GRADISON MCDONALD MUNICIPAL CUSTODIAN TRUST, 485BPOS, 1995-10-30

GRADISON MCDONALD MUNICIPAL CUSTODIAN TRUST
485BPOS, 1995-10-30

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<PAGE> 1
As filed with the Securities and Exchange Commission on October __, 1995

1933 Act Registration No. 33-48613 1940 Act File No. 811-6705
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. ( )

Post-Effective Amendment No. 6 (X)

and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )

Amendment No. 9 (X)

___________
G R A D I S O N - M C D O N A L D M U N I C I P A L
C U S T O D I A N T R U S T
(Exact Name of Registrant as Specified in Declaration of Trust)

580 Walnut Street, Cincinnati, Ohio 45202
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (513) 579-5700
Copy to:
Richard M. Wachterman Bradley J. Turner
Gradison-McDonald Municipal Gradison-McDonald Municipal
Custodian Trust Custodian Trust
580 Walnut Street 580 Walnut Street
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
Name and Address of Agent for Service)

It is proposed that this filing will become effective (check appropriate box):
_____ immediately upon filing pursuant to paragraph (b)
of Rule 485.

X on November 1, 1995 pursuant to paragraph (b) of
----- Rule 485.

_____ 60 days after filing pursuant to paragraph (a)
of Rule 485.
_____ on ________ 1995 pursuant to paragraph (a) of Rule
485
___________

Registrant has heretofore registered an indefinite number of shares of
beneficial interest, without par value, pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice was
filed on August 23, 1995.

================================================================================
<PAGE> 2
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST

CONTENTS OF POST-EFFECTIVE AMENDMENT

The post-effective amendment to the registration statement of Gradison-McDonald
Municipal Custodian Trust contains the following documents:

Facing Sheet

Contents of Post-Effective Amendment

Cross-Reference Sheet

Part A - Prospectuses

- Gradison-McDonald Ohio Tax-Free Income Fund
- Gradison-McDonald Intermediate Municipal Income Fund

Part B - Statement of Additional Information

Gradison-McDonald Ohio Tax-Free Income Fund
Gradison-McDonald Intermediate Municipal Income Fund

Part C - Other Information

Signature Page
<PAGE> 3
<TABLE>
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST

Cross-Reference Sheet

Pursuant to Item 501(b) of Regulation S-K
Under the Securities Act of 1933

<CAPTION>
Form N-1A Location in
Item Number Prospectus
- ----------- ----------

<S> <C>
1. Cover Page . . . . . . . . . . . . . .Cover Page of Prospectus
2. Synopsis . . . . . . . . . . . . . . .Expense Summary
3. Condensed Financial Information . . .Performance Calculations
4. General Description of Registrant . .Investment Objective and
Policies; Hedging; Quality
(Ratings); Maturity;
Concentration; Other Investment
Restrictions; Ohio Economic
Considerations; General
Information
5. Management of Fund . . . . . . . . . .Management of the Trust,
Distributions; Cover Page of the
Prospectus
6. Capital Stock and Other Securities .Cover Page of Prospectus;
Distributions; Taxes; General
Information
7. Purchase of Securities Being Offered .Purchases and Redemptions; Net
Asset Value; Optional Shareholder
Services; Distribution Plan;
Management of the Fund
8. Redemption or Repurchase . . . . . . .Purchases and Redemptions
9. Pending Legal Proceedings . . . . . .Not Applicable

Location in Statement
of Additional Information
-------------------------

10. Cover Page . . . . . . . . . . . .. Cover Page
11. Table of Contents . . . . . . . . . .Table of Contents
12. General Information and History . . Description of the Trust
13. Investment Objectives and Policies . .Investment Restrictions; Factors
Relating to Ohio; Portfolio
Transactions
14. Management of the Fund . . . . . . . .Trustees and Officers of the
Trust
15. Control Persons and Principal
Holders of Securities . . . . . . . . . *
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
16. Investment Advisory and Other
Services . . . . .. . . . . . . . Investment Adviser; Custodian
17. Brokerage Allocation and Other
Practices . . . . . . . . . . . . Portfolio Transactions
18. Capital Stock and Other Securities Description of the Trust
19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . .Purchase of Shares; Letters of
Intent; Redemption of Shares; Net
Asset Value
20. Tax Status . . . . . . . . . . . . Taxes
21. Underwriters . . . . . . . . . . . Investment Adviser
22. Calculation of Performance Data
. . . . . . . . . . . Performance Calculations
(Prospectus)
23. Financial Statements . . . . . . . . Financial Statements and
Accountants
</TABLE>
<PAGE> 5

OHIO TAX-FREE
INCOME FUND

GRADISON-MCDONALD

Duotone of dollhouse with house
blueprints, hammer, postcards
and a piece of iron fencing.
Tagline is Your Future Starts
Today.

To find out more about the

GRADISON-MCDONALD

OHIO TAX-FREE

INCOME FUND

or other funds in the family

CALL

1-800-869-5999

OR WRITE

Gradison-McDonald Mutual Funds

580 Walnut Street

Cincinnati, Ohio 45202

GRADISON-MCDONALD

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.
McDonald & Company Securities, Inc.
- - Distributor

P R O S P E C T U S

NOVEMBER 1, 1995
----------------

<PAGE> 6
OHIO TAX-FREE
INCOME FUND

SIGNIFICANT FEATURES

Professional Management

Portfolio Diversification

Dividends Paid in Additional Shares or Cash

Daily Liquidity at Net Asset Value

$1,000 Minimum Initial Investment

$50 Minimum Additional Investment

LIKE ALL MUTUAL FUNDS, THESE

SECURITIES HAVE NOT BEEN APPROVED OR

DISAPPROVED BY THE SECURITIES AND

EXCHANGE COMMISSION OR ANY STATE

SECURITIES COMMISSION NOR HAS THE

SECURITIES AND EXCHANGE COMMISSION

OR ANY STATE SECURITIES COMMISSION

PASSED UPON THE ACCURACY OR

ADEQUACY OF THIS PROSPECTUS. ANY

REPRESENTATION TO THE CONTRARY IS A

CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995

A MUNICIPAL BOND FUND WITH DOUBLE
TAX-FREE BENEFITS TO OHIO INVESTORS

The Gradison-McDonald Ohio Tax-Free Income Fund ("Fund") is a diversified
open-end management investment company which seeks to provide as high a level
of after-tax current income exempt from Federal income tax and Ohio state
personal income tax as is consistent with preservation of capital by investing
primarily in municipal securities. McDonald & Company Securities, Inc.
("McDonald" or the "Adviser") is the investment adviser and principal
underwriter for the Fund. The Gradison Division of McDonald ("Gradison") acts
as transfer agent of the Fund. The Fund is a series of the Gradison-McDonald
Municipal Custodian Trust.

This Prospectus is designed to provide you with information that you should
know before investing and should be retained for future reference. A Statement
of Additional Information for the Fund, dated November 1, 1995 has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. This Statement is available upon request without charge from the
Fund at the address shown on the cover of this Prospectus or by calling the
phone numbers provided below.

For all information (including purchases, redemptions, and most recent
yield), call 579-5700 from Cincinnati, Ohio or 1-800-869-5999.

