. It was not too long ago that market strategists trumpeted the claim "value is dead in the world." The first half of 1999 disproved this theory and we remain extremely bullish about the Fund's prospects.

DAVID HERRO
Portfolio Manager
dherro@cs.com

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

THE OAKMARK INTERNATIONAL FUND International Diversification—June 30, 1999

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

(a) Non-income producing security.

(b) Represents an American Depository Receipt.

(c) Represents a Global Depository Receipt.