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 (12/31/07) AS COMPARED TO THE LIPPER BALANCED FUND INDEX10 (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 Equity & Income Fund (Class I)	1.08%	11.97%	12.88%	11.89%	13.36%
Lipper Balanced Fund Index	-1.11%	6.55%	10.33%	6.14%	8.08%
S&P 5006	-3.33%	5.49%	12.83%	5.91%	9.70%
Lehman Govt./Corp. Bond11	3.10%	7.23%	4.44%	6.01%	6.22%
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

"You have opened the door to bitterness."
Korean admonition

The Equity and Income Fund achieved a return of 1% in the quarter ended December 31, 2007, compared to the -1% reported by Lipper for its Balanced Fund Index. For the 2007 calendar year, the Fund returned 12%, while the Lipper Balanced Fund Index earned 7%. We are pleased to report a return of 13% compounded annually since the inception of the Equity and Income Fund.

Strong contributors to performance during the quarter were Apache Corporation (strong fundamentals in energy); Express Scripts (continued strong long-term fundamentals); XTO Energy (continuation of outstanding fundamental results); EnCana Corporation (rebound in energy prices and strength of Canadian dollar); and Newfield Exploration (good asset acquisition plus reserve additions to existing fields). Detractors from returns for the quarter were EchoStar Communications (unfulfilled and disavowed takeover rumors); IDEARC Corporation (regional weakness in advertising in yellow pages); Ingersoll-Rand (disliked perception of large acquisition); and MEDTRONIC (perceived litigation risk from product recall).

Portfolio activity was in-line with this year's trends for the Fund. Zale Corporation was eliminated from the portfolio because of its board's unsuccessful efforts to enhance shareholder value through an internal restructuring program, which now appears stalled. The positions in Costco and McDonald's were both eliminated as those issues approached their valuation targets. MGIC Corporation was sold after its Third Quarter Report raised issues concerning the speed of deterioration in their core business as well as the adequacy of their reserve position. New positions were initiated in Teradata Corporation and Thor Industries. We continued to use interest rate volatility to take advantage of arbitrage opportunities presented by U.S. Government Agency securities relative to U.S. Treasuries and to manage our tax position. We also continued to slightly lower the duration on the fixed income portion of the portfolio, which is now just under three. This continues our defensive posture that we have taken in light of the conflict we see between continued commodity inflation, especially in food and energy, and the major domestic deflation in real estate assets. Due to the ongoing global liquidity and credit crisis, we have been more attuned to the return of our fixed income investments rather than the return on those investments. Because of this highly volatile interest and currency environment, we continue to work to preserve capital rather than to try to capture the maximum total return.

False Starts or False Premises?

In recent years, one of the articles of faith in the investment community was that one always should "Buy on the dips." Indeed, this became a tenet among those who started confusing career risk with investment risk. Hence, each new declaration by a financial institution of a write-off or write-down of subprime investments has been greeted in the Land of Oz that now passes for financial journalism, as the bottom for financials, to the accompaniment of many huzzahs and blandishments to the doubters to "get on the train before it leaves the station." After all the smart money (this time from overseas, although historically those overseas investors have never shown any aptitude at timing investments in our markets) was taking big equity stakes at preferred rates in U.S. financials. We are still inclined to husband our resources a bit longer.

Current bank assets show that real estate exposure is now at record levels—and that's looking only at assets listed on the balance sheets. In addition, deflation throughout the real estate world is increasing. Bank loan loss reserves stand at record lows. And banks are now borrowing record sums, prompting a series of liquidity injections from various central banks. To paraphrase Winston Churchill, we may be at the end of the beginning, but we are not anywhere near the beginning of the end, either for subprime or for the credit markets overall. It increasingly seems that we will find that lending standards were compromised throughout all areas of real estate lending, both commercial and residential, as well as into the corporate market.

What are the implications of this? First, the U.S. consumer seems less able to sustain an economic boom. According to recent Federal Reserve data, nondiscretionary outlays (which include food, energy, medical, and debt service) for the consumer are at their highest level in twenty-five years. Those outlays are also at an all-time high as a percentage of consumer after-tax income.

To make matters worse, this is also spilling over into corporate America, which—instead of accessing cheap credit markets—now finds itself forced to part with cash. So much for using corporate spending to repurchase shares or to grow the business. Those readers who find our outlook too gloomy should consider U.S. budget data. Corporate tax receipts for the first two months of fiscal 2008 (October and November) are down 35%. Stephanie Pomboy of MacroMavens has raised the key question: if a corporate profits recession is in full swing, how long will it be before companies cut capital spending and hiring?

With real estate deflation cutting the U.S. consumer's access to credit, consumer spending will become more reliant on income. Will the financial sector present a compelling investment opportunity anytime soon? Perhaps, but—somewhat like the Supreme Court's famous definition of pornography—we won't know it until we see it. As yet, we don't think we have seen it, given the ongoing disclosures from institutions that had previously made "full" disclosures. With double-digit earnings still optimistically forecast for the financial sector in 2008 by the young paladins of the Street, it seems early to try as one old investment adage goes, "to catch a falling knife."

Not a Normal Distribution World

Our earlier discussion of buying on the dips warrants a few additional comments about nonlinearity. The modern investment world is cursed by the tendency of both analysts and portfolio managers to extrapolate past results into the perceived foreseeable future. Put another way, investors fall into the trap of thinking linearly. The actuality of both "bull" and "bear" markets reinforce that tendency. After all, when the market goes up, our investments rise in value, and everything is evidently attributable to the genius of the investment strategy (or the strategy of the investment genius). As Michael Mauboussin of Legg Mason Asset Management has recently pointed out, we need to consider the concept of invisible vulnerability, or what happens when a large group of investors appear to be doing well with similar strategies. The lesson to be taken from this is if everyone invests the same way and leverage strategies magnify that behavior, then the impact in the marketplace can be disproportional when unforeseen "random" events happen. In other words, correlated strategies which were not thought to be the case, in reality are. This summer, we witnessed this phenomenon in the travails of the quantitative hedge funds.

The Long March

At the end of this quarter, 56.2% of the Equity and Income Fund was in equities, 38.5% in fixed income, and the balance held in cash. We continue to search for undervalued securities to invest in. In recent weeks we have seen hints of opportunity in some sectors. It is important to note, however, that we think of investing as an ongoing, long-term process, rather than a short-term frenzy for performance. Many of our competitors focus on a much shorter time horizon, and their limited focus contributes significantly to short-term price volatility. That said, we remain comfortable waiting for opportunities to emerge that fit our value criteria. In terms of investment ideas, all we need to find is one or two really good ones a year, while hopefully avoiding the value traps. Our competitive advantages are our long-term time horizon and our focus on business value. We still consider the portfolio to be defensively postured, and we expect that to continue due to our belief that significant, risk-adjusted returns are not presently available. Should opportunities present themselves that warrant a different response, we hope to react accordingly. We look forward to writing to you again at the conclusion of the next quarter.

Schedule of Investments—December 31, 2007 (Unaudited)