Graphic
of man
on the
phone
1 - 8 0 0 - 8 6 9 - 5 9 9 9

<PAGE> 7

TABLE OF CONTENTS

<TABLE>
<S> <C>
Expense Summary 2
Financial Highlights 3
Investment Objective 4

Risk Factors and For Whom the Fund May
Be Appropriate 4

Investment Policies 4
Ohio Economic Considerations 8
Purchases and Redemptions 9
Net Asset Value 11
Optional Shareholder Services 12
Distributions 12
Taxes 12
General Information 13
Management of the Fund 13
Distribution Service Plan 14
Performance Calculations 14
</TABLE>

EXPENSE SUMMARY

SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge on purchases 2.00%
------
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees .50%
12b-1 Fees .25%

Other Expenses .22%
------
TOTAL FUND OPERATING EXPENSES .97%
======

</TABLE>

The purpose of the preceding table is to assist
investors in understanding the various costs and
expenses that an investor in the Fund will bear
directly and indirectly. (For more information
about Fund expenses, see "Purchases and
Redemptions," "Distribution Service Plan," and
"Management of the Fund.")

Example: You would pay the following expenses
on a $1,000 investment assuming a 5% annual
return* and redemption at the end of each period:

<TABLE>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years

$30 $50 $73 $137
</TABLE>

*The 5% annual return is a standardized rate pre-
scribed for use by all mutual funds for the purpose
of this example and does not represent the past or
future return of the Fund.

The example should not be considered a repre-
sentation of past or future expenses. Actual
expenses may be greater or less than those
shown.

2
<PAGE> 8

FINANCIAL HIGHLILGHTS

The table below summarizes the financial highlights of the Fund's
operations. The information is expressed in terms of a single share
outstanding throughout the period and has been audited by Arthur Anderson LLP,
independent public accountants, whose unqualified report appears in the
Statement of Additional Information.

<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED 11 MONTHS ENDED SEPTEMBER 18, 1992
JUNE 30, 1995 JUNE 30, 1994(l) TO JULY 31, 1993 (2)
<S> <C> <C> <C>
Net asset value at beginning of period $ 12.466 $ 13.316 $ 12.500
-------- -------- --------
Income from investment operations:
Net investment income .661 .593 .599
Net realized and unrealized gain (loss) on investments .308 (.743) .813
-------- -------- --------
Total income (loss) from investment operations .969 (.150) 1.412
-------- -------- --------

Distributions to shareholders:
Dividends from net investment income (.662) (.594) (.596)
Distributions from realized capital gains -- (.106) --
-------- -------- --------
Total distributions to shareholders (.662) (.700) (.596)
-------- -------- --------

Net asset value at end of period $ 12.773 $ 12.466 $ 13.316
======== ======== ========

Total return (3) 8.00% (1.27%) 11.56%
======== ======== ========

Ratios/Supplemental data:
Net assets at end of period (in millions) $ 70.0 $ 77.6 $ 69.6
Ratios net of expenses waived by the adviser:
Ratio of expenses to average net assets .97% .90% (4)(5) .75% (4)(5)
Ratio of net investment income to average net assests 5.26% 4.94% (4)(5) 5.25% (4)(5)
Ratios assuming no adviser waiver of expenses:
Ratio of expenses to average net assets .97% .99% (4)(5) 1.14% (4)(5)
Ratio of net investment income to average net assets 5.26% 4.85% (4)(5) 4.86% (4)(5)
Portfolio turnover rate 80.19% 55.84% 45.04%
</TABLE>

(1) The Fund changed its fiscal year end to June 30, effective with
June 30, 1994, annual report.
(2) No income was earned or expenses incurred from the date the initial shares
were purchased by the adviser (August 21, 1992) through the date
of public offering (September 18, 1992).
(3) Total returns are based upon an initial investment purchased without the
applicable sales charge, represent the actual returns over those
periods, and have not been annualized.
(4) The adviser absorbed expenses of the Fund through waiver of a portion of
the investment advisory fee.
(5) Annualized.

Graphic
of man
on the 1-800-869-5999
phone

<PAGE> 9
INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide as high a level of after-tax
current income as is consistent with preservation of capital through invest-
ment primarily in obligations the interest from which is exempt from Federal
income taxation and from Ohio state personal income taxation. There can be no
assurance that the objective of the Fund will be achieved.

RISK FACTORS AND FOR WHOM
THE FUND MAY BE APPROPRIATE

The net asset value and yield of the Fund's shares will fluctuate depending on
market conditions and other factors, with the value of shares normally
fluctuating inversely with changes in, interest rates. There are risks
associated with investment in municipal securities, options, and financial
futures transactions, including changes by rating services of the rating of
portfolio securities and in the ability of issuers to make payment of principal
and interest. See "Investment Policies" at pages 4-8 of this Prospectus.
There can be no assurance that the investment objective of the Fund will be
achieved.

The Fund may be appropriate for investors seeking income free of regular
Federal income tax and Ohio income tax who can accept the fluctuations in the
value of Fund shares inherent in investment in long-term debt securities. The
Fund focuses on longer term investment grade Ohio municipal securities. The
Fund has a higher risk level and yield/return potential than fixed income
investments of shorter maturity, and/or higher grade securities and may have
a higher risk level than investments in more diversified municipal securities.
The Fund has a lower risk level and yield/return potential than fixed
income investments with lower grade securities and as compared to equity
investments.

INVESTMENT POLICIES

The Fund normally invests substantially all (at least 80%) of the value of its
net assets in securities, the interest from which is exempt from Federal income
tax and Ohio state personal income tax and which is not subject to Federal
alternative minimum taxation ("AMT"). Although the Fund does not antici-
pate that it will ordinarily invest in securities subject to Federal income
tax or the Ohio personal income tax, it may do so on a temporary basis when it
is considered necessary because of the unavailability of Federal or Ohio
tax-free securities. From the commencement of its operations (September 18,
1992) through June 30, 1995, 100% of the Fund's income dividends were free of
Federal income and Ohio personal income taxes. Investment in securities,
interest from which is subject to AMT, normally will not exceed 20% of the value
of the net assets of the Fund. During the most recent fiscal year ending June
30, 1995, 9.3% of the Fund's income dividends were subject to AMT. At times,
the Fund's trustees or the Adviser may determine that conditions in the markets
for tax-exempt securities make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Fund may invest more than 20% of its assets in investments subject to Federal
income tax, Ohio personal income tax, or AMT for temporary defensive purposes
to reduce fluctuations in the value of the Fund's assets. The investment
objective of the Fund and the policy set forth in the first sentence of this
paragraph cannot be changed without the approval of a "majority of the
outstanding voting securities" of the Fund as defined in the Investment Company
Act of 1940 (the "1940 Act"). See "Description of the Trust" in the Statement
of Additional Information.

The Fund invests in municipal bonds issued by or on behalf of a state,
territory or possession of the U.S. and their political subdivisions, agencies
and instrumentalities. Municipal bonds are generally issued to finance public
works such as airports, bridges, highways, schools and housing. Municipal bonds
are also used to repay outstanding obligations, to raise funds for general
operating expenses and to make loans to other public institutions and
facilities. Certain types of "private activity" municipal bonds are issued to
obtain funding for privately operated facililties. There are two general
categories of municipal bonds: general obligation and revenue. General
obligation bonds are backed by the taxing power of the issuing municipality.
Revenue

<PAGE> 10
bonds are backed by the revenue of a project or facility. Payment of
principal and interest on such bonds is dependent solely on the revenue
generated by the facility financed by the bond or other specified sources of
revenue or collateral. Private activity bonds are typically one type of
revenue bond.

