THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/00) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX
9/30/00 NAV $11.51	Total Return Last 3 mos.	Average Annual Total Return* Through 9/30/00 From Fund Inception 11/1/95
The Oakmark International Small Cap Fund	-4.0%	8.5%
MSCI World ex U.S. Index w/inc.**	-7.6%	9.9%
Lipper Analytical International Small Cap Fund Average**	-3.5%	18.5%
Micropal Equity International Small Cap Index**	-4.0%	18.5%
*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 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 76 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,

For the fourth quarter of the fiscal year, your fund was down 4.0%, compared to negative returns of 7.6% and 3.5% for the MSCI World ex US index and the Lipper International Small Cap Fund Average, respectively. For the nine months ended September 30, 2000, the Fund was down 7.9%, compared to negative returns of 10.3% and 2.5% for the MSCI World ex US Index and the Lipper International Small Cap Fund Average.

The past quarter was a rough one for most of the world's equity markets. The areas of greatest market excess, the ubiquitous "T-M-T" favorites (Technology, Media and Telecommunications) shouldered the brunt of the declines, but weakness was nearly universal. As long-term shareholders remember, we believe it is often in times of volatile share price movements that exceptional long-term values are unearthed.

Private Equity in Europe—Dry Powder

For quite a few quarters now, we have written about the exceptional values we are finding among the small and mid-cap stocks in Europe. Even with the latest downturns in the market indices, a large valuation gap still exists between huge, liquid, index names and everything else. A good question to ask is: "what is going to change this?"

One possibility is private equity — money that is raised from pension funds, insurance companies, and other institutions, pooled with ample amounts of debt, and used to buy pieces of businesses or entire companies. A healthy private equity market helps maintain "honesty" in share prices by focusing on businesses that are priced by the market at significant discounts to business value. These financial investors can make a bid for the entire enterprise, their non-core business lines, or under-performing operations.

The trend is clear. We continue to see a pronounced increase in private equity, raised both in the US and Europe, that is earmarked for deals in the UK and Continental Europe. In the past quarter, some examples of private equity investors raising significant funds include BC Partners (Euro3.5 bill), KKR (US$3 bill), CVC Capital Partners (US$3.5 bill), and Schroder Ventures (Euro3 bill). Other firms actively involved in searching for European deals include Hicks Muse Tate & Furst, Carlyle Group, ABN-AMRO Holdings, Morgan Grenfell Private Equity, Texas Pacific Group, and Clayton, Dubilier, & Rice.

This year, your fund had two companies that were bought out by private equity investors, each for similar reasons. The first, UK-based Wassall, was purchased in the first quarter by KKR for $1 billion. KKR saw Wassall as the perfect first step in their plan to consolidate the fragmented European lighting business. Wassall management will remain intact to assist KKR in this consolidation effort. The second buyout was De Dietrich, one of the oldest industrial companies founded in France over three hundred years ago. In this instance, when one of the controlling families wanted to sell their ownership interest, ABN-AMRO Holdings approached management with a full takeover offer. As with KKR, the buyer wanted to keep the existing superb management intact and simply supply the funding needed to grow the business.

In both cases, it was apparent to the management teams that the market was not giving them proper credit for substantial value creation, something that a deep-pocketed private equity buyer was happy to do. Both companies continue to operate as before, the only difference is they now have direct access to easy capital instead of a low stock market valuation.

Another good example of a buyout by private equity investors occurred in the past few weeks with Laporte plc, the UK chemicals group. Our analyst, Dan O'Keefe, was investigating the company for the Oakmark International Fund. Laporte plc announced the sale of a part of their business which they considered "non-core" to KKR for $1.2 billion, representing a huge valuation premium to the multiple for which the entire business was trading at the time. The share price, understandably, skyrocketed. As one market analyst put it: "Management has exploited the wide gulf between equity market multiples and the valuations that financial and trade buyers are willing to stomach."

We believe there is a substantial crop of low-hanging fruit to be harvested in Europe by private equity buyers, especially considering the presence of plentiful and cheap debt financing. The primary reasons you are not seeing a greater volume of transactions are political and cultural. Unlike the United States, it is still very early in Europe for these types of transactions to take place and it will take more time and delicacy to overcome political problems. Culturally, it will take time for top European managers to realize that divestitures and sales do not always equal failure. Despite these obstacles, the size and number of private equity transactions likely will grow in the years ahead.

Looking Forward

We continue to find very attractive situations in the small cap area across the globe. While the turbulence may continue for a bit, we believe the portfolio represents terrific long-term value at current prices.

We appreciate your continued support.

David G. Herro, CFA

Portfolio Manager
dherro@cs.com

Michael J. Welsh, CFA, CPA

Portfolio Manager
102521.2142@compuserve.com

October 10, 2000