THE OAKMARK EQUITY AND INCOME FUND Report from Clyde S. McGregor and Edward A. Studzinski, Portfolio Managers

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/07) AS COMPARED TO THE LIPPER BALANCED FUND INDEX7 (UNAUDITED)
	Average Annual Total Returns (as of 9/30/07)
(Unaudited)	Total Return Last 3 Months*	1-year	5-year	10-year	Since Inception (11/1/95)
Oakmark Equity & Income Fund (Class I)	3.17%	15.77%	13.98%	11.87%	13.56%
Lipper Balanced Fund Index	1.90%	13.22%	11.76%	6.42%	8.36%
S&P 5003	2.03%	16.44%	15.45%	6.57%	10.23%
Lehman Govt./ Corp. Bond8	3.01%	5.08%	4.16%	6.03%	6.08%
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 0.83%. 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

"Our current system of levered finance and its related structures may be critically flawed. Nothing within it allows for the hedging of liquidity risk, and that is the problem of the moment." William Gross, CIO of PIMCO

Quarter and Fiscal Year Review

Anyone who slept through the summer quarter may glance at the Equity and Income Fund's return of 3% and the Lipper Balanced Fund Index 2% result and think that the quarter was pleasant and probably dull. All others will know that pleasant and dull were not the operative descriptors. For what seemed like forever, market forecasters had argued that securities markets were mis-pricing risk and that low volatility could not continue. But as the late MIT Professor Rudi Dornbusch once observed, in financial markets, things always take longer to happen than you expect, but once they happen, events unfold much more quickly than you expect. During the summer the cumulative effect of overly aggressive private equity transactions combined with many quarters of poor mortgage underwriting to precipitate a financial markets crisis. Several hedge funds required liquidation, and in both the U.S. and the UK, depositors made panicked withdrawals from wounded institutions. The monetary authorities in the U.S. and Europe stepped in to provide liquidity. The Federal Reserve cut-short term interest rates and the Bank of England pretty much had to rescue that country's fifth largest mortgage lender. At the nadir of the crisis, the CFO of a major investment bank stated that "We are seeing things that are 25 standard deviation events…." Your Fund's managers note that such events happen less than once in 100,000 years, somewhat beyond the scope of even our long-term investment horizon.

The Equity and Income Fund was conservatively oriented going into the summer swoon, and this positioning enabled us to be opportunistic as market dislocations occurred. We were active in equities, reducing the number of holdings while taking advantage of volatility to build up undervalued positions. We re-worked our financial industry exposures. We eliminated two successful holdings (Ceridian and CDW) that were the subjects of buyout offers, both with private equity components. Perhaps most importantly, we worked carefully with our firm's fixed income team to ensure that the Fund's cash reserves were defensively positioned during this challenging time. Our biggest disappointment during the quarter derived from the failure of issues in the high yield corporate debt market to fall to prices that would offer compellingly attractive total returns to Fund investors. Newer Equity and Income Fund shareholders have yet to see a meaningful high yield debt allocation, yet historically this has been an important source of the Fund's returns and income.

September 30 also ends the Fund's fiscal year. We are pleased to report a return of nearly 16% for that time period, which compares to 13% for the Lipper Balanced Fund Index. As always, we report the Lipper figure only because our industry demands a benchmark. In truth, our goal for returns is to produce positive outcomes in every measuring period. While this goal is not realistic on a quarterly basis, we are pleased that only one fiscal year has produced a negative outcome which was a mere -0.47%. The compound rate of return since inception exceeds 13% per year.

Investing Environment Outlook

One of our all-time favorite comic strips came many years ago from the writer of the Wizard of Id. In the strip the king sits before his fortune teller and asks, "What are your predictions for the coming year?" She replies, "Plague, famine, and pestilence." The king, unperturbed, states, "You say that every year." To which the fortune teller replies, "Maybe this year I'll get lucky."

Given the recent financial crisis, which may not be over yet, it would be easy to write a fearsome forecast at this point. Real estate, currency values, and domestic inflation all look to remain difficult issues. Nevertheless, history teaches that financial crises that do not lead to meaningful recessions tend to create favorable investing conditions. Whether the U.S. can avoid a recession in spite of the various retarding effects remains a pivotal question.

We do not make economic forecasts but we do have to make investing decisions based on an understanding of the prevailing investing environment. While we can easily see an outcome where U.S. growth is sluggish because of the problems mentioned above, a recession forecast seems extreme. Economic growth remains robust in much of the world, particularly in developing economies, and the low value of the U.S. dollar will help export-oriented companies. Corporate balance sheets are healthy, and profit margins are wide. While many economists have predicted a downturn in consumer spending, we believe evidence to date does not support this idea.

Given the data currently available, a recession forecast appears aggressive. While the Wizard of Id fortune teller may some day get lucky, we believe that the resiliency and diversification of the U.S. economy, combined with worldwide economic momentum, will limit the impact of the past summer's events.

Is Growth the New Value?

We recently received a copy of an abstract from the consulting firm Frank Russell. The abstract's writers recommend that investors now shift toward growth equities. Quoting from their conclusion, "The last seven years have represented a perfect scenario for the Value investor. They began with historically dispersed valuations inside the market due to rampant speculation and euphoric expectations. In the period following, we witnessed unprecedented corporate scandals, a terrorist attack on U.S. soil, a major corporate profits recession, a dramatic decline in credit spreads, soaring commodity prices, major tax law changes that disproportionately helped income-oriented stocks, an extended war, an abnormal period of double-digit corporate profit growth, and a global flight to income. With these gale-force tailwinds, the market has responded with the strongest leadership shift in the history of Russell indexes in favor of more conservative, lower valuation investments."⁹

Your managers are card-carrying value investors, but the Russell analysis does not discourage us. Our goal has always been to understand and to interpret value as the market presents it to us at any moment of time. The Russell piece implies that value investors always favor equities with low price/earnings or price/book value ratios. While this describes part of our stock selection process, our approach is far more wide-ranging. As we have often written, we first look for companies selling at a significant discount to what an informed investor would pay to purchase the entire company. We next attempt to determine whether the company has been persistently increasing its intrinsic value per share. A company's ability to grow is itself an important component of its value. We also study management actions and investment position in the company to assess whether they have been shareholder friendly (watch what they do, not what they say). Sometimes our analysis leads us to noticeable industry concentrations. At other times we may find value leading us to favor either larger or smaller companies. And, if we are having difficulty populating the equity side of the portfolio with dominant investing ideas, we will enlarge the fixed income portion.

What does the current equity portfolio state about the Fund's managers perception of the investing environment? In general, the Fund remains quite diversified and eclectic in its composition. With 40 individual holdings, the portfolio is somewhat more concentrated than usual, and this reflects a greater degree of confidence in individual holdings. The Fund continues to have a significant exposure to oil and natural gas exploration companies. Foreign-domiciled concerns comprise almost one-fifth of the equity portfolio. The average market capitalization of the Fund's holdings has risen, but the range remains wide from low to high ($600 million up to $172 billion). Over the last few years we have added several traditional growth names to the portfolio such as Medtronic, McDonalds, and Express Scripts, but it would be hard to say that such names constitute an important theme.

In conclusion, your managers continue their search for value wherever it may be found, both in terms of equities and fixed income investments. Our job is fascinating to us in part because the investing environment is always evolving and recasting value. We thank you for being our shareholders and welcome your suggestions and comments.

Schedule of Investments—September 30, 2007