Interest from obligations of the governments of the U.S. Virgin Islands, Puerto
Rico, and Guam ("Territorial Obligations") is exempt from Ohio personal income
taxation as well as Federal income taxation. The Fund will not invest more than
5% of its net assets in the obligations of each of the Virgin Islands, Puerto
Rico and Guam.

The Fund may also invest in short-term tax-exempt securities, usually for
temporary purposes. Short-term tax-exempt securities are generally issued as
interim financing in anticipation of tax collections, revenue receipts or bond
sales to finance public purposes. From time to time, the Fund may also invest
up to 10% of its assets in tax-exempt mutual funds, including tax-exempt money
market funds, which have investment criteria equal to or higher than those of
the Fund, subject to the requirements of applicable law. Such investments will
result in shareholders, in effect, paying duplicate or multiple fees, since
such mutual funds incur expenses similar to those of the Fund. The 1940 Act
limits the Fund's investment in any other mutual fund to a maximum of 3% of
the outstanding voting stock of that mutual fund and an amount which may not
represent more than 5% of the total assets of the Fund. The Adviser will only
invest in such funds when it believes that the yields on such funds are
advantageous.

The Fund may invest in participations in lease obligations or installment
purchase contract obligations of municipal authorities or entities ("Municipal
Leases"). Certain Municipal Leases contain "nonappropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Although nonappropriation Municipal Leases are secured by
the leased property, disposition of the property in the event of foreclosure
might prove difficult. Nonappropriation Municipal Leases may present
special risks because the municipality's obligation to make future lease or
installment payments depends on money being appropriated in the future. The
Fund will limit its investment in nonappropriation leases to a maximum of 10%
of its total assets. The Fund invests in such leases according to guidelines
of the Fund as set forth in the "Municipal Leases" section of the Statement of
Additional Information.

With respect to unrated Municipal Leases, credit quality will be determined by
the Adviser (pursuant to procedures established by the Board of Trustees
("Board"), and subject to review by the Board) on an ongoing basis, including an
assessment of the likelihood that a lease will be cancelled. For further
information, see "Municipal Leases" in the Statement of Additional Information.

The Fund may invest in floating or variable rate instruments, which provide for
interest rate adjustments at specified intervals. Rate adjustments on such
securities are usually set at the issuer's discretion, in which case the Fund
would normally have the right to resell the security to the issuer or its
agent. Alternatively, rate revisions may be determined in accordance with a
prescribed formula or other contractual procedure. Generally, these interest
rate adjustments cause the market value of floating rate and variable rate
municipal securities to fluctuate less than the market value of fixed rate
obligations. Accordingly, as interest rates decrease or increase the potential
for capital appreciation or depreciation is less than for fixed rate
obligations.

The Fund may also acquire put options in combination with the purchase of
underlying securities or may separately acquire put options that relate to
securities held in the Fund's portfolio. Such put options would give the Fund
the right to require the issuer or some other person to purchase the underlying
security at an agreed upon price. There is no assurance that the issuer of a
put bond acquired by the Fund will be able to repurchase the bond upon the
exercise date if the Fund chooses to exercise its right to put the bond back to
the issuer.

<PAGE> 11

The Fund may invest in zero coupon municipal bonds. Such bonds are debt
obligations which do not require the periodic payment of interest and are
issued at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the
period until maturity at a rate of interest reflecting the market rate of the
security at the time of issuance. Zero coupon bonds benefit the issuer by
reducing its need to use cash for debt service, but also require a higher rate
of return to attract investors who are willing to defer receipt of such cash.
Such bonds experience greater volatility in market value due to changes in
interest rates than debt obligations which provide for regular payments of
interest. The Fund will accrue income on such bonds for tax and accounting
purposes, in accordance with applicable law, which income is distributable to
shareholders. Because no cash is received at the time such income is accrued,
the Fund may be required to liquidate other portfolio securities to satisfy its
distribution obligations. The Fund does not intend to invest more than 25% of
its total assets in zero coupon bonds.

The Fund may purchase and sell securities on a "when-issued" and "delayed
delivery" basis, that is, obligate itself to purchase or sell securities with
delivery and payment to occur at a later date. Such securities are subject to
market fluctuation and the yields on securities so purchased may be lower than
those available in the market at the time of delivery. When issued and delayed
delivery transactions may be expected to occur a month or more before delivery
is due. The Fund will maintain, in a segregated account with its custodian,
cash or liquid high-grade debt securities having an aggregate value equal to
the amount of such purchase commitments until payment is made. To the extent
the Fund acquires securities in when-issued and delayed delivery transactions,
it will do so for the purpose of acquiring securities for the Fund's portfolio
and not for the purpose of investment leverage. The Fund does not accrue income
on securities purchased on a when-issued or delayed delivery basis until
delivery occurs. The Fund may enter into delayed delivery sales of securities
in order to accommodate purchasers of portfolio securities from the Fund in
transactions effected at an advantageous price to the Fund. The Fund will
limit its outstanding purchases of securities on a when-issued or delayed
delivery basis to no more than 33 1/3% of its total assets.

The Fund may also hold cash that is not earning interest and may invest in
short-term obligations issued or guaranteed by the U.S. Government and its
agencies or its instrumentalities.

HEDGING

The Fund may engage in certain hedging transactions involving the use of
financial futures contracts, options on financial futures or options based on
either an index of tax-exempt securities or on debt securities the prices of
which, in the opinion of the Adviser, correlate with the prices of the Fund's
investments. These hedging transactions are designed to limit the risk of
price fluctuations of the Fund's investments.

The Fund may purchase and sell financial futures contracts and related options.
Futures contracts on a Municipal Bond Index are traded on the Chicago Board of
Trade. This Index is designed to represent a numerical measure of market
performance for long-term tax-exempt bonds. The Fund may purchase and sell
futures contracts on this Index or any other tax-exempt bond index approved for
trading by the Commodity Futures Trading Commission to hedge against general
changes in market values of portfolio securities which the Fund owns or expects
to purchase. The Fund may also purchase and sell put and call options on index
futures for hedging purposes. The Adviser believes that, under certain market
conditions, price movements in U.S. Treasury security futures and related
options may correlate closely with price movements in tax-exempt securities and
may as a result provide significant hedging opportunities for the Fund. The
Fund may also purchase and sell futures contracts and related options with
respect to such U.S. Treasury securities when the Adviser believes that the
price movements of Treasury securities will correlate with price movements in
tax-exempt securities.

The Fund will enter into hedging transactions only when it either owns an
offsetting position in the underlying securities, options or futures contracts
or maintains

6
<PAGE> 12
cash or liquid high-grade debt securities with a value sufficient at all times
to cover its obligations. The Fund might not employ any of the strategies
herein, and there can be no assurance that any strategy used will succeed. The
use of these strategies involves certain special risks, including (1) the fact
that the skills needed to use hedging instruments are different from those
needed to select the Fund's securities, (2) possible imperfect correlation, or
even no correlation, between price movements of the investments being hedged,
(3) the fact that, while hedging strategies can reduce the risk of loss, they
can also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments and (4) the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable to do so, or the possible need for the Fund to
sell a portfolio security at a disadvantageous time, due to the need for the
Fund to segregate securities in connection with hedging transactions and the
possible inability of the Fund to close out or liquidate its hedged position.
New financial products and risk management instruments and techniques continue
to be developed. The Fund may use these instruments and techniques to the
extent consistent with its investment objective and regulatory and tax con-
siderations.

