PERFORMANCE COMMENTARY                                                  Read in PDF Format

3rd QUARTER 2007

Average Annual Total Returns as of 9/30/2007*
	Three months*	1 Year	3 Year	5 Year	10 Year	Since Inception 6/3/1991
DSEFX	-1.91%	11.63%	9.59%	12.78%	5.28%	9.84%
S&P 500	2.03%	16.44%	13.13%	15.45%	6.57%	10.89%
Past performance is no guarantee of future results. The Fund’s returns quoted above represent past performance after all expenses. Investment return, principal value, and yield 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. For performance information current to the most recent month-end, see below or call 1-800-498-1351.     For the period reported in its current prospectus, during which net operating expenses were capped by the Fund’s Manager, the Fund’s gross annual operating expenses totaled 1.24% of net assets. Until November 30, 2008, the Fund’s Manager has contractually agreed to waive certain fees and/or reimburse certain expenses, including management fees, so that expenses paid by the Fund will not exceed, on a per annum basis, 1.15% of its average daily net assets representing Investor shares. Each Domini Fund charges a 2.00% redemption fee on sales or exchanges of shares made less than 30 days after the settlement of purchase or acquisition through exchange, with certain exceptions. See the Fund’s current prospectus for further information.   Note: On November 30, 2006, the Domini Social Equity Fund, formerly a passively managed index fund, transitioned to an active management strategy. Past performance before November 30, 2006, represents the former passive investment strategy, and is not indicative of future results.   *Not Annualized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic and Market Background

 

After dropping by about 9% from mid-July to mid-August, the S&P 500 Index recovered to finish the third quarter with a positive return of 2.03%. The stock market’s recovery came only after the Federal Reserve cut its funds rate by 0.5% in September — a bigger interest rate cut than the market had expected.

 

A primary factor in stock market volatility during the quarter concerned the weakness of the housing market following its boom over the past few years. Demand for houses has softened during 2007, and new housing starts, a significant source of employment and economic activity, have fallen from almost 2.25 million units per month to only 1.3 million. This represents the largest decline since the housing crash of the late 1980s.

 

Problems continued this quarter in the market for subprime mortgages: home loans to borrowers who don’t qualify for standard mortgages. Though subprime loans have made it possible for lower-income people to own homes, some lenders have allegedly used pressure tactics, misleading information, and falsified documents to make loans to people who had no realistic chance of repaying them. By the end of the quarter, home foreclosures had doubled over the same period last year. The Federal Deposit Insurance Corporation (FDIC) estimates that 1.5 million households will eventually be unable to meet their mortgage payments.

 

Because many subprime mortgages are “packaged” by Wall Street into mortgage-backed bonds, these developments presented significant challenges for the bond market, and triggered the stock market’s midsummer downturn when investors learned that a number of hedge funds and financial firms had significant subprime exposure. As several hedge funds and investment banks dealt with the collapse of their subprime holdings, the broader market began to take a much more cautious view of risk. Investors began moving away from riskier investments (like small-cap stocks, which underperformed for the quarter) and banks began tightening up on credit.

 

The Fed’s dramatic September interest rate cut succeeded in boosting the spirits of the stock market, which responded with the S&P 500’s largest single-day jump since early 2003. However, the interest rate cut also caused a significant weakening of the dollar against foreign currencies, as foreign investors saw a decrease in the interest yield from their U.S. dollar-based holdings. It also caused a renewed fear of inflation. Data released in August, however, showed that inflation for the previous year, as measured by the personal-consumption expenditure index (PCE) excluding food and energy, rose only 1.8%: within the 1% to 2% comfort zone of some Federal Reserve officials. Inflation was at its lowest level since February 2004.

 

Oil prices increased from $73 to $82 per barrel during the quarter, due in part to the weak dollar, since oil prices are denominated in U.S. dollars. In the stock market, high oil prices helped the energy sector to lead the S&P 500 in performance, while information technology and industrials also performed relatively well during the quarter. The most severe underperformance was in the consumer discretionary sector, which dropped by over 6% on investor concern that the fall in home values would lead to a decline in consumer spending. Hurt by the turmoil in subprime mortgages, the financials sector also declined.

