THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/99) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX
12/31/99 NAV $12.50	Total Return Last 3 mos.	Average Annual Total Return* Through 12/31/99 From Fund Inception 11/1/95
The Oakmark International Small Cap Fund	4.9%	12.3%
MSCI World ex U.S. Index w/inc.**	17.4%	14.7%
Lipper International Small Cap Fund Average**	32.3%	22.6%
Micropal Equity International Small Cap Index**	37.3%	23.1%
*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 MSCI World ex U.S. Index includes 21 country sub-indexes. The Lipper International Small Cap Fund Average includes 70 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,

Your fund enjoyed excellent performance for calendar year 1999, up 53.8% compared with a 27.9% return for the MSCI World ex U.S. Index, and a 75.4% return for the Lipper International Small Cap Fund Average.

Over the past twelve months we have benefited from the market's recognition of the under-valuation of the securities in the portfolio. Our belief is that, over time, value and price converge. However, now more than ever, overseas markets are being split into "haves" and "have-nots", with a huge gap in valuation separating the two. The "haves" include anything associated with telecommunications and technology, and, especially in Europe, anything with a mega-market cap that is included in a major index. The "have-nots" are, basically, everything else. As long-term investors we remain very excited because of the values we are finding among the "have-nots."

Proceed with Caution

As noted above, especially in the last quarter of 1999, a few narrow areas of the world markets performed extremely well. Global technology companies and anything with a ".com" in its name have skyrocketed in terms of share price performance. This is not sustainable! Most of these companies make little or no money and will not become reasonably profitable within the next 5 years. Many of these shares are driven up by hype, illiquidity and, specifically in overseas markets, scarcity. It is truly greater fool speculating at its best.

We are not saying that the Internet and technology aren't potent forces, and we are not avoiding them just to be stubborn or different. The point we'd like to make is that for an investment to make sense to us, there must be a reasonably estimated flow of cash tied to the assets of a company with a share price that allows us to buy below the intrinsic value of those future cashflows. Generally, technology stocks today are absurdly priced. In daily life, would it make sense to pay $1 million dollars for a HDTV set? Would you be wise to pay $5 million dollars for your favorite car? It may be a great TV or car, and if others were doing it, would you?

There are numerous examples of excellent technology companies with good growth rates that we've purchased over the years in the Fund at very reasonable valuations. In fact, four of the Fund's biggest winners this year were tech stocks that we were able to purchase at significant discounts to our estimate of future cash flows: Solution 6 Holdings, Koei, Enix, and SK Telecom. You can be assured that we will continue to monitor this area of the market to be in a position to take advantage of more reasonable prices when the inevitable pullback in valuation occurs.

1999 Results—The Good and The Bad

At the end of each calendar year we think it is important to specifically detail the ideas that had the biggest positive and negative impacts on the Fund's NAV. Our biggest collection of winners came from Asia, specifically our stock selection in Japan, Korea, and Hong Kong. The appreciation in share prices of our Japanese investments added around $1.20 to the Fund's NAV during the past twelve months. Ichiyoshi Securities, a stock that was burned-out, unloved, and under-followed when our analyst, David Samra, first recommended it, led the charge with a 300 percent increase in its share price—and it is still undervalued. Software entertainment producers Koei and Enix also posted huge gains and both hit their sell targets during 1999.

Our Korean holdings were again big winners in 1999, adding approximately $0.70 to the Fund's NAV in aggregate. SK Telecom powered ahead by almost 600 percent over the last twelve months. Hite Brewery, making a return appearance from our 1998 winners list, doubled.

The one stock that provided the biggest positive impact on the Fund also came from the Pacific Rim, in this case Australia. Solution 6 Holdings appreciated five-fold over the first eight months of 1999, adding around $0.60 to the NAV before being sold after exceeding our A$4.50 sell target. We owned this outstanding software company in the Fund for over three years and purchased shares for as little as A$0.55.

Carpetright plc, the UK-based retailer, added $0.48 with a doubling of its share price. Throughout the year, we were in the enviable position of competing to buy shares against members of management and the company's own repurchase program because we were all convinced of the attractiveness of the low share price. We only wish more companies were run by individuals with the same commitment to excellence as Carpetright's Chairman, Lord Harris.

Negative performers had a relatively small impact on Fund performance in 1999. Four companies generated declines in NAV of at least $0.14. With two of the four companies we continue to add to our positions (Reinsurance Australia and GFI Industries), while the other two have been sold (Dylex and TT Group).

Reinsurance Australia (ReAC) had the biggest individual negative impact, costing the Fund $0.27 for 1999. The reinsurance market has been extremely difficult over the past few years due to a substantial jump in claims but no corresponding firming in the pricing environment. This trend continued in 1999. Although new management has worked to stabilize the financial position, year-end storms of enormous magnitude in Europe thwarted their efforts. This has caused us to question the viability of ReAc as a long-term investment and thus at the time of this writing, we are reviewing our options.

The share price of GFI Industries of France was hit by market worries of an abrupt drop in aircraft production. GFI is a major supplier of fasteners to both Boeing and Airbus, and would certainly feel a slow-down but not nearly to the extent the market has assumed. The company is fierce in maintaining its cost competitiveness and has other business units that continue to perform well. Further, the company is run by one of the most shareholder-oriented management teams in Europe. We think it is a very attractive investment at the current price.

Two of this year's poorest performers are no longer in the portfolio. The share price decline in Canadian retailer Dylex cost the Fund $0.24. As detailed in last quarter's letter, we came to the conclusion that we had overestimated the ability of the company's management team and, therefore, sold the entire position.

Another poor performer was TT Group, the UK engineering company. The past several quarters have convinced us that TT's various manufacturing businesses do not have sufficient market positions or pricing power to warrant investment. We sold our position during the past quarter.

Looking Forward

Even though overseas markets had a very good year in 1999, we remain very optimistic about the value inherent in our investments. We want to thank you for your continued confidence.

David Herro

Portfolio Manager
dherro@cs.com

Michael Welsh

Portfolio Manager
102521.2142@compuserve.com

January 7, 2000

(a) Non-income producing security.