<PAGE> 1
LETTER TO SHAREHOLDERS
- -------------------------------------------------------------------------------
August 3, 1998
Dear Shareholders:
Effective April, 1998 Tom Seay joined Gradison-McDonald Asset Management to
assume portfolio management responsibility for the Government Income Fund. Tom
brings to our firm more than seventeen years of investment experience. Prior to
joining our firm, Tom spent eleven years at Lexington Global Asset Managers,
where he was responsible for the active management of all institutional fixed
income accounts. A cum laude graduate of the University of Denver, Tom holds an
MBA from the Colgate Darden Graduate School of Business at the University of
Virginia. Gradison is pleased to welcome Tom to the firm.
/s/ Bradley E. Turner
Bradley E. Turner
President
During the first half of 1998, the investment environment has been dominated by
the news out of Asia. The economic troubles of Southeast Asia persisted and the
inability of Japanese leaders to develop a plan to stimulate their economy out
of their recession appears to be slowing global economic growth. In this
environment, foreign investors poured money into the safety of United States
financial assets.
Meanwhile, in the United States the Federal Reserve has signaled that it is
still anxious about the rate of domestic growth, and it remains biased toward
raising short-term rates. Already this year, the U.S. has added over 1.4 million
new jobs. This rate of job creation has led to the lowest level of unemployment
in 28 years (4.5%). The tightness of the labor market is impacting
payroll checks, as average hourly earnings are increasing at their fastest pace
since 1989. More people are working, their salaries are rising and consumer
confidence statistics reveal a populace that is feeling great.
The result of the battle between troubles in Asia versus a strong U.S. economy
is lower interest rates, with 30 year U.S. Treasury bonds at their lowest levels
since issuance began in 1977. Although the Fund's performance kept pace with the
market, longer term funds provided better returns. But with the long bond at a
yield of 5.6%, it does not offer much of an advantage over short-term rates,
which are currently around 5.5%. With longer maturity bonds inherently riskier
than shorter maturity securities, they are not currently providing much
additional reward for that risk. In this environment, we see little incentive to
buy long maturity bonds.
Although we do not believe that potential rewards justify increasing the average
maturity of the Fund, we are not worried that interest rates will rise
significantly over the last half of 1998. Therefore, we are attempting to
increase the earning power of the Fund by increasing the weighting of mortgage
related securities in the portfolio. The changes in the Fund's sector
allocations are as follows:
<TABLE>
<CAPTION>
As of As of
Sector 6/30/98 12/31/97
<S> <C> <C>
U.S. Treasury Obligations 37% 45%
Mortgage-Backed Securities 49% 49%
GNMA Collateralized
Mortgage Obligations 13% 1%
Repurchase Agreement 1% 5%
</TABLE>
- -------------------------------------------------------------------------------
1-800-869-5999 [LOGO]
<PAGE> 2
LETTER TO SHAREHOLDERS CONTINUED
- -------------------------------------------------------------------------------
The increase in the Fund's collateralized mortgage obligations (CMO's) does not
represent an increase in the risk of the Fund. A CMO is a bond backed by a pool
of traditional mortgage pass-through securities, which generally supports
several classes of obligations. The various classes in a CMO represent a broad
range of investment opportunities, from the conservative to the very risky
investment. The CMO's purchased in the Fund are conservative securities that
provide more stable and predictable cash flows than traditional mortgage-backed
securities. Our objective is to own securities that will increase the interest
income earned by the Fund while maintaining its moderate risk profile that
shareholders expect when investing in the Fund.
As always, we thank you for your support and patronage of the Gradison
Government Income Fund.
