THE OAKMARK SELECT FUND Report from Bill Nygren and Henry Berghoef, Portfolio Managers

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (12/31/06) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX4
		Average Annual Total Returns (as of 12/31/06)
	Total Return Last 3 Months*	1-year	5-year	10-year	Since Inception (11/1/96)
Oakmark Select Fund (Class I)	8.39%	13.60%	8.09%	17.05%	18.28%
S&P 500	6.70%	15.80%	6.19%	8.42%	8.86%
Lipper Multi-Cap Value Index8	7.39%	17.07%	9.37%	9.55%	10.04%
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

Fourth Quarter Update
The Oakmark Select Fund increased in value by 8% for the quarter and 14% for calendar 2006. The quarter's strong performance occurred largely across the portfolio with no single stock responsible for an overwhelming gain. We did not purchase any new securities during the quarter, but First Data's spin-off of Western Union did create a new position. We believe Western Union is an unusually high quality business. It is the dominant leader in international money transfers. The growing number of people working in countries away from their families has dramatically increased the demand for that service. We believe the stock price does not fully reflect Western Union's growth prospects. During the quarter we added to our Western Union position and sold our remaining First Data shares.

Ten-year anniversary: Wah-wah-wee-wah!
In November we had a firm-wide luncheon in honor of Oakmark Select's tenth birthday. Like any birthday party it was a time of both celebration and reflection. We shared stories about the more memorable events of the Fund's first year – like getting followed out of a speech by a guy screaming that we were irresponsible to offer a non-diversified mutual fund and another early speaking engagement where literally not one person showed up! We also enjoyed reminiscing about the stocks that performed the best (Moody's, Cablevision) and, less enjoyable, the worst (US Industries, EDS). Knowing how well our shareholders have fared over the decade has somewhat eased the pain of those mistakes.

Something we've noticed at Oakmark is that our recollection of events often gets a little cloudy, and we tend to remember our forecasts as having been more accurate than they really were. For that reason, whenever analysts review our holdings we ask them to present a "retrospective." This requires taking a look back at everything they've previously written about a company and then comparing their expectations to the actual results. This process forces intellectual honesty, and also enables us to detect patterns that aid our understanding of other investments. So, in that spirit, here is the "retrospective" on Oakmark Select's first decade.

In our first report to shareholders in January 1997 (available on our website), we outlined our expectations for the decade. We expected equities would perform well, and as usual, they did. The S&P 500 returned about 8% per year, which was better than owning a ten-year bond (6%) and was much better than inflation (2%). Also as usual, performance didn't follow a straight line. The S&P suffered eleven corrections of greater than 10% (most decades have about six), but only two exceeded 20% (typical decades have had four). In that first report we said that, over the course of a decade, we expected to do better than the S&P and that, to be in the top 5% of funds, we needed to outperform the market by about three percentage points per year. For the decade, small- and mid-cap stocks outperformed the S&P, and mutual funds were overweighted in those stocks. That made it a better-than-average decade for mutual funds. About 20% of equity funds outperformed the S&P by more than that 3% hurdle, compounding returns at greater than 11%. But Oakmark Select also did better. Its 18% annualized return ranked it in the top 1% of equity funds.

While most analysis of returns is cut-and-dried, the equally important analysis of risk is a little more artistic. Most risk analysis today focuses on how differently a fund performs from its benchmark index. Our best year relative to the S&P was 2001, up 26% versus down 12%, 38 percentage points different than the index. Our worst was 1998, gaining 16% versus 29%, 13 percentage points different. In both directions, those differences are very big numbers for a mutual fund. If risk is defined as performance differential, then Select has been a very risky fund. Daily price change is another popular way to think about risk, and on that measure we also look risky. Oakmark Select's daily ups and downs were larger than average: our standard deviation of returns was about 8% higher than the S&P 500's.

But we tend to think about risk in more practical terms, like Warren Buffett, who defines risk as the chance of experiencing permanent loss of capital. Thinking along Buffett's line, what was the worst capital loss a Select investor incurred and how long did it take to recover? From May 17 through September 2, 2002, Select Fund investors saw their investment fall by 30%. They did not recover that loss until May 23, 2003, fifty-three weeks after the prior peak. Not pleasant, but not as bad as the S&P 500, which peaked on September 1, 2000, and troughed about two years later, down 47%. Now, more than six years after the peak, including dividends, it has barely recovered that loss. Another way of thinking about risk is how we measured up to our goal of growing capital over time. Select Fund reached new highs in 30 of its 41 quarters (counting the last two months of 1996 as its first quarter) compared to the S&P 500, which reached new highs in only 16 quarters. When one measures risk academically, using volatility or tracking error, Select's risk was well above average. But if risk is defined as losing money—and that's the risk we strive to avoid—the statistics suggest Select didn't ask its shareholders to endure as much pain as most funds did.

Over ten years of these reports we have consistently said that we would be long-term investors and that we believed we could add value through stock selection. We expected to have more winners than losers and expected the magnitude of our wins to exceed the magnitude of our losses. We have sure proven we are long-term. Over ten years, Oakmark Select has held 80 different stocks. Since we started with 18 (and one of those, Dun and Bradstreet, is still in the portfolio), that means we've added 62 new stocks over 10 years. Of those 62, two were stocks that went up so much during the month we started buying them that we aborted our purchase and instead sold the position. Eleven were the result of spin-offs, effectively making them involuntary additions. Deducting those, we bought 49 new positions, just short of five per year. Since our portfolio normally holds about 20 stocks, that means our average holding period has been about four years. Relative to the average fund, whose typical holding period doesn't quite stretch to one year, we have indeed been patient investors. While we don't necessarily strive for long holding periods, they do mean that our commission costs are below average, as are our short-term taxable gains.

Of the 80 holdings, 18 lost money, and 62 had positive returns. Our positive returns included 10 companies that were acquired and 17 that more than doubled in value. So far at least, we have delivered on the goal of selecting more winners than losers, and the margin of victory has exceeded the margin of defeat. Another message we have repeated is that our goal is to maximize after-tax returns. As the chart on the first page of this report shows, an initial Oakmark Select investment of $10,000 is now worth $55,126. Compared to a gain of over $45,000, our initial investors have received taxable distributions of only $12,707. The tax on 72% of their total gain has been deferred. Though we would always prefer paying tax on a gain to losing money, we have succeeded in reducing the tax bite without reducing the return.

Oakmark analysts' "retrospectives" usually end with "lessons learned." After a decade of managing Oakmark Select, we have learned that concentrated investing does what it's supposed to do—it magnifies the effect of stock selection. And when stock selection is good, as it was for this past decade, results of a concentrated portfolio can be very good. Obviously we don't know if that magnification will help or hurt over the next decade. But we do know that the same talented team of investment professionals will continue to apply the same common-sense, long-term investment philosophy that we've been using. Our initial report closed with a mention of a friend who said that his children, then infants, were depending on The Oakmark Select Fund to help finance their college education. It's an honor to have our shareholders place that level of trust in us, and it's rewarding to know that the college fund for those kids, now in junior high school, has grown significantly.

Schedule of Investments—December 31, 2006 (Unaudited)