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 (3/31/04) AS COMPARED TO THE LIPPER BALANCED FUND INDEX14
	Annual Average Total Returns
	(as of 03/31/04)
	Total Return Last 3 Months*	1-year	5-year	Since Inception (11/1/95)
Oakmark Equity & Income Fund (Class I)	4.18%	31.35%	13.89%	14.90%
Lipper Balanced Fund Index	2.39%	25.10%	3.11%	8.19%
S&P 5005	1.69%	35.12%	-1.20%	9.92%
Lehman Govt./Corp. Bond15	3.08%	6.15%	7.56%	7.33%
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.
The performance data quoted represents past performance. 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, call 1-800-OAKMARK or visit www.oakmark.com.
* Not annualized

Quarter Review

The Equity and Income Fund produced a return of 4% for the quarter ended March 31. This result modestly exceeded the 2% that the Lipper Balanced Fund Index reported. The fund's return has now bested the Balanced Fund Index in 15 of the past 17 quarters. While we are competitive individuals who enjoy achieving relative success, our goal in managing the fund is not to beat a benchmark. Rather, we seek to earn positive rates of return in all material time periods while always maintaining an unhedged commitment to common stocks of at least 50%.

The world is exceptionally confusing these days. Issues like the plague of terrorism, an unusually polarized U.S. election cycle, a synchronized global economic recovery, historically low interest rates, and troubling corporate governance issues have combined to make investing based on macro factors hazardous. Many investors who desire consistent positive returns have attempted to cope with uncertainty by moving money to hedge funds and investment partnerships that employ various esoteric strategies. These entities often pay little attention to the underlying fundamentals of their investments, instead treating securities more like mathematical abstractions. Hedge funds do, however, account for an ever-increasing share of trading volume.

We, of course, have our own opinions on macro issues, but we do not make these opinions central to how we invest your money based on those opinions. Instead, careful analysis of corporate business values drives our investment decisions. We have built the fund's record on thousands of decisions concerning individual securities, and we will continue to expend our energies in that manner. Since the fund's inception at the end of 1995, it has generated positive results in all but one calendar year and 25 out of 33 quarters. We hope to improve upon that record.

Hit and Miss

In our first 34 reports to shareholders we have written extensively (ad nauseam?) about our investing philosophy and process. Many reports also waxed eloquent about our fixed income approach. At the moment we find that we do not have anything new to say on these topics. Therefore, the remainder of this report will discuss individual equity holdings. Please recognize, however, that this does not imply any shift in our investing emphasis but rather a failing of our creative muse.

To format the discussion, we are shamelessly imitating a relatively new column of the Wall Street Journal titled "Tracking the Numbers/Hit and Miss." This column asks portfolio managers to describe experiences with one stock position that worked and one that failed. To make this more topical for our fund report, we will focus on two stocks that materially affected the fund's recent results.

Hit

Caremark, a pharmacy benefit manager (PBM) based in Birmingham, Alabama.

Average price we paid: $20.37. The stock closed the quarter at $33.25.

Why we bought it: We began purchasing shares in August 2002. Earlier that summer the financial press had questioned the accounting treatment of prescription co-payments by several PBMs, including Caremark. This industry seemed interesting to us because of the rapid growth rate in pharmaceutical expenditures, the even faster growth rate of the mail order pharmacy segment, and the attendant focus on drug cost containment. Caremark itself attracted us for many reasons, including its strong management team and its large specialty pharmaceutical business (distribution of expensive biotechnology drugs). 2002 stock market weakness and accounting paranoia (Caremark was an Arthur Anderson client) gave us the opportunity to invest at a great price.

How it did: To the date of this letter, Caremark has proven to be an ideal experience for the fund. The stock remained in a tight trading range for our first six months of ownership before rallying vigorously in mid-2003. The company then announced an agreement to acquire another major factor in its industry, Advance PCS. The market received this news negatively, offering us another opportunity to increase our holding at favorable prices. At the time of this writing Caremark has assumed the position of largest stock holding in the fund.

The latest: Caremark closed on its purchase of Advance PCS on March 24. After some initial discomfort with this deal, investors warmed to the idea that the additional scale would produce significant cost advantages. The stock gained 31% in the March quarter and was the largest single contributor to the fund's quarterly return.

Miss

First Health, a nationwide outsourcer of healthcare solutions based in Downers Grove, Illinois.

Average price we paid: $24.15. We sold the stock for an average price of $20.22.

Why we bought it: We began purchasing shares in January 2002 believing that the company was unique in offering corporate clients a nationwide healthcare solution. We thought that investors misunderstood the company, classifying it as a managed care provider (i.e., an HMO that underwrites health care insurance for its clients) rather than a company that simply provides health care solutions without the insurance liability. We also admired management's use of capital.

How it did: The share price of First Health meandered within a tight range until November 2003 when the company announced a significant earnings shortfall. The stock dropped 24% on the news. Subsequently, our research analysts' work on this industry suggested that the competitive environment for First Health had deteriorated and that the company's proprietary advantages had dissipated. Since this change in perception materially affected our reasons for owning the stock, we sold it.

The latest: First Health shares appear to have stabilized in the low $20s as investors await more data that would provide clarity concerning the competitive landscape.

So what do we take from this? Both of our subject companies are in the business of helping corporate America deal with rising health costs, both have shareholder-oriented, entrepreneurial management teams, and both have particular service offerings with a claim to a proprietary position. What changed was that the competitive position of Caremark actually strengthened while First Health's weakened. In today's hyper-competitive world economy, it may be that business values themselves are less stable than in the past.

In closing, we would once again like to thank our investors for entrusting us with their assets.

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

Schedule of Investments—March 31, 2004 (Unaudited)

See accompanying notes to financial statements.