/s/ Thomas M. Seay
Thomas M. Seay
Senior V.P. & Portfolio Manager
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------------------------------
Periods ended June 30, 1998
<TABLE>
<CAPTION>
10 Years 5 Years 3 Years 1 Year
<S> <C> <C> <C> <C>
Government Income Fund* 7.98 5.90 6.91 8.62
</TABLE>
- -------------------------------------------------------------------------------
*Effective July 7, 1997, the sales charge on purchases of Fund shares was
eliminated. Prior to July 7, 1997 certain qualifying group retirement Fund
purchases were made without a sales charge, as were all purchases representing
reinvestment of dividends. See pages 7 and 10 of the Prospectus. This
performance data does not reflect the deduction of the sales charge which would
reduce the performance illustrated.
The performance quoted above represents past performance. The investment return
and value of an investment in the Fund will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than the original cost. Total
return includes changes in share value and reinvestment of all distributions.
2
<PAGE> 3
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
For a share outstanding throughout each period (Unaudited)
<TABLE>
<CAPTION>
6 Months Year Ended
Ended --------------------------------------------------------------
6/30/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 13.139 $ 12.884 $ 13.214 $ 12.018 $ 13.373 $ 13.327
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .371 .775 .778 .786 .755 .749
Net realized and unrealized gain (loss)
on investments .039 .256 (.340) 1.232 (1.244) .239
-------- -------- -------- -------- -------- --------
TOTAL INCOME (LOSS) FROM INVESTMENT OPERATIONS .410 1.031 .438 2.018 (.489) .988
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.391) (.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 (.391) (.776) (.768) (.822) (.866) (.942)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 13.158 $ 13.139 $ 12.884 $ 13.214 $ 12.018 $ 13.373
======== ======== ======== ======== ======== ========
TOTAL RETURN (1) 3.25%(2) 8.36% 3.51% 17.20% (3.69%) 7.52%
======== ======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $ 159.7 $ 155.1 $ 162.9 $ 185.4 $ 184.0 $ 266.0
Ratio of gross expenses to average net assets (3) .90%(4) .90% .90% .92% -- --
Ratio of net expenses to average net assets .90%(4) .90% .90% .92% .90% .90%
Ratio of net investment income to average
net assets 5.77%(4) 6.04% 6.06% 6.19% 6.03% 5.48%
Portfolio turnover rate 25% 12% 13% 16% 21% 134%
</TABLE>
- -------------------------------------------------------------------------------
(1) Total return is based upon an initial investment purchased without a
sales charge.
(2) Total return represents the actual return over that period and has not
been annualized.
(3) 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.
(4) Annualized.
See accompanying notes to financial statements. 3
<PAGE> 4
GOVERNMENT INCOME FUND
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PAR COUPON
AMOUNT MORTGAGE-BACKED SECURITIES - 48.79% RATE MATURITY VALUE
<S> <C> <C> <C> <C> <C>
$ 8,266,867 Government National Mortgage Association 6.50% 1/15/13-3/15/13 $ 8,349,536
572,625 Government National Mortgage Association 6.55 11/15/13 572,625
17,037,500 Government National Mortgage Association 7.00 4/15/23-9/15/23 17,340,274
17,518,912 Government National Mortgage Association 7.50 4/15/23-3/15/24 18,006,157
13,986,204 Government National Mortgage Association 8.00 7/15/02-7/15/26 14,488,834
8,848,662 Government National Mortgage Association 8.50 4/15/21-3/15/28 9,332,573
2,577,262 Government National Mortgage Association 8.75 4/15/22 2,774,986
1,509,273 Government National Mortgage Association 9.00 1/15/20-8/15/21 1,613,035
2,269,794 Government National Mortgage Association 9.50 10/15/02-6/15/21 2,421,683
2,067,756 Government National Mortgage Association 10.00 5/15/12-6/15/21 2,263,547
----------
TOTAL MORTGAGE-BACKED SECURITIES (COST $76,570,657) 77,163,250
----------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS - 37.19%
<S> <C> <C> <C> <C> <C>
