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 (12/31/07) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX14 (UNAUDITED)
	Average Annual Total Returns (as of 12/31/07)
(Unaudited)	Total Return Last 3 Months*	1-year	5-year	10-year	Since Inception (11/1/95)
Oakmark International Small Cap Fund (Class I)	-9.52%	-8.33%	24.13%	17.07%	13.49%
MSCI World ex U.S.	-1.62%	12.44%	22.12%	8.99%	8.71%
MSCI World ex U.S. Small Cap17	-4.90%	3.29%	26.43%	N/A	N/A
Lipper International Small Cap Index18	-4.89%	9.88%	28.47%	14.99%	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.
Expense Ratio as of 9/30/07 was 1.34%.
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

As David wrote in his introductory letter, it was a difficult year (and quarter) for The Oakmark International Small Cap Fund, with the Fund losing 10% for the quarter ended December 31. This compares to the MSCI World ex U.S. Index, which lost 2%, and the MSCI World ex U.S. Small Cap Index, which declined 5%. Since inception, your Fund has returned 13% annualized, compared to the MSCI World ex U.S. Index, which returned 9% for the same period.

Stock selection in Germany and Switzerland boosted the Fund during the quarter, adding around 1% to relative performance. The U.K., French and Japanese holdings were the largest detractors, accounting for approximately 4.5% of the underperformance relative to the benchmark. From a sector perspective, performance was aided by the relative returns of our financial holdings versus those of the benchmark, adding around 100 bps to relative performance. Poor stock selection in the consumer and information technology sectors, coupled with our lack of exposure to energy, accounted for a large percentage of relative underperformance.

Contributors

Shares of MLP, the German financial advisor we’ve written about in each of our 2007 quarterly shareholder letters, rebounded after two weak quarters, up 18% in the fourth quarter. Speculation about possible interest in MLP drove the stock price up in the latter part of December, following Swiss Life’s bid for AWD (MLP’s largest competitor). Also during the quarter MLP finalized the replacement of its CFO and reported 3^rd quarter results that were in line with expectations. These events helped make MLP the Fund’s top performer for the quarter.

Julius Baer was the 2^nd best performer in the quarter. The group largely avoided the mortgage mess that tarnished many other private banks, thus also avoiding the need to raise substantial amounts of capital to comfort its client base. In addition, the group continues to report strong asset flows.

Rounding out the top three contributors was Raymarine, a new holding to the Fund this quarter. Raymarine offers an extensive range of electronic equipment for the leisure boating market. Although the U.S. market has been sluggish, European demand has held up strongly, and Raymarine remains confident that it will meet its full-year growth goals. We started buying Raymarine in October after the stock had dropped more than 40% since the beginning of the year. Since October the stock has bounced back approximately 15%.

Detractors

The U.K. market certainly wasn’t immune from the global liquidity issues, with lines queuing outside one of the country’s mortgage lenders—Northern Rock. Plummeting consumer confidence, coupled with a retrenchment in lending, has hit almost everything housing and consumer-related. Our U.K. positions were not unscathed in this environment, causing more than 200 bps of underperformance. Shares of Carpetright fell to a 2¹/₂ year low after plans to take the company private fell through; weakening credit markets and the inability to secure funding were cited as the causes. In line with reports we’ve seen from many other U.K. retail companies, JJB Sports suffered as consumers reined in their spending. LSL Property Services was down for the quarter due to a substantial slowdown in the U.K. housing market, which now is at its lowest transaction rate since 1989. Obviously, lending conditions will be tougher in 2008, which will continue to hurt home sales. LSL is well positioned due its relatively clean balance sheet and greater proportion of earnings derived from more stable surveying work. As such, we used the share weakness to add to our position in the quarter.

Share prices of Japanese temporary employment companies have been negatively impacted by scandals and worries of a slowing economy. While Pasona has avoided the scandals and continues to take market share, it has not been able to avoid its share price from being negatively impacted. StaffService Holdings, a competitor to Pasona, was recently acquired for 50% of revenues. This bodes well for Pasona, which currently trades at 20% of revenues, highlighting the tremendous potential for value creation.

Neopost fell 27% in the quarter. The group’s share price was under tremendous pressure for what was only a minor earnings surprise—sales missed our estimate by 3% and operating income by 4-5%. The group has benefited greatly from decertification in various markets, and it appears that its U.S. customer base has pulled back on ordering new equipment in 2007 because another round of equipment changes is on the horizon for 2008. Incidentally, Pitney Bowes, Neopost’s largest competitor, has also felt the same impact. As this earnings miss appears to suggest only a temporary dislocation, we used the share price decline to more than double our position.

Portfolio Composition

The Fund exited many positions during the quarter as they either reached fair value or for investment opportunities that had more upside, including South China Morning Post, Citizen Holdings, Square Enix, Mainfreight, Kongsberg Automotive, Lotte Confectionary, Sogecable, Medisize, Pargesa, Spectris and Wagon. In addition to Raymarine, we added two other new holdings to the Fund during the quarter: BBA Aviation, a U.K. firm that operates corporate/private jet airports and provides support and after market aircraft services, and Michael Page, a U.K. recruiting firm that we’ve owned historically.

Geographically, our portfolio weightings have changed slightly over the quarter. Europe and the U.K. have increased and represent approximately 75% of investments, reflecting where we are finding value during these extraordinary times. The majority of the balance excluding cash is invested in the Pacific Rim.

We’d like to thank you, our shareholders, for your continued support. As long-term value investors, we will continue to focus on finding attractive, undervalued foreign companies with management teams focused on building shareholder value.

International Diversification—December 31, 2007 (Unaudited)

Schedule of Investments—December 31, 2007 (Unaudited)