 

Portfolio Performance

 

For the three months ended September 30, 2007, the Fund declined by 1.91%, underperforming the S&P 500 Index by 3.94%.

 

As the stock market declined sharply from mid-July through mid-August, many market observers noted that investment funds pursuing quantitative stock selection strategies — like the approach taken by the Fund’s subadvisor, Wellington Management Company — were underperforming the market. In general, stocks whose valuation characteristics made them appear attractive to quantitative stock selection models performed poorly. This was true for the Fund, whose underperformance for the quarter occurred mainly during that one-month period.

 

Looking at the Fund’s holdings, Fund performance relative to the S&P 500 was hurt primarily by stock selection in the energy, information technology, and consumer staples sectors. In particular, the Fund’s position in Unit Corp., a natural gas provider, hurt performance when shares declined after the company reported a drop in earnings. The Fund was also hurt by its position in the information technology company Electronic Data Systems, whose shares declined after the company missed Wall Street earnings expectations, and by the appliance manufacturer Whirlpool, whose stock fell when the company missed sales expectations in its North American operations. The Fund’s performance was also hurt by its position in the finance company CIT Group, whose home lending portfolio was hurt by difficulties in the subprime market.

 

The Fund’s relative performance was helped by its position in Cummins, which benefited from strong foreign demand for its low-emission diesel engines. Cummins says it is the largest foreign investor in the diesel engine industry in China, and more than half of Cummins’ revenue comes from outside the U.S. The Fund also benefited by holding Western Digital, which experienced strong demand from Europe for its hard-disk drives.

 

Setting Standards

 

Two fundamental principles underlie our Global Investment Standards: the promotion of a society that values human dignity and the enrichment of our natural environment. We view these twin goals as crucial to a healthier, wealthier, and more sustainable world.

 

By applying environmental and social standards to our investments, we let corporations know that investors care about more than the next quarter’s earnings. We care about how they make their money. As a result, companies start paying attention to the consequences of their actions, and changing the way they do business. No company is perfect, but through the application of our standards we identify companies that are making a difference, and encourage others to make notable contributions to people and the planet.

 

One example is the agricultural equipment company John Deere, which was among the twenty companies that made the most positive contribution to performance during the third quarter. Although John Deere manufactures heavy equipment that runs on fossil fuels, it reports a number of notable environmental initiatives.

 

In its most recent Global Citizenship Report, John Deere describes an energy efficiency program that began in 1972, and a worldwide greenhouse-gas inventory program initiated in 2003. The company reported that from 1972 to 2006 it reduced total greenhouse gas emissions per ton of production by 63%, and it described several recent initiatives. During 2006 the company replaced an outdated building in the Netherlands with a larger and more energy-efficient one, reportedly cutting natural gas use by 25% and electricity consumption by 20%. In Germany, the company installed a solar panel measuring 3,940 square feet at one of its facilities, which can reportedly generate up to 45,000 kilowatt-hours of electricity each year. In the U.S., John Deere has partnered with a developer and Missouri’s Rural Electric Cooperatives to build the state’s first utility-scale windpower project, which will produce enough power for 30,000 homes.

 

The company also reports that its model 1490D Energy Wood Harvester contributes to the use of alternative energy by compressing logging residue into fuel bundles that are easy to transport and store, and that can be burned in power plants. Each of these “slash logs” contains the energy equivalent of about half a barrel of oil.

 

Shareholder Activism

 

On behalf of Fund shareholders, Domini uses its voice as an owner — through direct dialogue, shareholder resolutions, and proxy voting — to seek improvement in companies’ social and environmental behavior. We strive to move these companies toward better performance on issues including labor conditions, global warming, product safety, diversity, and poverty. We also speak out on public policy issues where we believe we can bring a unique perspective as a socially responsible investment firm, representing investors who care about human dignity and the future of the planet.  