8,000,000 U.S. Treasury Note 6.38 1/15/00 8,095,000
10,000,000 U.S. Treasury Bond 7.50 2/15/05 11,068,750
16,000,000 U.S. Treasury Bond 7.63 2/15/07 17,025,000
10,000,000 U.S. Treasury Bond 7.88 11/15/04 11,228,125
10,000,000 U.S. Treasury Bond 8.75 11/15/08 11,409,375
----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $58,565,625) 58,826,250
----------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS - 13.30%
<S> <C> <C> <C> <C>
3,000,000 Government National Mortgage Association 1998-11 VB 6.50 2/20/11 3,062,344
1,135,000 Government National Mortgage Association 1996-21 J 7.00 7/16/13 1,171,533
5,000,000 Government National Mortgage Association 1997-8 PL 7.00 1/16/25 5,134,375
719,000 Government National Mortgage Association 1995-8 B 7.50 8/20/20 730,122
2,000,000 Government National Mortgage Association 1996-20 C 7.50 5/16/23 2,069,375
3,000,000 Government National Mortgage Association 1995-7 CQ 7.50 9/16/25 3,150,938
616,748 Government National Mortgage Association 1994-6 L 7.99 8/16/99 622,434
1,600,000 Government National Mortgage Association 1998-13 DB 9.00 4/20/22 1,729,500
3,150,496 Government National Mortgage Association 1998-12 GA 9.00 12/20/23 3,371,523
----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $20,951,465) 21,042,144
----------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST
AMOUNT REPURCHASE AGREEMENT - 0.72% RATE (1)
<S> <C> <C> <C>
1,130,000 First Union Capital, dated 6/30/98, collateral:
U.S. Treasury Note 57/8% due 3/31/99, market value
$1,165,605 (repurchase proceeds: $1,130,178.92)
(COST $1,130,000) 5.70 7/1/98 1,130,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST $157,217,747) - 100% $158,161,644
============
</TABLE>
- -------------------------------------------------------------------------------
(1) For the Repurchase Agreement, the rate shown reflects the actual rate of
return to the Fund.
4 See accompanying notes to financial statements.
<PAGE> 5
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
6/30/98
<S> <C>
ASSETS
Investments in securities, at value (Note 1)
(Cost $157,217,747) $158,161,644
Interest receivable 1,793,637
Receivable for Fund shares sold 203,599
Prepaid expenses and other assets 26,499
Cash 9,468
------------
TOTAL ASSETS 160,194,847
------------
LIABILITIES
Payable for Fund shares redeemed 272,657
Dividend payable 126,589
Accrued investment advisory fee (Note 2) 65,669
Other accrued expenses payable to adviser (Note 2) 38,789
Other accrued expenses and liabilities 18,988
------------
TOTAL LIABILITIES 522,692
------------
NET ASSETS $159,672,155
============
NET ASSETS CONSIST OF:
Aggregate paid-in capital $164,831,779
Distributions in excess of net investment income
(Note 1) (317,914)
Accumulated net realized loss (5,785,607)
Net unrealized appreciation of investments 943,897
------------
NET ASSETS $159,672,155
============
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares authorized) 12,134,679
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE (Note 1) $13.16
============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements. 5
<PAGE> 6
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
6 Months Ended 6/30/98
<S> <C> <C>
INTEREST INCOME $5,222,888
EXPENSES:
Investment advisory fees (Note 2) $ 392,046
Distribution (Note 2) 192,416
Personnel costs (Note 2) 32,688
Data processing fees (Note 2) 19,522
Professional fees 17,082
Custodian fees (Note 1) 13,276
Registration fees 11,971
Trustees' fees (Note 2) 10,953
Printing 4,714
Postage and mailing 2,863
ICI dues 2,566
Insurance 706
Other 5,717
---------
GROSS EXPENSES 706,520
LESS EARNINGS CREDITS ON CASH BALANCES (Note 1) (1,610)
---------
NET EXPENSES 704,910
---------
NET INVESTMENT INCOME 4,517,978
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 210,307
Net change in unrealized appreciation of
investments 273,060
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 483,367
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,001,345
=========
- -------------------------------------------------------------------------------
