THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS

Fellow Shareholders,

During the past quarter, The Oakmark International Fund and The Oakmark International Small Cap Fund continued to perform well. Year to date, both Funds are outpacing comparable international market indices. Please see individual Fund letters for more specific performance information.

In Like a Bear…

You may recall that at the quarter's start, lots of negative sentiments surrounded the global equity markets. Numerous fears, including high energy prices, a housing meltdown in the U.S., and terrorist attacks fostered these negative views. However, we remained fairly bullish despite these "exogenous" forces because, as bottom-up value investors, we found plenty of opportunities in overseas markets. This highlights a very important lesson for all investors: investment success is generally driven by long term thinking, such as buying high quality businesses that are selling at discounted values and not trying to time markets or sectors. We will continue to focus on our fundamental task of searching for those foreign companies that fit our strict value criteria. Fortunately, we maintain our belief that the environment is very fertile for our type of investing.

Money, Money Everywhere!

The rebound in equity prices is in part due to increased corporate activity, which has been fueled by significant cash flows into the alternative investment space. Both private equity funds and hedge funds have raised significant fresh capital, and—with their borrowing power—this has meant that cheap stocks often don't stay cheap for too long. Within our two international portfolios, past and present names such as Associated British Ports, Giordano, Signet, Matalan, Enodis, Euronext, MLP and Julius Baer have been involved in some sort of corporate activity over the last 12 months. Despite the rising interest rate environment, in which financing often is difficult to obtain, the "alternative" players still have plenty of options. Ultimately, we believe this situation benefits fundamental long-term investors like us. These alternative funds' substantial cash reserves and their considerable leverage power enable them to pounce on low priced stocks, which in turn provides a catalyst for equity revaluation.

Farewell to a Strong Leader

Before this letter ends, I want to address Junichiro Koizumi's departure from Japan's office of Prime Minister and head of the ruling Liberal Democratic Party (LDP). Koizumi's policies were instrumental in halting Japan's decade-long deflationary spiral. He also took a strong political stand on the privatization of the Postal Savings Banks in Japan, a signal that he was serious about reform. It remains to be seen whether new Prime Minister Shinzo Abe will have such zeal, but it will be necessary to maintain the Japanese economy's positive momentum, especially since true micro- and macro-economic change is just now taking root. We are hopeful that the positive trends we have witnessed will continue to move forward.