U.S. equities exhibited gains for the second consecutive year. If there were a theme for the market during fiscal 2005 (July 1, 2004, to June, 30, 2005), it would have been "uncertainty."

Rising oil prices, the outcome of the presidential election and the war in Iraq continued to weigh heavily on investors' minds. Mid- and small-cap stocks continued to outperform large-cap stocks. Growth stocks significantly underperformed value stocks. The U.S. dollar continued to decline, and U.S. investors who allocated funds to international equities benefited.

Inflation appeared to be contained and the 10-Year Treasury's yield ended the year at 3.9 percent. The Fed increased interest rates several times during the year, which drove short-term yields up. As a result, the yield curve flattened during 2005, causing long-term bonds to outperform. The resulting one-year total return for the LB Aggregate Bond Index was strong (6.8 percent). High- yield and emerging-market bonds continued to be among the top performers.

Compared with the prior year, total assets of The Dayton Foundation, before depreciation, rose by $22.6 million (a 9.5 percent increase) to $260.6 million. Total contributions to all entities of The Dayton Foundation totaled $42.4 million. Grantmaking and distributions to nonprofit organizations were $33.6 million for the year. Documented legacies (planned and deferred gifts) totaled $212.7 million at June 30, 2005.

I am pleased to report that the independent accounting and auditing firm of PricewaterhouseCoopers LLP has completed its fiscal year-end audit of the combined financial statements of The Dayton Foundation and related entities and has issued an unqualified opinion thereon.*

Fund Evaluation Group, Inc., an independent performance measurement firm hired by The Dayton Foundation, continues to monitor our investment managers' performance results. For the fiscal year ending June 30, 2005, the composite time-weighted total return of our discretionary assets, after fees, was 7.1 percent.

On behalf of The Dayton Foundation, I would like to personally thank the Foundation's donors, who have given generously and made a charitable commitment to the Greater Dayton region. In so doing, they have helped grow the Foundation's community assets to the largest in The Dayton Foundation's 84-year history.

Laura B. Pannier

Chair, Finance Committee