</TABLE>
6 See accompanying notes to financial statements.
<PAGE> 7
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
6 Months Year
Ended Ended
6/30/98 12/31/97
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 4,517,978 $ 9,332,826
Net realized gain (loss) on investments/options 210,307 (61,865)
Net change in unrealized appreciation (depreciation) of
investments 273,060 3,016,012
----------- -----------
Net increase in net assets resulting from operations 5,001,345 12,286,973
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (4,768,142) (9,341,253)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 26,340,362 31,526,924
Net asset value of shares issued in reinvestment of
distributions 3,898,204 7,757,697
Payments for shares redeemed (25,871,222) (50,032,576)
----------- -----------
Net increase (decrease) in net assets from Fund share
transactions 4,367,344 (10,747,955)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,600,547 (7,802,235)
NET ASSETS:
Beginning of period 155,071,608 162,873,843
----------- -----------
End of period (including distributions in excess of net
investment income of ($317,914) and ($67,750),
respectively) (Note 1) $159,672,155 $155,071,608
=========== ===========
NUMBER OF FUND SHARES:
Sold 2,001,953 2,432,514
Issued as distributions to shareholders 296,559 600,948
Redeemed (1,966,061) (3,872,131)
----------- -----------
Net increase (decrease) in shares outstanding 332,451 (838,669)
Outstanding at beginning of period 11,802,228 12,640,897
----------- -----------
Outstanding at end of period 12,134,679 11,802,228
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements. 7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
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.
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 offering and redemption price per share are equal to the net asset value per
share. Effective July 7, 1997 the sales charge on purchases of fund shares was
eliminated.
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 June 30, 1998.
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
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
over-the-counter options where the Fund's ability to successfully extinguish its
obligation is dependent upon the credit standing of the other party.
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 June 30, 1998, the Fund had not committed to the
purchase of any when-issued or delayed delivery securities.
SECURITIES TRANSACTIONS
Securities transactions are accounted for on the trade date (the date the order
to buy or sell is executed).
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.
INVESTMENT INCOME
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 $157,466,933.
For financial reporting purposes, gross unrealized appreciation and gross
unrealized depreciation of securities at June 30, 1998 was $2,027,424 and
$1,083,527, respectively. For tax purposes, gross unrealized appreciation and
gross unrealized depreciation of securities at June 30, 1998 was $1,818,863 and
$1,124,152, 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> 10
NOTES TO FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
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.
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 period ended June 30, 1998, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $61,033,775 and
$37,726,962, respectively. There were no transactions in written options on U.S.
Treasury Notes and Bonds for the period ended June 30, 1998.
10
<PAGE> 11
GRADISON FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Increasingly, MUTUAL funds are the preferred vehicle for starting and building
an investment program. And today, GRADISON is a preferred name in mutual funds
for a GROWING number of investors.
GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
securities.
OHIO TAX-FREE INCOME FUND
An income fund which seeks to provide income exempt from regular Federal income
tax and Ohio state personal income tax.*
ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard & Poor's 500 Index and other large
companies.
GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income and
growth of income.
OPPORTUNITY VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are generally smaller in size than those included in the Standard
& Poor's 500 Index.
INTERNATIONAL FUND
A common stock fund that seeks capital growth by investing in common stocks of
non-United States companies.
MONEY MARKET FUNDS
Gradison offers a full range of taxable and tax-free money market funds.
Prospectuses are available upon request by calling (800) 869-5999 and should be
read carefully before you invest. An investment in the money market funds is
neither insured nor guaranteed by the U.S. Government and there can be no
assurance that they will be able to maintain a stable $1.00 share price. The
return and principal value of an investment in other funds will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than the
original cost. The returns of all funds will fluctuate.
* Investment income may be subject to the federal alternative minimum tax.
Capital gains, if any, are taxable.
<PAGE> 12
GOVERNMENT
INCOME FUND
SEMIANNUAL REPORT
JUNE 30, 1998
Gradison Mutual Funds [LOGO]
580 Walnut Street
Cincinnati, Ohio 45202-3198
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
