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 (12/31/05) AS COMPARED TO THE LIPPER BALANCED FUND INDEX11
		Average Annual Total Returns (as of12/31/05)
	Total Return Last 3 Months*	1-year	5-year	10-year	Since Inception (11/1/95)
Oakmark Equity & Income Fund (Class I)	0.44%	8.60%	11.27%	13.72%	13.75%
Lipper Balanced Fund Index	1.71%	5.20%	3.51%	7.57%	7.89%
S&P 5005	2.09%	4.91%	0.54%	9.07%	9.53%
Lehman Govt./ Corp. Bond12	0.60%	2.37%	6.11%	6.17%	6.36%
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, visit www.oakmark.com.
* Not annualized

"People are always blaming their circumstances for what they are. I don't believe in circumstances. The people who get on in this world are the people who get up and look for the circumstances they want, and, if they can't find them, make them."

George Bernard Shaw

Our Results

The Oakmark Equity and Income Fund remained unchanged for the quarter ended December 31, bringing the calendar year gain to 9%. For the calendar year 2005, the Fund outperformed the S&P 500, which gained 5%, and our primary benchmark, the Lipper Balanced Fund Index, which also gained 5% for the year. We are pleased with this period of absolute positive returns. As we have said, it is absolute positive returns that preserve and grow your capital. Absolute positive returns also allow you, our investors, to withstand this period of nascent inflation, a period which otherwise could have eroded your purchasing power. We are particularly aware of the importance of this issue for those shareholders who live on a fixed income. Looking back over the past five-year and ten-year periods, we have grown and compounded the capital of our long-term investors (ourselves included) at an 11% and 14% rate annualized respectively. We continue to dedicate ourselves to generating absolute positive returns.

That said, 2006 has the potential to be something of a difficult year. The inventory of unsold homes in the U.S. is increasing (finally), which has created a pause in the almost constant increase in domestic real estate prices over the past several years. In and of itself, this pause would not be bad, but to the extent that the consumer has relied on an increasing home price to finance the pace of consumer spending, this could have troubling consequences. Additionally, political risk seems to be returning to the global marketplace. For example, within the past twenty-four hours (as of the writing of this letter), Russia shut off and then reopened the flow of natural gas in its pipeline running through Ukraine into Western Europe. Russia is concerned that Ukraine is diverting gas from the pipeline for its own needs on an expired contract, at below market rates, and in volumes above what was originally contracted. We mention such macro events only because we are aware of them peripherally, as we continue to identify undervalued securities for our portfolio. If nothing else, we look for events that cause increased market volatility, for they often provide us with the opportunity to enter an attractive situation at a good price.

The Portfolio Revisited

On one level, recent portfolio activity could be described as incremental. At the end of the prior quarter, 61.1% of the Fund was invested in Equity and Equivalents. At the end of the current quarter, 60.5% of the Fund was invested in Equity and Equivalents. Positions in Imation, Live Nation (a spin-out from Clear Channel Corporation), and Techne were eliminated as they approached their sell targets. We also eliminated our position in Viacom before its corporate restructuring, for tax reasons. We initiated positions in Smithfield Foods and in News Corporation (through an investment in its Class B common stock).

On another level, we were gratified that Burlington Resources, which at the end of the past quarter was the single largest equity position in the Fund, was the subject of a takeover offer from ConocoPhillips. Proposed to close in the first half of 2006, the deal was valued at approximately $92 per share of Burlington Resources, half of which will be paid in cash and half of which will be paid in ConocoPhillips common stock.

Energy, Act II, Scene I

We spend a lot of time thinking about the Fund's energy investments. As readers of these commentaries know, we often explain our thinking to you. As value investors, we are particularly aware of the importance of regression to the mean, especially as it pertains to commodity businesses. However, as we have explained before, we believe that the dynamics of the natural gas industry in North America are very different from that of global energy markets. Accordingly, we have concentrated our investments in companies with major exposure to natural gas reserves in the politically stable areas of Canada and the United States. We have bought these companies at a discount to our estimates of the liquidation value of their energy reserves, which if accurate means we are paying nothing for their operating companies (both infrastructure and people). We continue to think that our other investments in this area are below their asset value, particularly given what we view as a paradigm shift in the natural gas markets.

Rather than natural gas prices returning to the mean or lower in the foreseeable future, the current environment of constrained supply and increasing global demand seems poised to continue. For example, as a result of the Gulf hurricanes, ten per cent of our domestic natural gas supply from the Gulf was interrupted. As much as half or 5% of that production may never be reinstated. In addition, the supply from a pipeline in Canada's MacKenzie Delta, which was supposed to provide a major new source of natural gas to the U.S., will likely be diverted by Canada for its own needs. Finally, the great hope for solving the U.S.'s supply issues—that stranded natural gas resources from around the world could supply the U.S. with a stream of liquefied natural gas—has lessened. It seems increasingly likely that the U.S., for the foreseeable future, will compete with other countries for that resource. Competitors for natural gas resources, such as Great Britain, are seeing access to its own supplies of natural gas from the North Sea in doubt, as those North Sea fields' production has peaked, leaving the UK with a choice of rebuilding many of its aging nuclear facilities or seeking alternative access to natural gas. Thus, we think it is unlikely that the price of natural gas will settle back as quickly or to as low of a price as we saw a few years ago. These developments will add uncertainty to an already dynamic marketplace in which LNG cargoes destined for the U.S. market will be diverted in mid-ocean, to the highest net bidder.

Other Asset Classes

Our investments in fixed income have not changed much over the past quarter. The duration of the bond portfolio shortened a bit, reflecting the Federal Reserve's continued increases of short-term rates, which have allowed us to both increase income while capturing tax losses. At this time, the yield curve has slightly inverted, meaning that the two-year rate is equal to or slightly higher than the five-year Treasury rate. While some claim that the yield curve's inversion portends a slowing economy, we would only like to comment that, because short-term rates are higher than intermediate rates, we can increase the Fund's income with a lesser degree of interest rate risk. We suspect the consequences of the yield curve's inversion are greater for spread investors, who borrow short to lend long.

Our investments in the high yield area have remained at a de minimis level. Quite frankly, much of the corporate bond market generally seems to be weighted towards lower quality issues, some of which are even approaching junk status. While some analysts argue that the Federal Reserve is on the job and has signaled the end of rising rates, we wonder exactly what the Fed has control of, other than the ability to print money. Foreign investors now have more say over credit conditions in this country than the Federal Reserve, to the extent that more than two-thirds of new issues appear to be absorbed by those foreign investors. Whether this will result in a benign future for capital markets both domestically and globally remains to be seen.

Musings

At this time of the year, one sees much investment commentary that resembles the "but for....." analysis. We borrow this phrasing from a comment Warren Buffett made many years ago before his holding company purchased General Reinsurance. The underwriters at General Reinsurance were apparently fond of telling senior management that, "But for this or that storm, the underwriting results would have been superior." The point of this tale is that our primary job as Fund managers is to make every effort to assess the potential range of the outcomes of an investment, always evaluating the worst-case scenario. Obviously, we prefer not to be in the position of needing to explain negative outcomes and worst-case scenarios. However, we have long maintained that our purpose is to inform you, our investors, partners, and readers. Part of that information involves preparing you for a range of outcomes, but that does not mean that our investment goals ever change. We always strive for an absolute positive return for our shareholders. We continue to invest as we have in the past, searching for businesses that sell at a comfortable discount to our estimate of intrinsic value. 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, 2005 (Unaudited)