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 (3/31/05) AS COMPARED TO THE LIPPER BALANCED FUND INDEX10
	Average Annual Total Returns (as of 3/31/05)
	Total Return Last 3 Months*	1-year	5-year	Since Inception (11/1/95)
Oakmark Equity & Income Fund (Class I)	-0.64%	5.26%	12.35%	13.83%
Lipper Balanced Fund Index	-1.27%	5.10%	2.09%	7.86%
S&P 5003	-2.15%	6.69%	-3.16%	9.57%
Lehman Govt./Corp. Bond11	-0.67%	0.40%	7.28%	6.57%
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. 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 current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com.
* Not annualized

Results

Positive returns were hard to generate in the latest quarter, and your Fund, regrettably, proved no exception in this regard. Oakmark Equity and Income lost 0.6% in the quarter, modestly besting the 1.3% decline that the Fund's standard of comparison, the Lipper Balanced Fund Index, registered. This is the Fund's ninth loss quarter in its 37-quarter history, and every one of them, regardless of the market conditions or the size of the loss, has disappointed your management team. We are not naïve enough to expect that the Fund's path will always be upward. Nor do we believe that a calendar quarter is a particularly meaningful measurement period. Nonetheless, we know that beating the comparable indices is at best an entertaining abstraction while earning positive returns can improve our shareholders' lives.

The Fund's record over longer time periods is more satisfactory. March saw the five-year anniversary of the all-time highs in stock market indices, such as the S&P 500 and the NASDAQ composite¹². Owning either index for the past five years would have been a painful experience. While the recent quarter for the Fund was not inspiring, we are pleased to be able to report that your Fund has returned 87% (13% annualized) since the peak of the NASDAQ on March 10, 2000.

In the late 1990s we often wrote about the extreme valuation divergences that were then manifest. Since that time, markets have worked toward convergence, and we now perceive valuations to be relatively homogenized, which—for value investors like us—makes the current market somewhat less hospitable. Nevertheless, we continue to find interesting opportunities across most industries and capitalization ranges. Given the Fund's current conservative asset allocation, we have the wherewithal to take advantage of the opportunities that the market will present to us.

An Active Quarter

Securities markets were generally dull and dreary locales in the quarter with index prices confined to fairly tight ranges. Inside the stock market, however, the component parts were far more interesting. High prices for fuels benefited our six holdings in the energy sector. Media stocks languished despite an improving advertising marketplace, and our two satellite television companies (Echo star and DIRECTV) experienced meaningful declines in price. Rising interest rates and increasing regulatory activity placed downward pressure on the prices of our financial industry holdings.

Our trading activity was unusually high in the quarter and focused on the portfolio's fixed income side. As fixed income investors, we face two risks: credit (default) risk and interest rate risk. Over the past six months we have concluded that bond prices did not fairly compensate investors for either risk, and we have worked to limit the Fund's exposures. Our first step was to reduce credit risk. We accomplished this with the elimination of seven of the Fund's high yield debt positions. We next addressed interest rate risk by slashing portfolio duration from 4.1 years to 2.4 years. Our only aggressive action was to rebuild the allocation to sovereign (foreign government issued) debt. Many assume that our occasional forays into the sovereign debt markets are based on a forecast for the trading value of the dollar, but we do not make such a forecast. Rather, we use sovereign debt to diversify the portfolio and enhance income at times when the relative valuations across the international debt markets seem attractive.

Turning to the equity market we initiated three positions and divested six. One purchase, Jupiter Telecommunications, is quite unusual for the Fund—a foreign initial public offering. Jupiter is a 10-year-old Japanese cable television operator that was founded as a joint venture between Sumitomo and Liberty Media. We perceive an opportunity for cable penetration of Japanese households to increase from levels well below that found in other developed nations. Unfortunately, it would seem that other investors share this thesis, and heavy demand for the IPO shares limited our ability to establish a position in the Fund. We also initiated holdings in Encana, a Canadian exploration and production company, and Scripps, a diversified media company.

Our six divestitures included three successful holdings (First Data, Fox Entertainment Group, and Stanley Works), two disappointments (Cool Brands and Delphi) and one neutral outcome (RenaissanceRe Holdings). Fox, a relatively recent purchase, received a takeover offer from parent company News Corp. Having only built a modest position in the company, we elected to sell. Neither Cool-Brands nor RenaissanceRe materially affected Fund results. Delphi, however, was the biggest detractor from the Fund's return in the quarter.

Spun off from General Motors in 1999, Delphi is the world's largest auto parts company. We based our investing thesis for the company's shares on technology, labor, management, and dividend yield. We also believed that GM, Delphi's largest customer, would experience improving sales as it introduced many new or updated models. Instead, GM's market share declined precipitously. At the same time Delphi also reported problems with its accounting for rebates in 1999 and 2000, resulting in the resignation of its chief financial officer. The CEO expressed his intention to retire. The Board cut the dividend. History teaches us that we should sell whenever our conceptual foundation for an investment idea erodes meaningfully. Having lost management and dividend yield as reasons to own Delphi, we exited the position.

Choicepoint is another holding that has generated considerable feedback from Fund shareholders during the quarter. Choicepoint is a multi-faceted database company, but its primary business is providing data and analysis to insurance companies to help in their underwriting and pricing of policies. A relatively unimportant unit of the company maintained a public records database, which, as the name suggests, gathered, organized, and resold data derived from filings individuals make with government agencies. In February management announced that a crime ring posing as a legitimate business had purchased data from Choicepoint's public records database for the purpose of engaging in identity theft. Management has subsequently curtailed this division's activities. The stock has reacted negatively to this news but, as of this writing, still trades above our purchase price. We will be monitoring this situation carefully.

As the quarter ended we learned of yet another accounting investigation of one of our holdings, financial guaranty insurer MBIA. The company's basic business is to use its AAA-rated balance sheet to support the debt of lower-rated municipalities as well as certain asset-backed issues. Given recent developments in the insurance industry, it is not surprising that regulators would seek more information from MBIA. So, why would we continue to hold our position given an accounting investigation? The key reasons are valuation and management followed by our belief that this is a business that needs to exist. Again, this is a situation that bears careful monitoring.

Distinguishing Characteristics

The bulk of this letter has been quite tactical and focused on individual portfolio decisions. We will close with a brief review of the characteristics that we think differentiate Oakmark Equity and Income from other balanced funds.

The first point of differentiation for any of our Funds derives from our firm's value investing philosophy. While our value orientation both informs and circumscribes our activities, we reject other types of limitations, and it is this rejection that gives the Fund its idiosyncratic nature. We will consider stocks of widely varying market capitalizations and bonds of any quality. We own international securities, both debt and equity. While we like dividends, we do not limit the Fund to dividend payers. We are not averse to concentration. And, as is true for all of The Oakmark Funds, we invest a large portion of our own net worth in the Fund.

As always, we welcome your e-mailed questions and comments.

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

Schedule of Investments—March 31, 2005 (Unaudited)