<PAGE> 1
Gradison Mutual Funds
580 Walnut Street
GOVERNMENT Cincinnati, Ohio 45202-3198
INCOME FUND
Annual Report
DECEMBER 31, 1997
[GRADISON MUTUAL FUNDS LOGO]
This material is intended for distribution to shareholders of the Gradison
Government Income Fund. It may be distributed to other persons only if it is
preceded or accompanied by a current prospectus of the Gradison Government
Income Fund. McDonald & Company Securities, Inc.--Distributor
<PAGE> 2
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
January 16, 1998
Dear Shareholders:
The year 1997 was an unusual period during which interest rates declined with
only one interruption (February and March), despite an unchanged Federal Reserve
Policy, a progressively tighter labor market, a 20 year low in unemployment, and
record home, car and truck sales. It has been referred to as a "Goldilocks
Scenario" by the media -- an economy which is growing very fast without the
traditional inflation problem. One important aspect of this interest rate
decline, however, was that it was concentrated in long-term securities; so much
so that the yield curve has become very flat, i.e. there is less difference now
between short-term and long-term rates than at the beginning of the year. The
spread (difference in interest rates) between 30 year bonds and 1 year bonds
changed from 1.15% at the beginning of the year to 0.44% at year end.
<TABLE>
<CAPTION>
U.S. TREASURY INTEREST RATES (%'S)
------------------------------------------
12/31/96 12/31/97 CHANGE
<S> <C> <C> <C>
1 year 5.49 5.48 -0.01
5 year 6.21 5.71 -0.50
10 year 6.42 5.74 -0.68
30 year 6.64 5.92 -0.72
30 yr - 1 yr 1.15 0.44 -0.71
- ------------------------------------------------------------------
</TABLE>
The Fund, with its intermediate-term portfolio (4 to 7 years average maturity),
despite having good returns, (see Performance Table) did not have the higher
returns that longer term funds enjoyed. Funds invested in lower quality
securities also achieved higher returns. Your Fund is invested in 100% full
faith and credit U.S. government securities.
The "surprise" in 1997 was the rapidly growing problems in the entire Pacific
Rim economic area which continues as this letter is being written. This area
runs from Australia, up to Japan and onto the Asian continent, including China.
The economic malaise of these countries was the "missing" ingredient that
allowed inflation to be very restrained in the U.S. and in the entire world.
Weaker prices of imports prevented domestic entities from raising prices,
because if they did, they would very quickly lose their business to foreign
imports. Additionally, the reduced level of activity in the Pacific Rim allowed
commodity prices to decline on a global basis.
Where do we go from here? The answer, we believe, will depend on the amount of
aid given to this economically troubled area. No help would cause a global
slow-down as banks worldwide were forced to curtail lending as a result of loan
defaults in this area. Too much help would result in allowing the area to
continue on an unstable inflationary path. It is the right amount of help that
is needed, and that will take time and some experimentation to determine. We
believe that intermediate-term rates will decline if the "rescue" fails or
long-term rates will rise if it succeeds. We have attempted to position the Fund
in accordance with this view.
As always, we thank you for your support and patronage of the Gradison
Government Income Fund.
Sincerely,
/s/ Michael J. Link
Michael J. Link
Exec. V.P & Portfolio Manager
<PAGE> 3
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF YEAR $ 12.884 $ 13.214 $ 12.018 $ 13.373 $ 13.327
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .775 .778 .786 .755 .749
Net realized and unrealized gain (loss) on investments .256 (.340) 1.232 (1.244) .239
-------- -------- -------- -------- --------
TOTAL INCOME (LOSS) FROM INVESTMENT OPERATIONS 1.031 .438 2.018 (.489) .988
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.776) (.768) (.787) (.779) (.738)
Dividends in excess of net investment income -- -- -- (.013) --
Distributions from realized capital gains -- -- -- (.053) (.204)
Distributions from paid-in capital -- -- (.035) (.021) --
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (.776) (.768) (.822) (.866) (.942)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR $ 13.139 $ 12.884 $ 13.214 $ 12.018 $ 13.373
======== ======== ======== ======== ========
TOTAL RETURN 8.36% 3.51% 17.20% (3.69%) 7.52%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (in millions) $ 155.1 $ 162.9 $ 185.4 $ 184.0 $ 266.0
Ratio of gross expenses to average net assets (1) .90% .90% .92% -- --
Ratio of net expenses to average net assets .90% .90% .92% .90% .90%
Ratio of net investment income to average net assets 6.04% 6.06% 6.19% 6.03% 5.48%
Portfolio turnover rate 12% 13% 16% 21% 134%
</TABLE>
- --------------------------------------------------------------------------------
(1) Effective December 31, 1995, this ratio reflects gross expenses before
reduction for earnings credits on cash balances; such reductions are
included in the ratio of net expenses.
