THE OAKMARK INTERNATIONAL SMALL CAP FUND Report from David G. Herro and Chad M. Clark, Portfolio Managers

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX17
		Average Annual Total Returns (as of12/31/05)
	Total Return Last 3 Months*	1-year	5-year	10-year	Since Inception (11/1/95)
Oakmark International Small Cap Fund (Class I)	6.58%	21.26%	20.63%	14.62%	13.94%
MSCI World ex U.S.	3.94%	14.47%	4.92%	6.22%	6.81%
MSCI World ex U.S. Small Cap19	7.31%	25.05%	16.72%	N/A	N/A
Lipper International Small Cap Average20	5.05%	18.42%	13.16%	12.69%	11.88%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. Past performance does not guarantee future results. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, visit www.oakmark.com.
* Not annualized

The Oakmark International Small Cap Fund gained 7% for the quarter, outperforming most of our benchmark indices. More importantly, however, for the past twelve months and since inception your Fund is up 21% and 14% respectively, outpacing the MSCI World ex U.S. Index with returns of 14% and 7%. The strong performance in the quarter was primarily driven by stock selection in the UK and Japan, with our average position gaining 11% in the UK and 21% in Japan.

Japan

Ichiyoshi Securities, a small securities company, was the leading contributor to performance after rising nearly 60% in the quarter and almost doubling in the year. Ichiyoshi, like all Japanese brokerage houses, is highly levered to the overall confidence and performance of the local market. With economic fundamentals continuing to improve in Japan, the Nikkei²¹ surged ahead almost 19% in the quarter, driving underlying demand for Ichiyoshi's services.

Taiyo Ink, a manufacturer of resist ink for printed circuit boards, was another large contributor to performance. Taiyo surprised the market with a sharp turnaround in first half performance following a weak first quarter result. The company was successful in passing on raw materials inflation, in mitigating pricing pressure and reclaiming lost license revenues. Since the results were released in early October, the shares have increased almost 40%.

United Kingdom

Carpetright, a carpet retailer and a name we discussed in detail in our June 2005 letter, rebounded strongly in the quarter, gaining 22%. As you'll recall, we aggressively added to this position during the course of the year as the shares fell in response to a slowing UK housing newbuild and refurbishment market. Carpet retail is cyclical by nature, but this is a company that is tremendously managed, generates strong returns on capital, and throws off massive amounts of free cash flow. The housing slowdown created a temporary opportunity to add to our position at very compelling prices. While the first half results weren't strong, there appeared to be minor demand uplift in the second quarter, and the group confirmed its gross margin would rise for the year despite increased promotional activity. We don't know when the housing recovery will come, but we do believe we own the best positioned, best managed company in the sector to benefit from the upturn.

Halma PLC, a manufacturer of specialty electronic products used to enhance safety (fire and gas detection equipment, door sensors, water leak detection devices) also performed strongly in the quarter, gaining 24%. The new CEO, albeit early in his tenure, has dismantled the walls separating Halma's various businesses, fostering cross-fertilization of technology and solutions and driving new product introduction. The initial sign of success came in the first half report, with organic growth increasing to 6% after an extended period of stagnation. Concurrent with the cultural change, both the resistors and water businesses have demonstrated strong margin recovery off cyclically weak bases. We believe the strong share price performance was driven by the market's initial recognition of the significant underlying changes taking place within this organization.

The share price recovery at Benfield, an independent reinsurance broker, continued in the quarter with the shares increasing almost 14%. Benfield was added to the portfolio in April 2005 as the share price fell in response to additional expenses related to growth initiatives and concerns over the insurance cycle in general. What we saw was a business that generated huge returns and free cash flow, had an owner-oriented management (the CEO owned $100m of stock himself), was less exposed to a turn in the insurance cycle than people expected, and would be a major beneficiary from customer fall-out surfacing from Spitzer's investigation of Aon and Marsh & McLennan. We won't see the true strength of Benfield's model until the insurance brokerage market firms in 2006 and 2007, but we're excited by the market share gains the company has made already this year.

Our hedges had a negligible impact in the quarter, and we enter 2006 unhedged. As such, we believe the U.S. dollar has approached a reasonable value level against other major currencies when measured primarily by purchasing power parity.

Portfolio Composition

We sold both of the Fund's Korean banking positions, Daegu and Pusan, following almost a doubling of each since the summer of 2004. Jason Long, one of our analysts, deserves credit for sifting through the devastated Korean banking sector and finding two stellar small-cap franchises. Each were well capitalized, with leading market shares in their regions, had attractive funding bases and significantly less exposure to the credit card problems plaguing the industry. As the environment stabilized in the past year, credit costs fell markedly. This, coupled with relatively resilient net interest margins and improving expense bases, allowed underlying profitability to expand rapidly. The share prices followed.

In addition to these Korean names, we've also trimmed our holdings in Alten, Carbone Lorraine, Baycorp, Ichiyoshi, Santen, Gurit-Heberlien, and Croda as each has neared our target price.

Meaningful positions were established coincidentally in two Norwegian names, Kongsberg Automotive and Tandberg ASA. Kongsberg is active in faster growing automotive supply niches including seat comfort and automatic gearshifts. Tandberg is one of the two leading providers of videoconferencing equipment.

Geographically, our portfolio weightings remain very similar to last quarter with Europe and the UK representing over 70% of investments and the majority of the balance excluding cash in the Pacific Rim.

As mentioned in previous letters, we continue to be positively surprised by the quality and quantity of small cap ideas our team continues to find despite the strong performance of the small cap markets over the last three years. Strong idea flow, plus persistent value growth from our existing holdings, has left the price attractiveness of the portfolio in what we believe to be a very good position. We remain excited and thank you for your continued confidence.

David G. Herro, CFA Portfolio Manager dherro@oakmark.com	Chad M. Clark, CFA Portfolio Manager cclark@oakmark.com

International Diversification—December 31, 2005 (Unaudited)

Schedule of Investments—December 31, 2005 (Unaudited)