President's Letter

Domestic and international stock markets rose in the third quarter, with most of the broader indexes extending their gains of the past several quarters. While world stock markets finished the quarter up slightly, the endpoint belies the volatility of the period. Rapid deterioration of the U.S. mortgage market in the early summer and a related liquidity squeeze converged to threaten financial market stability. U.S. stocks fell over 6% in the quarter before the Fed stepped in to cut the discount rate and reassure investors.

With this quarter's gains, most of the broader U.S. indexes have produced mid-teens increases over year-ago levels, and international equity indexes have risen over 20%. Low interest rates and worldwide economic growth (albeit somewhat slower growth) continue to contribute to this performance. Looking through the rear-view mirror at 15-25%+ returns in the domestic and international markets for the last several years, the market looks great. However, interest rates, history and economics suggest that returns are likely to revert to long-term norms—with prospective returns averaging in the high single digits.

Though almost all of our Funds produced solid double-digit returns for the fiscal year just ended and our clients' wealth has grown, only two of our Funds kept pace with the rapidly rising market indexes. As we have counseled our investors in the past, this is often the case with our disciplined value investment approach.

Credit Cycles and Investment Risk (Chapter II)

In our June quarterly report, we discussed the widespread underpricing of risk in the world's capital markets. Several of our portfolio managers also made similar observations related to international and domestic debt and equity markets. In particular, I suggested that the abundance of capital available for risky investments had led to excesses that made a credit market correction likely.

The ink was hardly dry on last quarter's letters when the correction hit with a vengeance. Difficulties in the subprime mortgage market accelerated. Rising default rates prompted nervous lenders to pull credit lines to mortgage brokers. At several banks with large mortgage lending operations, depositors lined up to withdraw their money. Market bids for riskier mortgage securities all but disappeared. The mortgage market suddenly faced a full-fledged liquidity panic.

Several hedge funds that had invested in mortgage securities were quickly liquidated. These difficulties spread to the high-yield bond market as debt investors demanded higher yields and several pending leveraged buyouts ("LBOs") were cancelled. For other LBOs for which banks had committed to underwrite loans at fixed rates, the increase in market rates led to hundreds of millions of dollars of write-offs. Further deterioration was headed off only when the Federal Reserve stepped up in mid-August to lower short-term interest rates and provide assurances of liquidity to the market. A strong stock market rally ensued, and broader market indexes have surprisingly reached new highs.

While the white knuckle days of mid-August are behind us, two important observations are worth making about the unwinding of this credit cycle. First, fundamentals suggest that the credit correction has not completely run its course. As we pointed out last quarter, the excesses of the underpricing of risk occurred in a broad range of markets—not just for mortgages and LBOs. The unwinding of these excesses is likely to include other market adjustments, including rising corporate debt default rates, higher yield premiums for risky loans, and a broader differentiation of business quality in equity market valuations. Oakmark's investment approach, with our focus on valuation and risk-and-reward tradeoffs, has limited our exposure to investments in areas vulnerable to these forces.

Second, although we see potential for further distress in the debt and equity markets, we will not be tempted to time the market. Instead, we view weakness in market prices as an opportunity to add to existing holdings or buy new stocks at steeply discounted valuations—as we did in the recent quarter. While the market delivered a few bumps and bruises to our holdings this summer, we continue to believe that our disciplined investment process—involving thorough analysis, a valuation driven focus, and patience will continue to reward our shareholders.

Thank you for entrusting your long term assets 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.

September 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 9/30/07, the expense ratio was 1.01% for The Oakmark Fund, 0.97% for The Oakmark Select Fund, 0.83% for The Oakmark Equity and Income Fund, 1.13% for The Oakmark Global Fund, 1.31% for The Oakmark Global Select Fund, 1.05% for The Oakmark International Fund and 1.34% for The Oakmark International Small Cap Fund.

FUND EXPENSES

A shareholder of each Fund incurs two types of costs: (1) transaction costs, such as redemption fees, and (2) ongoing costs, including investment advisory fees, transfer agent fees, and other fund expenses. The examples below are intended to help shareholders understand the ongoing cost (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other funds.

Actual Expenses

The following table provides information about actual account values and actual fund expenses for Class I of each Fund. The table shows the expenses a Class I shareholder would have paid on a $1,000 investment in each Fund from April 1, 2007, to September 30, 2007, as well as how much a $1,000 investment would be worth at the close of the period, assuming actual fund returns and expenses. A Class I shareholder can estimate expenses incurred for the period by dividing the account value at September 30, 2007, by $1,000 and multiplying the result by the number in the Expenses Paid During Period row as shown below.

Certain accounts invested for 90 days or less may be charged a 2% redemption fee. Please consult the Funds' prospectus at oakmark.com for more information.

Hypothetical Example for Comparison Purposes

The following table provides information about hypothetical account values and hypothetical expenses for Class I of each Fund based on actual expense ratios and an assumed rate of return of 5% per year before expenses, which are not the Funds' actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balances or expenses shareholders paid for the period. Shareholders may use this information to compare the ongoing costs of investing in a Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as redemption fees. Therefore, the third line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, the total costs would have been higher.