See accompanying notes to financial statements.
2
<PAGE> 4
GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
December 31, 1997
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
January 1, 1988 to December 31, 1997
<TABLE>
<CAPTION>
TOTAL RETURN PERIODS ENDED DECEMBER 31, 1997
10 YEARS 5 YEARS 1 YEAR
---------------------------
Government Income Fund 8.05% 6.37% 8.36%
1/1/88 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GRADISON GOVERNMENT INCOME FUND $10,000
LEHMAN BROTHERS GNMA INDEX $10,000
LEHMAN BROTHERS AGGREGATE BOND INDEX $10,000
LEHMAN BROTHERS TREASURY INDEX $10,000
<Caption
12/31/96 12/31/97
--------------------
<S> <C> <C>
GRADISON GOVERNMENT INCOME FUND $21,698
LEHMAN BROTHERS GNMA INDEX $24,625
LEHMAN BROTHERS AGGREGATE BOND INDEX $22,380
LEHMAN BROTHERS TREASURY INDEX $23,395
</TABLE>
Effective July 7, 1997, the
sales charge on purchases of
Fund shares was eliminated. This
performance data does not
reflect the deduction of the
sales charge which would reduce
the performance illustrated.
Past performance is not
predictive of future
performance.
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PAR COUPON
AMOUNT MORTGAGE-BACKED SECURITIES - 49.13% RATE MATURITY VALUE
<S> <C> <C> <C> <C>
$ 700,776 Government National Mortgage Association 6.55% 11/15/13 $ 697,710
18,033,427 Government National Mortgage Association 7.00 4/15/23-9/15/23 18,174,313
18,870,532 Government National Mortgage Association 7.50 4/15/23-3/15/24 19,324,604
17,253,243 Government National Mortgage Association 8.00 7/15/02-7/15/26 17,884,064
7,254,960 Government National Mortgage Association 8.50 4/15/21-11/15/22 7,617,708
2,592,380 Government National Mortgage Association 8.75 4/15/22 2,787,214
1,829,866 Government National Mortgage Association 9.00 1/15/20-8/15/21 1,958,528
2,575,244 Government National Mortgage Association 9.50 10/15/02-6/15/21 2,769,030
2,324,614 Government National Mortgage Association 10.00 5/15/12-6/15/21 2,557,075
----------
Total Mortgage-Backed Securities (Cost $73,289,246) 73,770,246
----------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
December 31, 1997
PORTFOLIO OF INVESTMENTS Continued
<TABLE>
<CAPTION>
PAR COUPON
AMOUNT U.S. TREASURY OBLIGATIONS - 45.10% RATE MATURITY VALUE
<S> <C> <C> <C> <C>
$10,000,000 U.S. Treasury Bond 5.88% 11/15/05 $ 10,050,000
20,000,000 U.S. Treasury Note 6.25 2/15/03 20,443,750
10,000,000 U.S. Treasury Note 6.38 1/15/00 10,131,250
5,000,000 U.S. Treasury Bond 6.38 3/31/01 5,093,750
10,000,000 U.S. Treasury Bond 7.63 2/15/07 10,612,500
10,000,000 U.S. Treasury Bond 8.75 11/15/08 11,381,250
----------
Total U.S. Treasury Obligations (Cost $67,517,734) 67,712,500
----------
- -------------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.59%
876,310 Government National Mortgage Association GNR-94-6-L (Cost $892,330) 7.99 8/16/99 887,401
----------
- -------------------------------------------------------------------------------------------------------------------------------
FACE INTEREST
AMOUNT REPURCHASE AGREEMENT - 5.18% RATE (1)
7,770,000 First Chicago Capital, dated 12/31/97, collateral: U.S. Treasury
Note 6%; due 09/30/98, market value $4,243,662 and U.S. Treasury
Note 5.875%; due 10/31/98, market value $3,685,641 (repurchase
proceeds: $7,772,797) (Cost $7,770,000) 6.48% 1/2/98 7,770,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST $149,469,310) - 100% $150,140,147
============
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</TABLE>
(1) For the Repurchase Agreement, the rate shown reflects the actual rate of
return to the Fund.
