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 (6/30/03) AS COMPARED TO THE LIPPER BALANCED FUND INDEX14
	Average Annual Total Returns1
	(as of 6/30/03)
	Total Return Last 3 Months*	1-year	5-year	Since Inception (11/1/95)
Oakmark Equity & Income Fund	13.20%	7.33%	11.19%	14.24%
S&P 5004	15.39%	0.25%	-1.61%	8.68%
Lehman Govt./Corp. Bond15	3.53%	13.15%	7.83%	7.73%
Lipper Balanced Fund Index	10.91%	3.49%	1.98%	7.34%
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.
Past performance is no guarantee of future results. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change.
* Not annualized

"Skepticism is the first step on the road to philosophy."
                                                                    Diderot

Our Results

The Oakmark Equity and Income Fund increased 13% for the quarter ended June 30, bringing the calendar year gain to 11%. For the calendar year 2003, the Fund has lagged the stock market averages but has handily outperformed our primary benchmark, the Lipper Balanced Fund Index, which has gained 9% year to date. We are grudgingly pleased with this result. We are happy at the contribution these absolute positive returns make to the preservation and growth of your capital. We are also pleased with the composition of the portfolio at this point, much as we were pleased with it at the beginning of the quarter, which is most appropriately reflected in the turnover numbers. We are concerned however, that the market's recent outsized returns will be misinterpreted. It will appear to many people that the village idiot could have made money by investing during the quarter (and many did). Many individuals might again conclude that repeated success in investing can be achieved without study, discipline, and patience (as opposed to buying a lottery ticket). We believe that it is rather a matter of assessing the profitability and potential of an individual business and then putting together a portfolio composed of those individual businesses that sell at a discount to our estimate of their intrinsic value. It is for us at least, hard work that should sustain our investment performance through an investment cycle. It is not for us, a matter of logging on to a computer after a morning cup of coffee and throwing in a few day trades.

Bleak House Revisited

Charles Dickens' Bleak House is an interesting tale, which among other things highlights the tragedy that occurs when litigation becomes an end unto itself. As we have commented on in past letters, much time and effort has been and continues to be devoted to trying to find "someone" to blame for the investment debacles of the past few years. Many pieces of reform legislation and administrative rules have come into being, some well thought out and appropriate. Some will undoubtedly have unintended consequences. We have to wonder, if Sarbanes-Oxley is appropriate for the corporate world, why is it not also appropriate for the government? Should we not as taxpayer/shareholders be entitled to the same certifications with regard to the U.S. budget and financial statements? We have always thought that legislating morality and ethics is of questionable worth, for character is formed at a much earlier age. At the end of the day, standards have to come down from the top. We would agree with Charlie Munger of Wesco Financial that much of the problem in Wall Street comes from a deterioration in underwriting standards. Sometimes plain simple greed overcomes the rational. We suggest investors consider the language of U.S. District Court Judge Milton Pollack's opinion in dismissing a class action suit against Merrill Lynch, where he basically said investors could not be compensated for their own rash speculation in stocks when they disregarded widely known and disseminated information about conflicts of interest between Wall Street analysts and investment bankers. Investors need to appreciate the risks, but managements on Wall Street also have to take the view that there are just some things that they will not do, rather than rationalize that it is appropriate to do something for competitive reasons because everyone else is doing it. Until then, we should expect and be on guard against continuing ethical lapses. As with used cars, what emanates from Wall Street should always be viewed from a "buyer beware" perspective. And if something looks too good to be true, it usually is. At Oakmark, we have tended to be skeptical of what Wall Street is trying to peddle, whether it is a securities offering or a stock idea. We don't rely on others to do the work or the thinking for us.

Godot Stopped By—Things Are Still The Same

Did we do anything different this past quarter? Not really. At the beginning of the quarter, we were finding a number of interesting things to buy initially or in which to add to existing positions. By the end of the quarter, it was more common to find ourselves selling or beginning to sell stocks that had reached our assessment of intrinsic value. Remember, ideally we want to buy things at a 60% discount to intrinsic value and sell when they have appreciated to 90% of their intrinsic value. As we have said many times, our ideal holding period is forever—if we can find an undervalued company whose growth in intrinsic business value outstrips the increase in its price. Where that doesn't happen, our discipline leads us to sell a security. We will also sell a security when something changes in our original assessment of the business.

During the quarter, we initiated positions in Diageo PLC, General Dynamics, Nestle S.A., and Stanley Works. On the fixed income side, we increased slightly from a dollar perspective our investment in short-term Canadian Government Treasury Bonds.

We would like to discuss briefly the sale of one investment, namely our holding in GATX Corporation. GATX Corporation is the expert in tank car leasing, and has built a substantial business in the leasing of transportation assets such as railcars and aircraft, as well as earning fees for managing those leased assets for other, primarily corporate, investors. Over the last several years, the company had divested itself of non-core businesses such as petroleum storage, pipelines, and logistics to concentrate on its transportation leasing business. It sold those non-core businesses for attractive prices. The proceeds were to be deployed (and in many instances were) in the higher ROE core transportation leasing businesses. From our perspective management has done and continues to do the right things. Unfortunately, recent events in the airline industry have impacted the company, both in the pricing on the renewal leases of its aircraft portfolio, as well as its ability to continue to fund itself through the commercial paper market. Funding is the key and often forgotten sine qua non for all finance companies. Having watched the experience of Household International, which almost overnight could no longer access funding and thus had to sell itself at what appears to have been a fire-sale price, we realized that we were no longer able to ascertain with confidence the business value of GATX and elected to liquidate the position.

The Future

At the moment, the great financial press debate centers on whether a new bull market has started, fueled by the return of the retail investor to the stock market. Much ado is being made of the fact that with the paucity of returns available in other asset classes such as bonds and money market instruments in an era of continued low interest rates, the investor has no place left to go but to the stock market. We don't know that our opinions about these and other "big picture" issues that tend to seize media attention add anything in the way of worth to our primary effort. That primary effort is our ongoing search for business values available in the market place at that margin of safety discount to intrinsic value that we like. Rest assured that still is the primary focus of our daily activities, as we assess both the potential return on as well as return of your investments. We are grateful to you, our shareholders and partners, for entrusting us with your capital.

Clyde S. McGregor, CFA Portfolio Manager mcgregor@oakmark.com	Edward A. Studzinski, CFA Portfolio Manager estudzinski@oakmark.com

Schedule of Investments—June 30, 2003 (Unaudited)