THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS

Fellow Shareholders,

Both International Funds performed acceptably during the quarter that ended March 31, 2007. The return of market volatility this quarter did not concern us because, as longterm investors, we view instability as an opportunity to achieve better long-term results for our Funds. Please see the individual Fund letters for more specific performance information.

In Like a Bull, Out Like a Bear?

The strong global equity market of 2006 continued into the first six weeks of 2007. However, global markets began an abrupt sell-off in late February, triggered by a 9% decline in the Chinese market. Despite all of the panicky headlines, we view this as normal equity market behavior and continue to focus on finding value—searching for high quality businesses that sell at attractive prices. Market sell-offs actually help our quest because they provide us with more investment opportunities. Keep in mind that we strongly believe that the way to achieve investment success over time is to stay focused on the long term. We will continue to use periods of market volatility to try to enhance the attractiveness of our portfolios.

During the quarter we initiated hedges on the UK holdings in our Funds as we believe that the Sterling has appreciated above the range of its intrinsic valuation parameters as measured by purchase power parity and other economic fundamentals.

Japanese Corporate Governance and the Case of Nikko Cordial

One star performer in not only The Oakmark International Fund but also in both of our Global Funds was Nikko Cordial, a Japanese investment firm and the country's third largest brokerage firm. We invested in Nikko towards the end of 2006 after the share price had been hit exceptionally hard due to a relatively small accounting scandal that raised the possibility of the stock being de-listed from the Tokyo exchange. We believed that Nikko offered significantly higher return potential because, in addition to the company's exceptionally strong franchise, the Japanese investment sector presented a huge growth opportunity. This opportunity is the result of recent Japanese regulations that allowed investors to move savings from deposits that earned less than 1% to products and funds offered by Nikko that could offer significantly higher returns. Additionally, because those who were involved in the accounting scandal were fired, we estimated that it was improbable that the stock would be de-listed.

Our hypotheses were mostly correct about the strength of Nikko's business and the Japanese exchange's action, and we correctly assumed that Citigroup, who owned approximately 5% of Nikko and runs a joint venture with them, would be interested in bidding for the company. As a result, Nikko's share price increased almost 25% for the quarter. We did not, however, anticipate that Nikko's management would seem more interested in pleasing Citigroup than in serving the other 95% of its shareholders. Sadly, once Citigroup expressed interest in buying the company, Nikko's management seemed to actively discourage other interested parties.

Time and time again I have written about Japanese boards' failure to focus on maximizing shareholder value. The Nikko case exemplifies why we have so much difficulty in finding Japanese stocks for our portfolios: generally speaking, the shareholders do not appear to be a high-ranking constituency in the eyes of corporate Japan. We have trimmed our position as a result of the share price's massive appreciation, but our preference at this time would be to stay on as Nikko shareholders given the unsatisfactory price that Citigroup is offering.

When searching for stocks in Japan, the world's largest equity market outside of the U.S., we continue to look for companies that are both cheap in price and have management teams that view building shareholder value as a key priority. Though there is an abundance of the former, the latter has proven to be more elusive.

As always, thanks for your continued support and confidence.