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 (3/31/06) AS COMPARED TO THE LIPPER BALANCED FUND INDEX12
	Average Annual Total Returns (as of 3/31/06)
	Total Return Last 3 Months*	1-year	5-year	10-year	Since Inception (11/1/95)
Oakmark Equity & Income Fund (Class I)	2.00%	11.49%	10.81%	13.66%	13.61%
Lipper Balanced Fund Index	3.25%	10.02%	5.25%	7.68%	8.02%
S&P 5004	4.21%	11.73%	3.97%	8.95%	9.73%
Lehman Govt./Corp. Bond13	-1.01%	2.02%	5.23%	6.32%	6.10%
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 most recent month-end performance data, visit www.oakmark.com.
* Not annualized

Quarter Review

The Equity and Income Fund returned 2% in the quarter ended March 31, which contrasts to the 3% result Lipper reported for its Balanced Fund Index. Equities provided virtually all of the Equity and Income Fund’s return as rising interest rates caused the prices of fixed income investments to weaken. The shortfall compared to the Lipper Balanced Fund Index does not diminish our pleasure in reporting another positive quarter. As we have often said in these letters, we present the Lipper Balanced Fund Index as a standard for comparison, but our personal benchmark is to earn substantial, persistent positive returns. Persistent positive returns over time build wealth faster than volatile return streams, and the persistent stream demands less psychological fortitude from the investor.

Nonetheless, during this quarter, many of you communicated discomfiture with our progress. Most comments pertained to 2006 year-to-date returns, while one individual was quite particular, highlighting the period September 15, 2005 through January 31, 2006. Some correspondents asked if the Fund was lagging because we had restructured the portfolio prematurely, while others suggested that we should restructure the portfolio immediately in order to escape our malaise. We have always said that we welcome your e-mailed comments and queries, and we are almost as glad for the unhappy tidings as we are for the compliments. This past quarter’s e-mails suggest that we need once again to discuss our core principles in managing this Fund.

Core Principles

The Equity and Income Fund is a balanced fund intended to produce income while preserving and growing capital. The Fund’s asset allocation has tended to stay in the general neighborhood of 60% equity and 40% fixed income, a common structure for balanced funds. Asset allocations of this sort are responsive to the universal need to mediate between goals for current income and long-term growth, and, happily, they ask little of human nature. For an asset allocation to be effective, it must provide its greatest utility in times of stress. Experience has demonstrated that investors who maintain a well-balanced asset allocation are less likely to panic. Equity and Income’s similarities with most other balanced funds end with our average asset allocation, however.

The factor that most distinguishes the Fund is our investment philosophy. To manage the Equity and Income Fund, we use the same value investment philosophy that undergirds all of the Funds in the Oakmark group. We continually ask “what are our holdings worth” and “what are their prices.” In addition for our equity investments, we seek to determine if the issuing company shows persistent growth in intrinsic value per share and if its management team treats its shareholders as though they are partners.

Second, our concept of a balanced fund differs from most other fund managers. We understand a balanced fund to be an integrated portfolio, not an aggregation of independent pieces. All of the Fund’s holdings compete with every other holding for space. Accordingly, our ability to identify attractive investment opportunities affects the Fund’s asset allocation. Over the Fund’s more than ten-year history, the equity allocation percentage has ranged from the low 50’s to the mid-60’s, always a function of our ability to identify undervalued equities. In the same manner, the allocation to corporate debt instruments has varied widely depending on our evaluation of opportunities in that sector.

Other Differentiating Characteristics Include:

• Benchmarks do not drive our investing. Investors in the Fund should expect results to differ from benchmarks, especially over short time periods. We are pretty much congenitally unable to do anything other than buy and own securities at a discount to intrinsic value. And, we accept that periods of underperformance will occur when the market does not recognize the values we have identified.

• We are relatively indifferent to the size of the opportunity. We have the ability to invest the Fund in stocks of small-cap, mid-cap, and large-cap companies, as well as foreign-domiciled concerns.

• While income is always desirable, value is determinative. What this means is that income is a characteristic to which we assign value and, like most characteristics, it can be over-priced or under-valued.

• Quality, like income, is a factor to which we ascribe value. We can and will own low grade bonds and/or preferred stocks in the Fund, but only when we perceive their potential return to be competitive with equities.

• The Fund’s diversification is an outcome of our bottom-up investment process. We will generally invest the Fund in a more concentrated fashion than other balanced funds. Outstanding investment opportunities are scarce, in our opinion.

• Our investment horizon is very long-term. The ability to think and act with a long-term horizon is a great advantage. At the same time, we can be rather inactive for long periods. In our view, sometimes the best course of action is to do nothing.

For investors in mutual funds the question of "fit" is paramount. Investors make the best decisions when they have invested with funds whose style and philosophy mesh well with their own character and needs. Perhaps the most useful advice we can give fund investors is that they should often check to see if they understand their funds and, if so, consider whether their funds still fit their investing needs.

Fixed Income Update

In any given time period our shareholders’ e-mails tend to coalesce around specific issues. While recently the flow of e-mails has focused on short-term results, three years ago the flow overwhelmingly centered on the question of how to protect against rising interest rates. We wrote then about our efforts to protect the portfolio through the use of short duration securities and inflation-indexed bonds. How has this worked out? In an unexpected and not particularly satisfying fashion, we would say.

To all of our correspondents who warned us that the Federal Reserve would substantially increase short-term interest rates, you were correct. The effect on the fixed income market, however, has been quite limited. For example, ten-year U.S. Treasury notes trade for yields almost unchanged from two years ago. Our defensive posture in our fixed income holdings has, to date, reduced both risk and return.

Nevertheless, we remain risk-averse in our fixed income allocation, both in terms of sensitivity to interest rate changes and in terms of quality. The fixed income duration is just under two years and the portfolio has no high yield debt. We will happily change these portfolio characteristics when we perceive that value has returned to the sector.

A Note on Activity

As mentioned above, during the quarter shareholders asked us repeatedly if we were substantially restructuring the portfolio. Merely looking at the number of equity holdings that left the portfolio in the quarter (nine), one could easily come to this conclusion. This is misleading, however. Eight of the holdings were of minimal size, collectively comprising less than 2% of the portfolio. The ninth, Burlington Resources, completed its sale to ConocoPhillips on March 31 (effective 4/3/06). The portfolio ended the quarter somewhat more concentrated but little changed in fundamental character.

In closing, we should note that we also receive many complimentary e-mails for which we are grateful. As always, we thank you for entrusting us with your assets.

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

Schedule of Investments—March 31, 2006 (Unaudited)