See accompanying notes to financial statements.
4
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12/31/97
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $149,469,310) $150,140,147
Receivable for investments sold 4,053,877
Interest receivable 1,823,958
Receivable for Fund shares sold 61,614
Cash 9,318
Prepaid expenses and other assets 47,593
-----------
TOTAL ASSETS 156,136,507
-----------
LIABILITIES
Payable for Fund shares redeemed 869,377
Accrued investment advisory fee (Note 2) 65,571
Dividend payable 51,973
Other accrued expenses payable to adviser (Note 2) 37,883
Other accrued expenses and liabilities 40,095
-----------
TOTAL LIABILITIES 1,064,899
-----------
NET ASSETS $155,071,608
===========
NET ASSETS CONSIST OF:
Aggregate paid-in capital $160,464,435
Distributions in excess of net investment income (Note 1) (67,750)
Accumulated net realized loss (5,995,914)
Net unrealized appreciation of investments 670,837
-----------
NET ASSETS $155,071,608
===========
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares authorized) 11,802,228
===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (NOTE 1) $13.14
===========
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 7
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED 12/31/97
<S> <C> <C>
INTEREST INCOME $10,729,617
EXPENSES:
Investment advisory fees (Note 2) $ 773,094
Distribution (Note 2) 380,694
Personnel costs (Note 2) 53,667
Data processing fees (Note 2) 40,302
Professional fees 32,942
Custodian fees (Note 1) 25,250
Trustees' fees (Note 2) 22,623
Registration fees 19,668
Postage and mailing 17,372
Printing 10,285
ICI dues 6,848
Insurance 4,255
Other 12,021
---------
GROSS EXPENSES 1,399,021
LESS EARNINGS CREDITS ON CASH BALANCES (NOTE 1) (2,230)
---------
NET EXPENSES 1,396,791
----------
NET INVESTMENT INCOME 9,332,826
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (61,865)
Net change in unrealized appreciation/depreciation of investments 3,016,012
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,954,147
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,286,973
==========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------
12/31/97 12/31/96
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 9,332,826 $ 10,442,430
Net realized loss on investments/options (61,865) (536,544)
Net change in unrealized appreciation/depreciation of investments 3,016,012 (4,448,606)
----------- -----------
Net increase in net assets resulting from operations 12,286,973 5,457,280
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (9,341,253) (10,293,237)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 31,526,924 28,763,172
Net asset value of shares issued in reinvestment of distributions 7,757,697 8,597,718
Payments for Fund shares redeemed (50,032,576) (55,084,613)
----------- -----------
Net decrease in net assets from Fund share transactions (10,747,955) (17,723,723)
----------- -----------
TOTAL DECREASE IN NET ASSETS (7,802,235) (22,559,680)
NET ASSETS:
Beginning of year 162,873,843 185,433,523
----------- -----------
End of year (including distributions in excess of net investment income of
($67,750) and ($59,323), respectively) (Note 1) $155,071,608 $162,873,843
=========== ===========
NUMBER OF FUND SHARES:
Sold 2,432,514 2,230,737
Issued in reinvestment of distributions to shareholders 600,948 670,451
Redeemed (3,872,131) (4,293,141)
----------- -----------
Net decrease in shares outstanding (838,669) (1,391,953)
Outstanding at beginning of year 12,640,897 14,032,850
----------- -----------
Outstanding at end of year 11,802,228 12,640,897
=========== ===========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Gradison Custodian Trust (the "Trust") is registered under the Investment
Company Act of 1940 (the Act), as amended, as a diversified, open-end management
investment company. The Trust was created under Ohio law by a Declaration of
Trust dated June 3, 1987; it commenced investment operations and the public
offering of its shares on September 16, 1987. There is currently one series, the
Gradison Government Income Fund (the Fund). The Fund's investment objective is
to seek high current income through investment in U.S. Government obligations
and obligations of agencies or instrumentalities of the U.S. Government.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION
Portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest bid price. Debt securities maturing within 60
days are valued at amortized cost, which approximates market value. Portfolio
securities for which market quotations are not readily available are valued at
their fair value as determined by management using procedures approved by the
Board of Trustees.