The Fund may purchase options on debt securities only if the value of the
premiums does not exceed 5% of the Fund's total assets and will not purchase or
sell futures contracts or related options if the sum of the amount of initial
margin deposits on the Fund's existing futures positions and initial margin
deposits and premiums paid for related options would exceed 5% of the market
value of the Fund's total assets. These respective guidelines cannot be
guaranteed to limit the percentage of the Fund's assets at risk to 5% as to
each type of transaction.

See the Statement of Additional Information for further information about
futures and options and associated risks.

QUALITY (RATINGS)

The Fund may also invest in unrated obligations determined by the Adviser to be
of equivalent quality to the rated securities in which it is permitted to
invest. See the Statement of Additional Information for more detailed
information concerning securities ratings. If the rating of a bond held by the
Fund drops below investment grade or if an unrated bond deemed by the Adviser
to be of equivalent quality to investment grade ceases to be considered
investment grade, the Fund will normally sell such bond in a reasonable period
of time.

In the case of short-term notes, the Fund will invest in notes rated SP-1
through SP-2 by S&P or MIG 1 through MIG 3 by Moody's. In the case of tax-
exempt commercial paper, the Fund will invest in such when rated A-l+ through
A-2 by S&P or Prime-1 or Prime-2 by Moody's.

MATURITY

The Fund intends to emphasize investments in obligations with long-term
maturities in order to maintain an average weighted maturity of 20 to 30 years
but will also invest in shorter term obligations. The average weighted
maturity may be shortened from time to time depending on market conditions in
order to limit market risks. On June 30, 1995, the average weighted maturity
of the Fund's portfolio was 13 years.

7
<PAGE> 13
DIVERSIFICATION

The Fund will not, as a fundamental policy, with respect to 75% of its assets,
invest more than 5% of its assets in securities of any one issuer or acquire
more than 10% of the voting securities of any issuer, except securities issued
by the U.S. Government or its agencies or instrumentalities. The Fund does
not intend to invest in securities backed by letters of credit of any one bank
to the extent that such securities constitute more than 10% of the assets of
the Fund. For this purpose, the "issuer" of a security is deemed to be the
entity whose assets and revenues are committed to the payment of principal and
interest on that security, provided that the guarantee of an instrument will be
considered a separate security except when the value of all securities issued
or guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of
the value of the total assets of the Fund.

CONCENTRATION

It is possible that the Fund will invest more than 25% of its assets in a
particular segment of the municipal bond market such as Hospital Revenue Bonds,
Housing Agency Revenue Obligations or Airport Revenue Obligations. This
would only be the case if the Adviser determined that the yields available from
such obligations justified the additional risks associated with such
concentration. Economic, business, political and other developments generally
affecting the revenue of such projects and market factors affecting the demand
for their services or products) may have a general adverse effect on all
obligations in such a market segment.

OTHER INVESTMENT RESTRICTIONS

The Fund may not borrow money, except from banks as a temporary measure or for
extraordinary or emergency purposes, and then only in amounts not exceeding 10%
of its total assets or one third of the value of the Fund's total assets
including the amount borrowed. While any borrowing of greater than 5% of
assets occurs, the Fund will not purchase additional portfolio securities.
This restriction may not be changed without shareholder approval. The Fund may
not invest more than 15% of its assets in securities that are not readily
marketable nor may it pledge more than 15% of its assets.

PORTFOLIO MANAGER

Stephen C. Dilbone, Executive Vice President of the Trust, has been primarily
responsible for the day-to-day management of the Fund's portfolio since the
Fund's inception and has been portfolio manager of the Gradison-McDonald
Intermediate Municipal Income Fund since its inception in April 1994. Mr.
Dilbone is a First Vice President of Gradison with responsibility for
tax-exempt securities trading.

OHIO ECONOMIC CONSIDERATIONS

Because the Fund invests primarily in securities of Ohio issuers, political and
economic factors affecting Ohio could affect the creditworthiness and the
value of the securities in its portfolio. The Ohio economy, while diversifying
more into the service and other non-manufacturing areas in recent years,
continues to rely in part on durable goods manufacturing largely concentrated
in motor vehicles and equipment, steel, rubber products and household
appliances. As a result, general economic activity in Ohio, as in many other
industrially developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of
the economy, with over half the State's area devoted to farming and
approximately 16% of total employment involved in agribusiness. The State's
overall unemployment rate is commonly somewhat higher than the national figure
although in recent years the reverse has been true. The unemployment rate and
its effects vary among particular geographic areas of the State. Future
statewide or regional economic difficulties, and the resulting impact on State
or local government finances generally, could adversely affect the market value
of Ohio obligations held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on those
obligations. See the Statement of Additional Information for additional
information about Ohio economic considerations.

<PAGE> 14
The public offering price is the net asset value plus a sales charge. The
sales charge varies depending on the size of the purchase. The current sales
changes are:

<TABLE>
<CAPTION>
TOTAL SALES CHARGE AMOUNT OF SALES CHARGE
_____________________________________

AS PERCENTAGE OF AS PERCENTAGE OF REALLOWED TO DEALERS

SIZE OF TRANSACTION OFFERING PRICE NET ASSET VALUE AS A PERCENTAGE OF

AT OFFERING PRICE OFFERING PRICE
<S> <C> <C> <C>
Less than $250,000 2.00% 2.04% 2.00%

$250,000 or more but less than $500,00 1.00% 1.01% 1.00%

$500,000 or more 0.00% 0.00% 0.00%
____________________________________________________________________________________________________________________________________
</TABLE>

PURCHASES AND REDEMPTIONS

HOW TO PURCHASE SHARES

You may purchase shares of the Fund by bringing or mailing funds to McDonald or
Gradison, the principal underwriter of the Fund. The minimum investment
required to open an account is $1,000 and additional investments must be
at least $50. These minimums may, however, be waived for certain group
purchases. Purchase orders become effective when the Fund receives the
necessary information about your account and provision for payment has been
made. No share certificates will be issued. Share purchases are confirmed by
issuance of account statements.

Shares are sold at the public offering price based on the net asset value next
determined after the Fund receives your order. See the table at the top
of this page for additional information about sales charges. The Fund receives
the net asset value from purchases. The sales charge is retained by McDonald or
reallowed by McDonald to your investment dealer. In accordance with a
distribution service plan adopted pursuant to Rule 12b-1, McDonald also receives
an annual service fee as Distributor in the amount of .25% of the average net
assets of the Fund (see "Distribution Service Plan"). The Fund sells shares
without a sales charge to: the trustees of any investment company as to which
McDonald is investment adviser (and their families), current and retired
employees of McDonald and affiliates (and their families), advisory accounts
managed by McDonald or Gradison, and accounts participating in McDonald's Fund
Select mutual fund consulting program.

