Dear Fellow Shareholders,

Domestic and international stock markets advanced strongly in the quarter ended June 30, extending their gains of the past several quarters. International market indexes again showed the highest returns, benefiting from the weakness of the dollar. Strong worldwide economic growth, robust corporate profits, and record high levels of acquisition activity, generated by corporate purchasers and private equity/leveraged buyout houses, drove this performance. The strength comes despite a jump in long-term U.S. interest rates and credit concerns about the weak U.S. housing and mortgage sector. With the strength in the quarter, most of the broader U.S. and international equity indexes finished the quarter up over 20% from a year ago. Importantly, every one of our Funds achieved a new all-time high net asset value during the quarter.

Credit Cycles and Investment Risk

Times are good. The U.S. economic expansion is in its sixth year. World economic growth is also strong, led by the surging Chinese and Indian economies. World stock market indexes are setting new records. Liquidity is high and lenders are anxious to put money to work. Large ($10 billion plus) leveraged buyouts (“LBOs”), which take public companies private using borrowed money, have become commonplace and are fueling the market’s strength. In fact, investors have concluded that they are now such a permanent part of the landscape that the private equity firms that sponsor these deals are selling their own business to the investing public at rich valuations.

As often happens in extended good times, investors who hope to extend their winning streak (or keep up with the market) reach for returns by taking on additional risk. As the memories of difficult times fade, investors can lose perspective on the downside of the risk/reward tradeoff. Premiums demanded for riskier loans and investments narrow, and eventually we find ourselves where we are today—where capital available for risky investments is exceedingly abundant and receives little reward for the high risk it bears. Today we see these excesses in the highyield bond market, in the flow of loans and investor equity into LBOs and hedge funds, in the strong flows of capital into emerging markets such as China, in the high values assigned to low quality cyclical businesses, and until recently in the U.S. mortgage market.

We have noted these excesses for some time, and several of our Fund managers touch upon them again in their letters this quarter. We believe, however, that some of these imbalances may be starting to correct—particularly in the mortgage and high-yield debt markets. The timing and severity of the inevitable correction and the events that will trigger the shift are difficult to forecast. Credit and risk cycles often last much longer than logic might predict. We suggest, though, that the unwinding of the current cycle will be painful for investors who have reached for risky investments and that, as has been the case in most past cycles, markets will overcorrect.

At Oakmark, our value investing discipline and bottom-up stock picking help us to avoid many of the pitfalls of the risk cycle. We focus on business value and limiting risk, which enables us to concentrate our analysis upon risk/reward tradeoffs so that we only take on extra risk when we believe we will be richly rewarded. As an example, we sold most of our high-yield bond holdings in 2005, when yield premiums narrowed to levels that we deemed inadequate. Likewise, we have found ourselves shifting our equity holdings—stock by stock—to higher quality, lower risk, large-cap companies that we believe offer larger discounts to value and lower risk than most of their cyclical counterparts. Finally, as David Herro notes in his letter, while Chinese stocks have drawn many eager investors seeking to capitalize upon the country’s soaring economy and stock market, we have avoided investments in Chinese stocks due to their inflated valuations, corporate governance issues, and political risk.

Looking forward, as the current cycle matures, we will continue to weigh our alternatives patiently and unemotionally in order to find the most attractive investments. If credit markets shift dramatically and offer us the compelling risk/reward payoff that we seek, we are likely to become owners of many of the same investments that we have shunned for the past several years.

Thank you for entrusting your investments to The Oakmark Funds. We welcome your comments and questions. You can reach us via e-mail at ContactOakmark@oakmark.com.

John R. Raitt
President of The Oakmark Funds
President and CEO of Harris Associates L.P.

June 30, 2007

THE OAKMARK FUNDS

Summary Information

The performance data quoted represents past performance. The above performance information for the Funds 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 current month end performance data, visit oakmark.com.

* Not annualized

As of 9/30/06, the expense ratio was 1.05% for The Oakmark Fund, 0.99% for The Oakmark Select Fund, 0.86% for The Oakmark Equity & Income Fund, 1.18% for The Oakmark Global Fund, 1.08% for The Oakmark International Fund and 1.37% for The Oakmark International Small Cap Fund. As of 10/2/06, the expense ratio was 1.75% for The Oakmark Global Select Fund after accounting for a contractual expense reimbursement.