Repurchase agreements, which are collateralized by U.S. Government obligations,
are valued at cost which, together with accrued interest, approximates market.
Collateral for repurchase agreements is held in safekeeping in the customer-only
account of the Fund's custodian. At the time the Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying security,
including accrued interest, will be equal to or exceed the face amount of the
repurchase agreement. In the event of a bankruptcy or other default of the
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying security and losses. These losses would not exceed an
amount equal to the difference between the liquidating value of the underlying
security and the face amount of the repurchase agreement and accrued interest.
To minimize the possibility of loss, the Fund enters into repurchase agreements
only with selected domestic banks and securities dealers which the Fund's
investment adviser believes present minimal credit risk. Refer to the Fund's
Portfolio of Investments for the face amount of repurchase agreements and
repurchase proceeds as of December 31, 1997.
OPTION ACCOUNTING PRINCIPLES
When the Fund writes a call option, an amount equal to the premium received by
the Fund is recorded as an asset and as an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current market
value of the written option. The current market value of a traded option is the
last ask price on the principal exchange on which such option is traded. If the
option expires on its stipulated expiration date or if the Fund enters into a
closing purchase transaction, the Fund will realize a gain or loss without
regard to any unrealized gain or loss on the underlying security and liability
related to such option will be extinguished.
The risk in writing a call option on a security which the Fund owns is that the
Fund limits the profit potential from an increase in the market price of the
security. The Fund may also be subject to the additional risk of not being able
to enter into a closing transaction if a liquid secondary market does not exist.
The Fund also writes over-the-counter options where the Fund's ability to
successfully extinguish its obligation is dependent upon the credit standing of
the other party.
8
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
December 31, 1997
SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
When the Fund purchases securities on a when-issued or delayed delivery basis,
the transaction may be entered into a month or more before delivery and payment
are made. Such securities are subject to market fluctuation during this period.
In the event that the seller fails to deliver the securities, the Fund could
experience a loss to the extent of any appreciation, in the price of the
securities.
The Fund will maintain, in a segregated account with its custodian, cash or U.S.
Government securities having an aggregate value at least equal to the amount of
such purchase commitments. At December 31, 1997, the Fund had not committed to
the purchase of any when-issued or delayed delivery securities.
FUND SHARE VALUATION
The net asset value per share is computed by dividing the net asset value of the
Fund (total assets less total liabilities) by the number of shares outstanding.
The redemption price per share is equal to the net asset value per share.
Effective July 7, 1997 the sales charge on purchases of fund shares was
eliminated.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends arising from net investment income are declared daily and paid
monthly. Distributions of net realized short-term capital gains, if any, are
declared and paid monthly on all shares of record on established record dates.
Net realized long-term capital gains, if any, are distributed at least annually.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for on the trade date (the date the order
to buy or sell is executed). Interest income is accrued as earned. Gains and
losses on sales of investments are calculated on the identified cost basis for
financial reporting and tax purposes.