Investors may purchase shares of the Fund without payment of a sales charge to
the extent that the investment represents the proceeds of a redemption of
any other mutual fund's shares, the purchase of which involved an initial
sales charge. Additionally, investors may purchase shares of the Fund without
payment of a sales load to the extent that the investment represents the
proceeds of a redemption of any other mutual fund, except a Gradison-McDonald
fund or a money market fund, so long as the investor has been invested in such
fund for at least one year prior to the purchase of Fund shares. Investors must
inform Gradison or McDonald of their eligibility for these no sales charge
purchases and provide appropriate documentation to demonstrate their
eligibility. Call Gradison or McDonald for details.

Within six months of a redemption of shares of the Fund, shareholders may
reinvest all or part of the redemption proceeds in shares of the Fund without
the payment of a sales charge. The amount which may be so reinvested is limited
to an amount up to the redemption proceeds. In order to exercise this
privilege, you must make a written request for reinstatement which must
accompany the reinvestment. Gradison, McDonald, and the Fund do not assume
any responsibility for your receipt of the reinvestment credit in the absence of
such written notice from you, or for ensuring that you provide such written
notice. This reinstatement privilege can be exercised only once for all or a
portion of the shares redeemed. The tax treatment of a gain realized on a
redemption will not be affected by exercise of the reinstatement privilege, but
a loss may be nullified by a reinvestment in the Fund within 30 days before or
after

Graphic
of man
on the
1 - 8 0 0 - 8 6 9 - 5 9 9 9 phone

<PAGE> 15
the redemption. See "Taxes." The Fund may amend or cease offering this
privilege at any time as to shares redeemed after the date of such amendment or
change.

QUANTITY DISCOUNTS

You may be entitled to reduced sales charges through a Combination of
Investments, Rights of Accumulation, or a Letter of Intent, even if you do not
wish to make an investment of a size that would normally qualify you for a
quantity discount. You must notify Gradison or McDonald whenever a
quantity discount is applicable to your purchase and, if necessary, provide
sufficient information to verify that your purchase qualifies for a discount.
Upon such notification, you will receive the lowest applicable sales charge.
Gradison, McDonald, and the Fund shall not be responsible for failure to obtain
such a quantity discount in the absence of such notification. Quantity
discounts may be modified or terminated at any time. For more information
about quantity discounts, contact Gradison or McDonald.

1. Combination of Investments. You may combine your purchase of shares of the
Fund on any day with purchases of shares of the Fund or any other Gradison-
McDonald funds sold with a sales charge made by you, your spouse and your
children under the age of 21 to qualify for a quantity discount. The
aggregate investments of a trustee or custodian for the benefit of you or any
of the individuals described above may also be considered in determining
whether a reduced sales charge is available.

2. Rights of Accumulation. Under your Rights of Accumulation, in determining
the sales charge to be paid for your current purchase you may combine your
current purchase with the current public offering price of shares of the Fund
or any other Gradison-McDonald funds sold with a sales charge (or the
original amount invested, whichever is greater) that are currently owned by
you, your spouse, your children under the age of 21, or the aggregate
investment of a trustee or other fiduciary, for the benefit of you or any of
the individuals described above.

3. Letter of Intent. You may qualify for a reduced sales charge immediately by
stating your intention to invest, during a 13-month period, an amount that
would qualify you for a reduced sales charge. You may do this by signing a
nonbinding Letter of Intent, which may be signed at any time within 90 days
after the first investment you want included under your Letter of Intent. Each
investment you make after signing the Letter of Intent will be entitled to the
sales charge applicable to the total investment indicated in the Letter of
Intent. A Letter of Intent will apply to all Gradison-McDonald funds sold with
a sales charge.

When you sign a Letter of Intent, shares purchased by you with a value of 3% of
the amount you specify in the Letter of Intent will be restricted, that is,
these shares cannot be sold or redeemed until the Letter of Intent is satisfied
or the additional sales charges have been paid. If the total purchases you make
under the Letter of Intent, less redemptions, equal or exceed the amount you
specify in the Letter of Intent, the shares will no longer be restricted. If
the total purchases, less redemptions, exceed the amount you specify, and
qualify you for further quantity discount, Gradison or McDonald will, at your
request, make a retroactive share adjustment and will apply the adjustment to
purchase additional shares of the Fund for your account at the next computed
price. If you do not complete your purchases under the Letter of Intent, your
sales charge will be adjusted upward, and if, after written notice, you do not
pay the increased sales charge, restricted shares will be redeemed to pay such
charge. The purchases and share balances of all accounts managed by a
particular investment adviser may be aggregated for purposes of determining the
quantity discounts discussed above.

HOW TO REDEEM SHARES

<PAGE> 16
extraordinary circumstances, within seven days after receipt of a properly
executed redemption request. Shareholders may make special arrangements for
wire transfer of redemption proceeds by contacting the Fund in advance of a
contemplated share redemption. The Fund reserves the right to delay payment for
the redemption of shares where the shares were purchased with a personal check,
but only until the purchase payment has cleared, which may take up to 15 days
from the day the check is received by the Fund. If you need more immediate
access to your investment, you should consider purchasing shares by wire, cash,
or other immediately available funds.

All redemption information and authorizations (except those effected by McDonald
or Gradison) should be mailed or delivered to Gradison-McDonald Mutual Funds,
580 Walnut Street, Cincinnati, Ohio 45202.

Under extraordinary circumstances, such as periods of drastic economic or
market changes, it is possible that you might not be able to reach the Fund by
telephone to effect a redemption. In the event of such a situation, you can
mail or personally deliver a written redemption request to the Fund's offices.
Shareholders who have brokerage accounts with McDonald or Gradison can also
request that their Investment Consultant arrange the redemption. The telephone
redemption feature may be terminated or modified upon 30 days' notice to
shareholders.

The Fund, Gradison, McDonald, and their officers and employees will not be
liable for following instructions communicated by telephone that are reasonably
believed to be genuine. The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine, and if it does not, in
the view of the Securities and Exchange Commission, it may be liable for any
losses resulting from unauthorized instructions. Telephone transactions are
available to all shareholders automatically.

REDEMPTIONS THROUGH McDONALD AND GRADISON

Investors who maintain brokerage accounts with McDonald or Gradison may redeem
shares of the Fund through their Investment Consultant.

EXCHANGES

Shares of the Fund may be exchanged, without administrative fees, for shares of
any other Gradison-McDonald fund and for shares of certain Federal and/or
Ohio tax-free or municipal income money market funds.

You may request exchanges by telephoning or writing the Fund. Before making an
exchange, you should read the prospectus of the fund in which you are
investing which is available upon request. An exchange may not be made from the
Fund to the fund in which you are investing unless the shares of such fund are
registered for sale in the state in which you reside. Exchanges of Fund shares
for shares of funds sold subject to an initial sales charge will be subject to
such sales charge except to the extent that a sales charge has previously been
paid in connection with the shares. The terms of the exchange feature are
subject to change and the exchange feature is subject to termination, both upon
60 days' written notice, except that no notice shall be required under certain
circumstances provided for by rules of the Securities and Exchange Commission.