 

During the third quarter, we met with 16 companies in person or by phone, including Hershey’s to discuss labor standards in the company’s supply chain, McDonald’s and Disney to continue work on a multiyear project on factory working conditions, and Timberland to discuss the company’s efforts to reduce its carbon footprint. We wrote to an additional 212 companies, including 196 companies in North America, Europe, and Asia that did not respond to the Carbon Disclosure Project, an annual survey of greenhouse emissions data that is sent to the world’s largest companies on behalf of institutional investors with $41 trillion under management.

 

We also continued our efforts to protect the right to file shareholder resolutions, in response to concepts raised in an official SEC release that could eliminate our ability to file resolutions at certain companies. Our Action Alerts on the subject, issued in July and September, generated more than 2,000 emails to the SEC. We wrote to the SEC to address several specific concerns, and we drafted a comment letter that was submitted on behalf of 47 institutional investors and service providers from ten countries — all signatories of the Principles for Responsible Investment — representing approximately $1.4 trillion under management. The letter argued that shareholder resolutions “have served a critical function by helping to convince U.S. companies to adopt more responsible governance practices, to issue sustainability reports disclosing indicators of social and environmental performance, and to take meaningful steps to address those previously unrecognized risks.”

 

For more detail on Domini’s shareholder activism work, please read the quarterly Social Impact Updates in the Shareholder Activism section of our website at www.domini.com.

 

Proxy Voting

 

The voting rights that come with ownership of a company’s stock can be an important tool for change. Domini is committed to voting our shareholders’ proxies openly and responsibly to help influence a wide range of corporate policies and governance issues.

 

According to a new analysis by Jackie Cook of FundVotes.com, Domini continues to rank among the most activist fund groups. For the year ended June 30, 2007, the 54 fund groups examined supported about 90.7% of management proposals and 35.2% of shareholder proposals. Domini supported 66% of management proposals and 63% of shareholder proposals.

 

During the third quarter, the Fund voted on 63 proposals at a total of 9 meetings. The Fund opposed management on 32% of the proposals presented (20 out of 63). It did not vote on any shareholder proposals. The Fund opposed the board of directors slate at Tidewater and Evergreen Solar because they lacked gender or racial diversity.

 

Several years ago, in the wake of a range of corporate scandals, the Domini Funds adopted a voting policy to strengthen the independence and reliability of financial audits by opposing auditors that charge more than 25% of their total fees to non-audit services. We are concerned about potential conflicts of interest that arise when accounting firms provide both audit and non-audit-related services to a company, and derive significant fees for these non-audit services.  During the quarter, the Fund opposed one proposal to approve auditors because non-audit fees exceeded 25% of total fees.

 

For more information on Domini’s use of proxy voting, please visit the Shareholder Activism section of our website at www.domini.com.

 

Past performance is no guarantee of future results. The Domini Social Equity Fund is not insured and is subject to market risks. Investment return, principal value, and yield of an investment will fluctuate so that an investor’s shares, when redeemed, may be more or less than their original cost. You may lose money.

 

The Advisor waived certain fees payable by the Fund during the period and the Fund's average annual and quarterly total return would have been lower had these not been waived. Total return figures are historical and include changes in share price and reinvestment of dividends and capital gains. Current performance may be lower or higher than the performance data quoted. For recent performance information current to the most recent month-end, call 1-800-582-6757 or view the Performance page on our website, www.domini.com.

 

The composition of the Fund’s portfolio is subject to change. The Standard & Poor's 500 Index is an unmanaged index of common stocks. You cannot invest directly in an index. Obtain a copy of the Fund’s most recent Annual or Semi-Annual Report, containing a complete description of the Fund’s portfolio, by calling 1-800-762-6814 or at www.domini.com.

 

This commentary should not be considered a recommendation of the financial attractiveness as an investment of any of the companies mentioned.

 

This material must be preceded or accompanied by a prospectus. Please read it carefully before investing.

 

DSIL Investment Services LLC, Distributor. 10/07