THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS

Fellow Shareholders,

We are disappointed to report that both The Oakmark International and International Small Cap Fund had negative quarters, down 23% and 22% respectively. Global equity markets have witnessed vast price destruction as demonstrated by EAFE²¹ (-20%), MSCI ex USA Small²² (-16%), the Lipper International Funds Index²³ (-20%) and the Lipper International Small Cap Average²⁴ (-19%) which were also down. As a result, many foreign markets are now trading at 5+ year lows and we are seeing valuations in developed markets that we have rarely seen before. Yes, there has been widespread destruction of price, yet we do not see a correspondingly large fall in business value. To us, this spells opportunity.

Anatomy of a Bear Market

The current weakness we are seeing (especially in Europe) has roots that date back to 1996 when equity markets around the world began an aggressive move upward which did not end until the Spring of 2000. The last two years in particular saw share prices move exponentially upward, much of the strength fueled by technology, media and telecommunications ("TMT") companies. After 2 years of price declines in foreign equities, we are now seeing pre-hype prices. We believe this to be a very good thing. The bear market started off by hammering away at inconceivably priced "fluff" stocks, later moving on to real businesses that were over-priced, and now, marking what we think could be an end to the bear market, has moved to reasonably priced, high-quality businesses. Simply put, no stock has been spared.

Signs of Light at the Tunnel's End

The fact that stable, well-financed, well-run foreign stocks are trading at dirt cheap prices reminds us of the Singapore stock market getting crushed at the end of the Pacific Rim crisis in 1998. Though share prices throughout Asia were hard hit in ‘97 through mid ‘98, Singapore, known for high-quality companies and seen as the safe haven of Asia, didn't feel the heat until the summer of 1998. This event marked the bottom of Asian share prices in August/September of that year.

Today we worry about war, corporate scandal and slowing economies. Yes, there is always something to worry about. In the past it was inflation, unemployment, the cold war, European unification, the Euro, Y2K (remember Y2K?), Russia, Mexico, U.S. Banks, hedge funds, etc., etc., etc. The point is, we will always have some negative macro influences. They should not be ignored, but do need to be put into perspective.

Today, European share prices are at 5-6 year lows. Many of the higher-quality companies have sustainable dividend yields greater than 4% and price-to-cashflow ratios of under 10x's. Outside the US, most corporate tax rates have been chopped to the degree that the U.S. has higher corporate tax rates than most of Europe and Asia. Interest rates are at extremely low levels. The tech/telecom revolution and legitimate restructuring continue to boost productivity. The developing world is rapidly becoming developed, especially when you look at East Asia and parts of Latin America. Especially noteworthy are events in China, now a member of the World Trade Organization, which is currently seeing such an influx of Foreign Direct Investment that it has even surpassed the levels of FDI in the USA. China is the world's most populous place: an economically healthy China may help propel world GDP growth for a long, long time.

So, because of these and other reasons, we are extremely optimistic about future investment opportunities. We will continue to work hard to continue to ensure the best of these opportunities find their way into our international funds.

Housekeeping

At the end of September, we will have completed the 10th year of managing The Oakmark International Fund. After 10 years, it has returned 9% per annum, ranking it number 4/84 funds by Lipper²⁵. We are proud of our 5-Star rating for this period in Morningstar's²⁶ Foreign Stock category measured against the performance of 92 funds in that category. We would especially like to thank all of our shareholders for your confidence and trust, and others that have been instrumental to our success over the past 10 years. Also, we are delighted to welcome two new members, Jeff Weiss and Natalie Barber to The Oakmark International analytical team. We hope this demonstrates our commitment to our shareholders to constantly improve the strength and depth of our research effort.

David G. Herro, CFA Portfolio Manager dherro@oakmark.com	Michael J. Welsh, CFA, CPA Portfolio Manager 102521.2142@compuserve.com