NET ASSET VALUE

The net asset value per share of the Fund is determined by calculating the total
value of the Fund's assets, deducting its total liabilities, and dividing
the result by the number of shares outstanding. The net asset value is generally
computed once daily as of the close of regular trading on the New York Stock
Exchange, normally 4:00 p.m. Eastern time, on each day when the New York Stock
Exchange is open for business and on any other day there is a sufficient degree
of trading in the Fund's portfolio securities that the net asset value might be
materially affected by changes in the value of portfolio securities.

<PAGE> 17
of Trustees. Short-term securities with remaining maturities of less than
60 days are valued at amortized cost which approximates market value. Other
assets are valued at fair value as determined pursuant to procedures
approved by the Board.

OPTIONAL SHAREHOLDER SERVICES

AUTOMATIC INVESTMENT PLAN

You may arrange for a fixed amount of money to be transferred automatically on
a regular basis from your bank or other depository account to your fund
account. For additional information, obtain the Gradison-McDonald Automatic
Investment Plan form from the Fund.

MONTHLY DISTRIBUTION PLAN

You may elect (on the Account Information Form) to automatically receive cash
payments of dividends and/or capital gains distributions. (For this purpose,
short term capital gains distributions are considered dividends.) You may
change or terminate this option at any time by written notice to the Fund.

AUTOMATIC PAYMENT PLAN

If your account has a value of at least $10,000, you may elect (on the Account
Information Form) to have monthly or quarterly payments of a specified amount
(but not less than $50) mailed to you or anyone specified on the form. You may
change or terminate this option at any time by written notice to the Fund.
Because the Fund cannot guarantee that payments will be made on the date
specified, the Plan should not be used for time-sensitive payments.

DISTRIBUTIONS

The Fund declares dividends from net investment income daily, immediately prior
to the close of business. These dividends are credited to fully paid shares
of record at the time of declaration. (Fund shares begin earning dividends on
the business day after the Fund receives payment for the purchase of such
shares.) Dividends representing the amounts credited to Fund shares are
paid monthly. Net realized capital gains, if any, will be distributed at least
annually. The Fund distributes substantially all of its net investment
income and capital gains (if any) to shareholders each year.

Unless you select the Monthly Distribution Plan, all income dividends and net
realized capital gain distributions are automatically paid in additional
shares at the net asset value of such shares on the date the dividends or other
distributions are payable. There is no sales charge for shares issued in this
manner.

TAXES

Federally tax-free interest earned by the Fund is federally tax-free when
distributed to you as income dividends. Any taxable income earned on the
Fund's investments will be distributed to you as a taxable dividend. If the
Fund invests in "private activity" obligations, individuals who are subject to
the AMT must report a portion of the Fund's dividends as a tax preference
item in determining their Federal income tax liability. Distributions of
short-term capital gains are taxable for Federal income tax purposes as
dividends, and distributions of net capital gain, when designated as such, are
taxable for those purposes as long-term capital gains, regardless of the length
of time you have owned your shares. Distributions of any taxable dividends or
realized capital gains are taxable when they are paid, whether you take them
in cash or additional Fund shares, except that any distributions declared in
December and paid in January are treated as if paid on December 31.

The Fund's income dividends will be exempt from the Ohio personal income tax
and excluded from the net income base of the Ohio corporation franchise tax
except to the extent that such dividends consist of interest from obligations
that are neither debt obligations issued by or on behalf of the State of Ohio
and its political subdivisions, agencies, and instrumentalities ("Ohio
Obligations") or Territorial Obligations. Distributions of short-term and
long-term capital gains will also be exempt from the Ohio personal income tax
and the net income base of the Ohio corporation franchise tax to

<PAGE> 18
the extent that they represent gain from the sale of Ohio Obligations.

Each year, the Fund will provide a statement informing you of the Federal
and state income tax status of dividends and other distributions paid during
the previous year.

If you purchase Fund shares just before the record date of a distribution of
capital gains, you will pay the full price for shares and then receive a
portion of the price back as a taxable distribution. Congress may propose to
restrict or eliminate the Federal income tax exemption for interest on
municipal securities. If such a proposal were enacted, the availability of
municipal securities for investment by the Fund and the value of its portfolio
would be adversely affected. In such event, the Fund would reevaluate its
investment objective and policies. The Fund is required to withhold 31% of
all taxable dividends, capital gain distributions, and redemption proceeds if
you do not furnish the Fund with a correct taxpayer identification number and
in certain other circumstances.

Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your
adjusted basis for the redeemed shares (which normally includes any sales
charge paid. An exchange of Fund shares for shares of any other fund generally
will have similar tax consequences. However, special rules apply (1) when you
dispose of Fund shares through an exchange within 90 days after your purchase
and acquire shares of another fund without paying a sales charge, or (2) if you
redeem shares of another fund within 90 days after purchase and then acquire
Fund shares without paying a sales charge. In these cases, any gain on
disposition of shares would be increased, or loss decreased, by the amount of
the sales charge you paid when those shares were acquired, and that amount will
increase the adjusted basis of the shares subsequently acquired. In addition,
if you purchase Fund shares within 30 days after redeeming other Fund shares at
a loss, that loss will not be deductible and will increase the basis of the
newly purchased shares.

The foregoing is only a summary of some important generally applicable Federal
and state income tax provisions in effect as of the date of this
Prospectus; see the Statement of Additional Information for a further
discussion. There may be other Federal, state or local tax considerations
applicable to a particular investor.

GENERAL INFORMATION

The Fund is a series of the Gradison-McDonald Municipal Custodian Trust (the
"Trust"), which is an Ohio business trust organized under the laws of the
State of Ohio by a Declaration of Trust dated June 11, 1992. The Fund is a
diversified portfolio of the Trust which is registered with the Securities and
Exchange Commission as an open-end management investment company. Each
share of the Fund has one vote and represents an equal pro rata interest in the
Fund. As an Ohio business trust, the Trust is not required to hold annual
shareholder meetings, although special shareholder meetings may be called for
purposes such as electing or removing trustees. Special meetings shall be
called upon the written request of shareholders owning at least 10% of the
outstanding shares of the Fund. Shareholder inquiries should be directed to
the telephone number or address of the Fund listed on the first page of this
Prospectus.

MANAGEMENT OF THE FUND

The Board is responsible for the direction and supervision of the Fund's
operations. McDonald acts as the Fund's investment adviser and principal
underwriter. McDonald is a wholly owned subsidiary of McDonald & Company
Investments, Inc., McDonald Investment Center, 800 Superior Avenue, Cleveland,
Ohio 44114. Subject to the authority of the Board, McDonald manages the
investment and reinvestment of the assets of the Fund, and provides its
employees to act as the officers of the Fund who are responsible for the
overall management of the Fund. McDonald is an investment adviser and a
securities broker-leader. McDonald, through its Gradison Division, including
Gradison's predecessor, has served as investment adviser to investment
companies since 1976.

13
<PAGE> 19

The Fund pays the Adviser a fee of one half of 1% of its average daily net
assets for acting as its investment adviser. Gradison acts as the Fund's
transfer agent, dividend disbursing agent, and accounting services provider.
For providing such services, Gradison receives an annual fee of $26.50 per
shareholder non-zero balance account plus out of pocket costs for acting as
transfer agent and dividend disbursing agent and an accounting services fee of
..035% of the first $100 million of average daily net assets, .025% of the next
$100 million of average daily net assets, and .015% of average daily net assets
in excess of $200 million, with a minimum fee of $48,000 per year. Gradison's
address is 580 Walnut Street, Cincinnati, Ohio 45202.

