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 (6/30/06) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX17
	Average Annual Total Returns (as of 6/30/06)
	Total Return Last 3 Months*	1-year	5-year	10-year	Since Inception (11/1/95)
Oakmark International Small Cap Fund (Class I)	-0.58%	31.38%	21.59%	13.74%	14.39%
MSCI World ex U.S.	0.67%	26.89%	10.40%	6.76%	7.45%
MSCI World ex U.S. Small Cap20	-3.54%	28.31%	18.54%	N/A	N/A
Lipper International Small Cap Index21	-2.72%	31.73%	17.72%	11.64%	N/A

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 most recent month-end performance data, visit oakmark.com.

* Not annualized

The Oakmark International Small Cap experienced a loss of 1% for the quarter ended June 30, 2006, outperforming some of our benchmark indices. More importantly, however, for the past twelve months and since inception your Fund is up 31% and 14% respectively, outpacing the MSCI World ex U.S. Index with returns of 27% and 7%.

Markets experienced strong volatility this quarter. The main indices rose nearly 8.5% through early May, only to fall 7.5% over the past six weeks. With risk aversion increasing, emerging markets and smaller-cap stocks experienced their first declines in several quarters. This was not an international phenomenon alone, as the Russell 2000 Index²² in the U.S. fell 5% in the quarter.

In these turbulent markets, the Fund benefited greatly from both geographic allocation and stock selection. One of the worst performing small cap markets in the quarter was Japan, whose small cap index declined over 13%. As we've discussed many times in previous letters, we continue to be relatively underweight in the Japanese market not because we don't like Japan in general, but because we haven't found sufficient companies and management teams in the country that meet our quantitative and qualitative criteria. The Fund's underweighting in Japan was the largest contributor to performance.

Stock selection in Switzerland and the United Kingdom was particularly strong, and the Fund's large overweighting in these two markets more than compensated for its underweighting in Japan. The Fund's Swiss and UK names returned 6% and 5% (in U.S. dollars) respectively in the quarter, solidly ahead of both countries' return in the MSCI World ex U.S. Small Cap Index.

Large Contributors

Carpetright PLC, a UK retailer and a name we've discussed in the past, continued to rebound in the quarter, gaining 16%. As you may recall, we aggressively added to this position in the summer of 2005 as the shares fell in response to a slowing UK housing new-build and refurbishment market. As we noted at the time, carpet retail is cyclical by nature, but Carpetright is very well managed, generates strong returns on capital and throws off massive amounts of free cash flow. During the general market downturn, Carpetright's business model and management team have shined. Carpetright has gained tremendous market share, as the group outperformed the overall market by an estimated 1300 basis points in 2005. It has done this despite moving a large portion of its retail outlets to third-tier, lower-cost, out-of-town locations. International operations in Belgium and the Netherlands are also improving, and Polish operations are gaining scale. In the second half of 2006, Carpetright posted a significant improvement in both sales and operating profit. We continue to be large holders of the stock.

Gurit Holding AG, a Swiss holding company, was the second largest contributor to performance in the quarter. Gurit's management had built a very unique collection of quality assets via acquisition, including dental supplies, industrial composites, and textile machine components. However, we became increasingly critical of their operational execution as profits fell in their two non-healthcare operations. The Board became critical as well, deciding in the fall of 2005 to split the businesses and terminate the CEO, refocusing the remaining management and unlocking a large amount of value. Since the announcement, Gurit's shares have advanced almost 60%. The textile machine components operations have been divested, and we believe the dental business looks particularly attractive in a consolidating industry. As the share price has neared our target price, we've been trimming our holding.

Mabuchi Motor, a Japanese manufacturer of a variety of mini-motors, advanced 17% in the quarter, well ahead of its local benchmark. After a sustained period of tough consumer electronics markets, the group appears to have hit an inflection point. First quarter results point to a slowing rate of decline in the consumer-related sales and a large increase in auto-related sales. Mabuchi continues to pay out virtually 100% of its free cash flow in dividends and share repurchases and remains well over-capitalized.

Detractors

Sogecable, the leading Spanish pay-TV provider, was the worst performer in the quarter, falling 28%. Sogecable currently owns the rights to broadcast all Spanish soccer games, of which all but one game per week are resold to other content providers. In May, a Spanish content provider bid for the TV rights for Barcelona's soccer team. This isn't very valuable because without owning the rights to the remaining teams you can't broadcast the match. While such deals create confusion and noise, Sogecable will retain the rights to Barcelona for the next couple years. However, it is clear that pricing for soccer content will increase. Sogecable has lost nearly 1B Euros in market capitalization for what is anticipated to be a couple hundred of millions in increased content costs. We believe this is a gross over-reaction given that Sogecable will retain the top pay-TV position in the under-penetrated Spanish market, a valuable Canal-Plus franchise, movie exclusivity and at a minimum pay-per-view access to soccer matches. We have added to our position in the quarter.

MLP, one of the two leading independent financial advisors in Germany, fell 13% in the quarter. Management has set very aggressive targets for new customer additions and sales of pension and investment products. The first quarter results showed increasing consultants and customers, yet brokerage revenues fell like-for-like. We continue to believe the independent financial advisors will benefit strongly as large unfunded state pension schemes transition to private and corporate offerings. MLP's advisors will become more productive as training improves and a greater share complete the required exams to sell a broader product portfolio.

Portfolio Composition

We sold our entire positions in Coloplast, Alfa Laval and Robert Wiseman in the period as each reached its respective sell price. We've used the market volatility to begin building a number of new positions including: Kimberly Clark de Mexico, a manufacturer of diapers and bathroom tissue; Binggrae, a South Korean food products company; Britvic, a UK soft drinks and juices bottler; Boewe Systec, a German manufacturer of mail inserting and cutting machines; and Australian Pharmaceutical Industries, an Australian pharma distributor.

Geographically, our portfolio weightings remain very similar to last quarter with Europe and the UK representing 71% of investments and the majority of the balance excluding cash in the Pacific Rim.

After having a tremendous run over the past four years, both small capitalization international stocks and emerging markets retrenched in the quarter. Our strong new idea generation is evidence of this, with five new names added in the quarter, two of which hail from emerging markets. In addition to idea generation, the volatile markets allowed us to add to many of the Fund's positions that continue to demonstrate strong underlying performance, yet whose share prices declined along with the overall markets. We are excited and thank you for your continued confidence.

International Diversification—June 30, 2006 (Unaudited)

Schedule of Investments—June 30, 2006 (Unaudited)