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 (12/31/03) AS COMPARED TO THE LIPPER BALANCED FUND INDEX16
	Annual Average Total Returns1
	(as of 12/31/03)
	Total Return Last 3 Months*	1-year	5-year	Since Inception (11/1/95)
Oakmark Equity & Income Fund	9.19%	23.21%	12.97%	14.81%
S&P 5005	12.18%	28.68%	-0.57%	10.01%
Lehman Govt./Corp. Bond17	-0.03%	4.67%	6.65%	7.16%
Lipper Balanced Fund Index	7.95%	19.94%	2.95%	8.14%
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

"Virtue has never been as respectable as money." Mark Twain

Our Results

The Oakmark Equity and Income Fund increased 9% for the quarter ended December 31. For the calendar year 2003, the Fund gained 23% lagging the broad market averages while outperforming our primary benchmark, the Lipper Balanced Fund Index, which gained 20% during the year. We are pleased with this result, as we have consistently said that absolute positive returns preserve and grow your capital. We are even more pleased that, looking back over the past three-year and five-year periods, we have grown and compounded the capital of our long-term investors (ourselves included) at a 12% and 13% rate respectively. Please do not think for one moment that those returns are going to make us complacent. We started the year 2003 cautiously pessimistic, and remained that way for most of the year. We have ushered in 2004 feeling pretty much the same way, agreeing with Don Marquis that, "An optimist is a man who has never had much experience." Our experience tells us to be wary of the cheerful consensus. We prefer to keep a weather eye towards the investment horizon and be positioned for a range of potential eventualities, in order that we may continue to preserve and grow your capital.

And the Last Shall be First

Particularly strong performers during the quarter were Diageo PLC, Laboratory Corporation of America, Rockwell Automation, Varian, and XTO Energy. Over time, we have noted that many of the strong performers of the past quarter were the worst performers of the quarter before. We mention that as it again says something about the importance of having a long-term focus in investing. Allowing one's self to be swayed by the vagaries of short-term perceptions, these shifts have little, if anything, to do with the long-term business value of a company.

The worst performer during the quarter was First Health Corporation, which saw its share price decline dramatically when it reported Q3 earnings and guided to a lower growth rate (and lower expectations) for calendar year 2004. A substantial amount of market (as opposed to business) value was erased. At the same time, it should be noted that there has been some erosion of FHCC's franchise at the edges, and the nature of its business model will continue to change as the regional managed-care companies become national players. At current prices, though, we feel that FHCC is too cheap to be sold, given both the quality of the management and the cash-generating abilities of the business model.

Only one position, Cooper Industries, was eliminated during the quarter. We initiated four new positions in TJX Companies, Dean Foods, First Data, and Imation. We are comfortable with our holdings and the asset-allocation of the fund. The turnover, or lack thereof, reflects that. For the most part, the buoyant market of 2003 has eliminated most of the compelling values that we were seeing (and took advantage of) at the beginning of 2003. By the same token, the securities that we own have not appreciated to the point where a wholesale liquidation is called for based on valuation. We would point out that there IS a reason why we construct portfolios rather than focus on individual stocks. Ours is a business, to use a baseball analogy, of hitting singles and doubles. If every now and then, there is a home run, that's nice, but it is the single and doubles that allow us the consistency of return over time while controlling the risk we are undertaking. We know at some point the market and its participants will present us again with the opportunity to buy a lot of very high quality securities at very reasonable prices. In the interim, all we are looking for is one or two really good ideas a year.

A Word about Bonds

Probably one of the most frustrating things for us over the last twelve months has been the dearth of what we considered to be good opportunities to invest in fixed income. After all, as many of you have pointed out, the fund has an income component and the bonds have not been providing much of one recently. For most of this year, we have kept the duration on the fund short- around two years. This is has been because we thought the risk of substantial capital loss from lengthening both duration and maturity outweighed the potential returns. We still feel that way. And while we would have liked to be able to put lots of money to work in high-yield securities, we were unable to do so in issues that meet our stringent criteria. To date, many of the concerns about the return of inflation, the problems of the U.S. currency, and ballooning budget deficits, have been just that, concerns. So overall, the potential rewards for lengthening maturity and duration, as well as lowering credit quality, remain at best illusory while the potential for a "Perfect Storm" environment in the bond market remains.

The Return of Hype

We have often spoken about our criteria for stock selection. Ideally we would like to buy a stock at 60% of our assessment of intrinsic value, where the business value is growing and the management actually thinks and acts like shareholders and stewards of capital. During the last six months of the year, we were surprised (although we shouldn't have been) to see technology stocks vaulting to the top of both the performance and recommended lists of both Wall Street and cable television commentators. Many of these issues are showing little but the hints of improved prospects. It would appear that turnarounds are also in the eye of the beholder. We wonder about the willingness of the investing public to accept the pabulum which they are routinely spoon-fed, especially from cable television, rather than be somewhat more discerning as to the sources of their investment information and advice. This is especially puzzling after the huge capital displacements many of them have suffered over the last three years. For ourselves, we have come to the conclusion that much of what passed for entertainment as reality television today is anything but, and that most cable television business reporting is of the same ilk. As David Frost once said, "Television is an invention that permits you to be entertained in your living room by people you wouldn't have in your home."

Predictions

We don't make predictions, so this heading is something of a misnomer. We have no crystal balls, nor the modern equivalent, a string of supercomputers wired together to spit out real-time analysis of various asset classes and the markets they are trading in, with a view to identifying short-term anomalies (or arbitrage opportunities, before that strategy became viewed somewhat differently than in the past). Rather, we are just plodding along, looking to see whether we can unearth the occasional diamond in the rough as an investment opportunity. One thing in our favor is the rather wholesale bloodletting that has taken place at most Wall Street firms, putting into place a new class of analysts who have yet to make their mistakes of both omission and commission, which may lead to opportunities of displacement in the marketplace. A second thing in our favor is the continued and even intensified focus on short-term events that drives much of investment analysis and portfolio management decisions today. Sometimes (actually more than sometimes), doing nothing is the correct decision if you have confidence in the correctness of your original assessment. In any event, we are not going to do anything different this coming year than what we have done in the past. We will continue to search for business values in the market place at that margin of safety discount to intrinsic value that we like. We remain grateful to you, our shareholders and partners, for your patience and confidence in 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—December 31, 2003 (Unaudited)