All expenses not specifically assumed by the Adviser, Transfer Agent, or
Distributor and incurred in the operation of the Fund are borne by the Fund.
These include expenses for: printing and mailing registration statements,
prospectuses, periodic reports and other documents furnished to shareholders
and regulatory authorities; registration, filing and similar fees; legal
expenses; auditing and accounting expenses; taxes and other fees; brokers'
commissions chargeable to the Fund in connection with securities transactions;
expenses of Trustees who are not affiliated with the Adviser; expenses of
Shareholders' and Trustees' meetings; and fees and other expenses incurred by
the Fund in connection with its membership in any organization. The Fund
reimburses the Adviser for all costs, direct and indirect, which are fairly
allocable to services performed by the Adviser's employees for which the Fund
is responsible.

McDonald may, from time to time, agree to waive the receipt of management or
transfer agent fees from the Fund and/or reimburse the Fund for other expenses
in order to limit the Fund's expenses to a specified percentage of average
net assets. Waiver and reimbursement arrangements, which may be terminated at
any time without notice, will increase the Fund's yield. If McDonald
discontinues a waiver or reimbursement arrangement, the Fund's expenses will
increase and its yield will be reduced. McDonald retains the ability to be
repaid by the Fund for fees waived and expenses reimbursed if expense ratios
fall below the specified limit prior to the end of the fiscal year. McDonald
may waive or reimburse fees in a greater amount than is required by an
applicable fee waiver arrangement.

DISTRIBUTIONS SERVICE PLAN

Under the terms of a distribution service plan adopted pursuant to Rule 12b-1
under the 1940 Act, the Fund pays to McDonald as Distributor a service fee at
the annual rate of one quarter of 1% of the average daily net assets of the
Fund. Such fee is calculated on a daily basis and paid to the Distributor
monthly. The service fee is paid as compensation to the Distributor for
providing personal services to shareholders of the Fund, including responding
to shareholder inquiries and providing information to shareholders about their
Fund accounts. The service fee is a fixed fee which may be more or less than
the Distributor's expenses for rendering these services. The Distributor may
use the fee to make payments to authorized dealers, including Gradison and
McDonald, for providing these services to Fund shareholders.

PERFORMANCE CALCULATIONS

From time to time the fund may advertise its "yield," "taxable equivalent
yield," and "total return." Both yield and total return figures are based on
historical figures and are not intended to indicate future performance. The
yield of the Fund is computed by dividing the net investment income per share
during the period stated in the advertisement by the maximum offering price per
share on the last day of the period (using the average number of shares
entitled to receive dividends). The yield formula provides for semiannual
compounding which assumes that net investment income is earned and reinvested
at a constant rate and annualized at the end of the six-month period. The
Fund's taxable equivalent yield is the yield that a taxable investment would
have to generate in order to equal the Fund's yield for an investor in a stated
tax bracket.

<PAGE> 20

return which assumes that no sales charge was charged on the initial investment
and aggregate total returns over various periods of time. the calculations of
total return assume the payment of all dividends and other distributions in
additional Fund shares.

The Fund may also advertise performance rankings assigned to it by
organizations which evaluate mutual fund performance such as Lipper Analytical
Securities Corp. It may also advertise "ratings" assigned to it by
organizations such as Morningstar, Inc.

The Fund's Annual Report to Shareholders contains additional performance
information and will be made available upon request without charge.

<PAGE> 21

GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND

GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST

___________________________________________________________________________

STATEMENT OF ADDITIONAL

INFORMATION

___________________________________________________________________________

For information, call: 579-5700 from Cincinnati, Ohio

Toll free (800) 869-5999 from outside Cincinnati

Information may also be obtained from the Fund at:
580 Walnut Street
Cincinnati, Ohio 45202

___________________________________________________________________________

This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus of the Fund, dated November 1, 1995,
which has been filed with the Securities and Exchange Commission. The
Prospectus is available upon request without charge from the Fund at the above
address or by calling the phone numbers provided above.

The date of this Statement of Additional Information is November 1, 1995.

<PAGE> 22
<TABLE>
<CAPTION>
CONTENTS
- ---

Page Location in Prospectus
<S> <C> <C>
INVESTMENT POLICIES AND RESTRICTIONS . . . . 4 Investment Objective
Diversification . . . . . . . . . . . 5
Tax-Exempt Securities Ratings . . . . 6

FACTORS RELATING TO OHIO . . . . . . . . . . 7 Ohio Economic Considerations

HEDGING STRATEGIES . . . . . . . . . . . . .12 Investment Objective
Special Risks of Hedging Strategies . 13
Additional Information
About Hedging Transactions . . . . . 15
Options . . . . . . . . . . . . . . . 15
Guidelines for Options . . . . . . . . 17
Futures . . . . . . . . . . . . . . . 18
Guidelines for Futures and
Related Options . . . . . . . . . . 20

MUNICIPAL LEASES . . . . . . . . . . . . . .20 Investment Objective

PURCHASE OF SHARES . . . . . . . . . . . . 21 Quantity discounts

LETTERS OF INTENT . . . . . . . .. . ... . .22 How to Purchase Shares

REDEMPTION OF SHARES . . . . . . . . .. .. . 22 How to Redeem Shares;
Redemptions through
Gradison and McDonald
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES. .23 Distributions

TAXES . . . . . . . . . . . . . . . . ... . ..23 Taxes
Federal . . . . . . . . . . . . . . .23
Ohio State and Local Tax Matters .. . .26

NET ASSET VALUE . . . . . . . . . . . . . . .27 Net Asset Value
</TABLE>

2
<PAGE> 23

<TABLE>
<S> <C> <C>
PURCHASE OF FUND SHARES . . . . . . . . . . .27 How to Purchase Shares

PORTFOLIO TRANSACTIONS . . . . . . .. . . . 28

INVESTMENT ADVISER . . . . . . . . . . . . .30 Management of the Fund
Advisory Agreement . . . . . . . . . . 31
Master Distribution Agreement . . . . 32
Distribution Service Plan . . . . . . 32

Transfer Agent and
Accounting Services Agreement . . . 34
Other Compensation Paid/
Reimbursement Made to the Adviser . 34

TRUSTEES AND OFFICERS OF THE TRUST . . . . . 34

DESCRIPTION OF THE TRUST . . . . . . . . . . 36 General Information

CUSTODIAN . . . . . . . . . . . . . . . . . . 38

INDEPENDENT PUBLIC ACCOUNTANTS. . . . . . . . 38

LEGAL COUNSEL . . . . . . . . . . . . . . . . 38

EXCHANGES . . . . . . . . . . . . . . . . . . 39 Exchanges

TELEPHONE ACCESS TO ACCOUNT
INFORMATION . . . . . . . . . . . . . . . . 39

PERFORMANCE CALCULATIONS . .. . . . . . . . 39

APPENDIX A . . . . . . . . . . . . . . . . . 41

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS AND FINANCIAL STATEMENTS Following Page 42

