The Oakmark International Fund returned 5% for the quarter ending September 30, which compares favorably to the MSCI World ex U.S. Index's return of 4%. More importantly, year-to-date, the Fund is up 19%, and since inception, the Fund is up 13% per annum. These positive long-term results especially please us and once again fare well in comparison with the MSCI World ex U.S. Index's return of 14% year-to-date and 9% since the Fund's inception.

Impact Players

During 2006, the two greatest contributors to the Fund's performance have been BMW and Diageo. Both stocks are long time holdings of the Fund. BMW is still performing well in a weak sector because of its rising profits, which stem from the company's new models and its cost-cutting efforts. Further, BMW's incredibly strong balance sheet has enabled the company to buy back stock and return cash to its owners. Diageo, the global leader in branded spirits, continues to increase its free cash generation as it integrates newly acquired brands and increases its market share in the U.S.

Two names that have weakened the Fund's year-to-date performance are Rohm and DaimlerChrysler. Rohm, the Japanese maker of specialty semiconductors, seems to be suffering simply because it is a Japanese tech stock. This sector has been very weak despite the fact that the businesses of individual constituents, like Rohm, are performing well. We believe that Rohm will rebound over time as the market looks beyond industry and country concerns to appreciate Rohm's solid fundamentals.

DaimlerChrysler, a relatively new addition to the portfolio, has been hurt mostly by its exposure to the U.S. automotive sector. We feel that the market is fixated on Chrysler's situation in North America and is overlooking the company's progress at Mercedes-Benz and in its commercial vehicle divisions. The quarter's top contributor, Signet, has benefited from private equity interest, which has subsequently drawn attention to this Anglo/U.S. jewelry retailer, perhaps best known for its Jarrod's and Kay's retail shops. Despite these indications of interest (at too low of a price, in our opinion), the company has avoided being taken over.

UK-based maker of kitchen equipment, Enodis, has been a top ten contributor to the Fund in 2006, partially because two of its competitors showed interest in taking over the company. Yet recent news that no deals would happen hurt the share price, making it the Fund's worst performer from July through September.

Lastly, we remain very underweight in the Japanese market, ending the quarter just under 12%, compared to the EAFE weight of just under 24%. Last year, when Japan performed well, this underweight slowed performance. This year, our underweighting has helped because Japan has lagged behind other foreign markets. We remain diligent in our search for Japanese companies that meet our criteria, but have found this a difficult task. As stated in past letters, we are not only concerned about "price" in Japan; rather, we continue to have trouble finding companies that consistently earn good returns and wisely allocate capital.

International Diversification—September 30, 2006 (Unaudited)

Schedule of Investments—September 30, 2006

See accompanying Notes to Financial Statements.