Fellow Shareholders,

We are happy to report that both of your Funds, Oakmark International and Oakmark International Small Cap, had outstanding quarters. The Oakmark International Fund returned 11% over the last three months, comparing favorably to the 1% and 2% returns posted by the MSCI World ex-U.S.¹⁹ and the Lipper International Fund²⁰ indices, respectively. Meanwhile, International Small Cap climbed 10% over the last quarter, as compared to a 6% increase for the MSCI Small Cap World ex-U.S. index²¹ and a 5% return for the Lipper International Small Cap Average.²²

Based on the attractive valuations of the businesses we own in the portfolios we continue to remain excited about future prospects. Stocks around the world are attractively priced, economic growth is accelerating, and in general, corporate governance continues to strengthen.

What is Enron-itis?

The world has been a buzz about the scandal at Enron for some time now. Sadly, in our opinion, the Enron mess is nothing new. We view the events as "more of the same", but on a grander scale. What is "more of the same?" People investing in companies solely because they see share prices going up. The Enron fiasco was another spectacular instance of speculation, not investing. Despite our industry being littered with MBAs, CFAs, CPAs and even PhDs, greed almost always seems to get in the way of a little common sense.

The financial community knew Enron's financial statements were "opaque"—a polite euphemism for intentionally complicated and incomplete. Any investment professional that took the time to analyze Enron's statements could figure out the company generated poor returns and no free cash flow. Industry competitors called Enron "the crooked E." And yet Enron's share price continued climbing, seemingly immune to economic reality. The price, which traded around $20 in mid-1998, soared to over $80 in mid-2000. A share will now cost you a few pennies.

We are sometimes asked whether it is difficult to deal with foreign accounting standards and statements. Often the question is posed in a condescending way, the clear implication being that standards for foreign companies are lax relative to their US peers. One lesson we have learned over the past 16 years is that the integrity of any accounting statement, especially the income statement, is a reflection of the company's management. Companies run by prudent and honest management teams usually have clear and often "understated" financial statements; those run by aggressive, self-promotional managers tend to have very opaque or incomplete accounting statements that sometimes don't quite add up.

To us, we have always viewed the analysis of a company's management team as a major part of our job. It is critical to understand their motivations, incentives, and, to the extent possible, integrity.

And the key in understanding and hopefully avoiding faulty accounting? As we have said from the beginning, watch the CASH.

European Restructuring

A new company in The International Small Cap Fund is Schindler Holding. The Schindler story is in microcosm the story of what has occurred in Europe over the past ten years. This is a company that for most of the 90's was very uncommunicative (and, on occasion, hostile) to outside investors and their questions. We still remember one meeting in particular in 1994, one that took weeks of pleading and negotiating to arrange. Many questions were met with answers dripping with arrogant evasion or outright refusal. They viewed our questions about the controlling family and their indifferent treatment of minority shareholders with unabashed hostility. This line of questioning provoked a classic old-school European response: "Look, the Family has much more at risk than you do! They can't just go out and sell their shares the next day like you can!" They already did sell shares, we replied, and now they have an obligation of fair treatment to those outside investors. End of meeting.

This mentality has changed dramatically. Senior management has been replaced; both the CEO and CFO are Americans. They have repurchased a significant number of shares and just recently announced an authorization to repurchase an additional 10% of the shares outstanding, as well as make a tax-free capital repayment to shareholders. Along with restructuring the balance sheet, they are also focusing on revamping operations. The restructuring plans they have announced include measures to increase the operational competitiveness of the company, with the goal of reducing complexity and costs.

The Oakmark Way

Everyone makes mistakes. But, our mistakes tend to be caused by misjudging the ability of a company's management to allocate capital or not properly weighting a factor that ends up being more important to a company's success. Even though we are not perfect, our mistakes are our own: we rely on our own, independent thorough research. We start with the premise that a company's value is determined by its ability to generate free cash flow and end with an assessment of a management team's ability to drive its assets for profit and invest capital wisely. This forms the basis for an investment decision. Note the difference: price movements drive a speculator's actions; our actions are determined by value assessment. Adherence to this discipline is what has led to our strong performance since inception, and why we think our process will continue to lead to good results.

Thank you for your continued confidence and support.

David G. Herro, CFA

Portfolio Manager
dherro@oakmark.com

Michael J. Welsh, CFA, CPA

Portfolio Manager
102521.2142@compuserve.com

April 4, 2002