EXPENSE OFFSET ARRANGEMENT
The Fund has an arrangement with its custodian bank whereby the custodian's fees
are reduced by credits earned on the Fund's cash on deposit with the bank. This
deposit arrangement is an alternative to overnight investments. The credits are
shown as a reduction of expenses on the Statement of Operations.
TAXES
It is the Fund's policy to comply with the provisions of the Internal Revenue
Code applicable to regulated investment companies. As provided therein, in any
fiscal year in which the Fund so qualifies, and distributes at least 90% of its
taxable net income, the Fund will be relieved of federal income tax on the
income distributed. Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year, at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains, if any (earned during
the twelve months ended October 31), plus
undistributed amounts from prior years.
The tax basis of investments is $149,718,496.
For financial reporting purposes, gross unrealized appreciation and gross
unrealized depreciation of securities at December 31, 1997 was $2,278,036 and
$1,607,199, respectively. For tax purposes, gross unrealized appreciation and
gross unrealized depreciation of securities at December 31, 1997 was $2,069,475
and $1,647,824, respectively.
As of December 31, 1997, the Fund had a capital loss carryforward for Federal
income tax purposes of approximately $5,948,000 which may be utilized to offset
future net realized capital gains through December 31, 2004 prior to
distributing such gains to shareholders.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 2 -- TRANSACTIONS WITH AFFILIATES
The Fund's investments are managed, subject to the general supervision and
control of the Fund's Board of Trustees, by the Gradison Division of McDonald &
Company Securities, Inc. (Gradison), a registered investment adviser and
securities dealer, pursuant to the terms of an Investment Advisory Agreement
(the Agreement). Under the terms of the Agreement, the Fund pays Gradison a fee
computed and accrued daily and paid monthly based upon the Fund's daily net
assets at the annual rate of .50%.
Under the terms of the Agreement, the Fund reimburses Gradison for the cost of
furnishing personnel to perform shareholder and certain other services for the
Fund. The Agreement also provides that Gradison bear the costs of salaries and
related expenses of executive officers of the Fund who are necessary for the
management and operations of the Fund. In addition, Gradison bears the costs of
preparing, printing and mailing sales literature and other advertising
materials, and compensates the Fund's trustees who are affiliated with Gradison.
All expenses not specifically assumed by Gradison are borne by the Fund.
Under the terms of a Data Processing Agreement between the Trust and Gradison,
the Fund pays Gradison a monthly fee at an annual rate of $8.25 per shareholder
non-zero balance account for data processing services provided to the Fund.
In accordance with the terms of a Distribution Service Plan adopted under Rule
12b-1 of the Act, the Fund pays Gradison a distribution service fee at an annual
rate of .25% of average daily net assets.
During the year ended December 31, 1997, Gradison received sales charges
aggregating $30,601 on sales of shares of the Fund.
The officers of the Trust are also officers of McDonald & Company Securities,
Inc.
Each trustee of the Trust who is not affiliated with Gradison receives fees from
the Trust for services as a trustee. The amounts of such fees for each trustee
are as follows: (a) an annual fee of $3,500 payable in quarterly installments
for service during each fiscal quarter and (b) $500 for each Board of Trustees
or committee meeting attended.
NOTE 3 -- SUMMARY OF SECURITIES TRANSACTIONS
For the year ended December 31, 1997, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $17,980,141 and
$25,934,039, respectively. There were no transactions in written options on U.S.
Treasury Notes and Bonds for the year ended December 31, 1997.
10
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
ARTHUR
ANDERSEN
To the Shareholders and Board of Trustees
of the Gradison Government Income Fund
of the Gradison Custodian Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison Government Income Fund of the Gradison Custodian Trust (an Ohio
business trust), including the portfolio of investments, as of December 31,
1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for the two years then ended and the
financial highlights for the five years then ended. These financial statements
and financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison Government Income Fund of the Gradison Custodian Trust as of December
31, 1997, the results of its operations for the year then ended, the changes in
its net assets for each of the two years then ended, and the financial
highlights for the five years then ended, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Cincinnati,Ohio,
January 30, 1998
11