SALES BROCHURE INFORMATION . . . . . . Following Financial Statements
</TABLE>

3
<PAGE> 24
INVESTMENT POLICIES AND RESTRICTIONS

Gradison-McDonald Ohio Tax-Free Income Fund (the "Fund") invests
primarily in securities issued by state and local municipalities the interest
from which is free from Federal income tax and Ohio state personal income tax.
In addition to the investment restrictions described in the Prospectus, the
Fund has adopted the following investment restrictions and limitations, which
may not be changed without the approval of the holders of a majority of the
outstanding voting securities of the Fund. (See "Description of the Trust.")
The Fund will not:

(1) Borrow money, except from banks or as a temporary measure or for
extraordinary or emergency purposes such as to enable the Fund to
satisfy redemption requests where liquidation of portfolio securities is
considered disadvantageous and not for leverage purposes, and then only
in amounts not exceeding 10% of the total assets of the Fund at the time
of the borrowing or one third of the value of the Fund's total assets
including the amount borrowed. Any borrowing that comes to exceed 33
1/3% of the Fund's total assets by reason of a decline of net assets
will be reduced to the extent necessary to comply with the 33 1/3%
limitation. While any borrowing of greater than 5% of the assets
occurs, the Fund will not purchase additional portfolio securities;

(2) Make loans, except that the purchase of securities as allowed by the
Fund's investment objective and other investment restrictions and the
entering into of repurchase agreements shall not be prohibited by this
restriction;

(3) Purchase or sell real estate. The purchase of securities secured by
real estate which are otherwise allowed by the Fund's investment
objective and other investment restrictions shall not be prohibited by
this restriction;

(4) Underwrite the securities of other issuers, except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of
1933 in connection with the acquisition of portfolio securities;

(5) Purchase or sell commodities or commodity contracts or interests in oil,
gas or other mineral exploration or development programs. The purchase
or sale of financial futures contracts or options on financial futures
contracts for the purposes and within the limits set forth in the
Prospectus and this Statement of Additional Information shall not be
prohibited by this restriction;

(6) Issue senior securities as defined in the Investment Company Act of
1940, except to the extent that such issuance might be involved with
respect to borrowings subject to item (1) above or with respect to
transactions involving futures contracts or the writing of options

4
<PAGE> 25
within the limits described in the Prospectus and this Statement and
provided that the Fund may issue shares of additional series or classes
that the Trustees may establish.

The following limitations are not fundamental and may be changed without
shareholder approval: (1) With respect to the purchase of securities of other
investment companies, the Fund will not (a) purchase more than 3% of the
outstanding voting shares of an investment company; (b) invest more than 5% of
its assets in securities of any one investment company; or (c) invest more than
10% of its assets in securities of all investment companies. (2) The Fund will
not make short sales of securities, or purchase securities on margin, except
for short-term credit as is necessary for the clearance of transactions. The
deposit or payment by the Fund of initial or maintenance margin in connection
with futures contracts or related options transactions is not considered the
purchase of a security on margin. (3) The Fund will not purchase or retain in
its portfolio any securities issued by an issuer, if to the Fund's knowledge,
those Trustees and officers of the Trust or of the Fund's investment adviser,
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities. (4) The Fund will not mortgage, pledge or hypothecate
securities in amounts exceeding 15% of the value of the assets of the Fund
(taken at market value). Notwithstanding this restriction the Fund may enter
into "when issued" and "delayed delivery" transactions. The deposit of
underlying securities and other assets in escrow or other collateral
arrangements in connection with the writing of options or margin for futures
contracts or options on futures contracts are not deemed to be pledges or
hypothecations subject to this restriction. (5) The Fund may not invest more
than 15% of its assets in the aggregate in securities of unseasoned issuers
which with their predecessors have had less than three years of continuous
operations and in securities subject to legal restrictions upon resale.

If a percentage restriction set forth above is met at the time of
investment, a later movement above the restriction level resulting from a
change in the value of securities held by the Fund will not be considered a
violation of the investment restriction.

DIVERSIFICATION

A bond for which the payments of principal and interest are secured by
an escrow account of securities backed by the full faith and credit of the U.S.
Government (defeased) as described in the SAI will not be treated as an
obligation of the original municipality for purposes of determining
concentration. When a security is insured by bond insurance, it is not
considered a security guaranteed by the insurer and there is no limit on the
percentage of the Fund's assets that may be invested in securities insured by a
single insurer.

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<PAGE> 26
TAX-EXEMPT SECURITIES RATINGS

Moody's Investors Services, Inc. ("Moodys"), Standard & Poor's ("S&P"),
and Fitch Investors Services, Inc. ("Fitch") are private services that provide
ratings of the credit quality of debt obligations, including issues of
municipal securities. A description of the investment grade ratings assigned
to municipal securities and tax-free commercial paper is set forth below. The
Fund may use these ratings in determining whether to purchase, sell or hold a
security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, municipal securities with the
same maturity, interest rate and rating may have different market prices.

MUNICIPAL BONDS - Tax-exempt bonds rated Aaa and Aa by Moody's comprise what
are generally known as "high grade bonds". Tax-exempt bonds which are rated A
by Moody's possess many favorable investment attributes and are considered
"upper medium grade obligations". Factors giving security to principal and
interest of A-rated tax-exempt bonds are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the future.
The Baa rating is assigned to "medium grade" obligations by Moody's. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Tax-exempt bonds rated AAA bear the highest rating
assigned by S&P to a debt obligation and indicates an extremely strong capacity
to pay principal and interest. Tax-exempt bonds rated AA also qualify as
high-quality debt obligations. Capacity to pay principal and interest is very
strong, and in the majority of instances they differ from AAA issues only in
small degree. Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions. The BBB rating, which is the
lowest "investment grade" security rating by S&P, indicates an adequate
capacity to pay principal and interest. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest for Municipal Obligations in this category than for
Municipal Obligations in the A category.

Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. Bonds rated AA by Fitch are considered to be
investment grade and of very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite as strong as
bonds rated AAA. Bonds rated A by Fitch are considered to investment grade and
of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory

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<PAGE> 27
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment.

SHORT-TERM NOTES - Moody's MIG1/VMIG1 rating denotes best quality characterized
by strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing. Moody's
MIG2/VMIG2 denotes high quality with ample margins of protection. MIG3/VMIG3
denotes favorable quality. While all security elements are accounted for there
is lacking the undeniable strengths of MIG1/VMIG1 and MIG2/VMIG2. Moody's
ratings MIG1/VMIG1-MIG3/VMIG3 are all investment grade ratings. S&P's rating
of SP-1 reflects very strong or strong capacity to pay principal and interest.
S&P's SP-2 rating reflects satisfactory capacity to pay principal and interest.

TAX-FREE COMMERCIAL PAPER - Issuers rated Prime-1 by Moody's (or related
supporting institutions) have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced
by the following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well established access to a range of financial markets; and
assured sources of alternate liquidity.

Issuers rated Prime-2 by Moody's (or related supporting institutions)
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample liquidity is
maintained.

A-1 - (S&P) This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.

A-2 - Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".

FACTORS RELATING TO OHIO

As described above, and except to the extent investments are in
temporary investments, or invested in the limited amounts described in the

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<PAGE> 28
Prospectus in obligations of the governments of Puerto Rico, Guam, and the U.S.
Virgin Islands, the Fund will invest substantially all of its net assets in
obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Fund is therefore susceptible to
political, economic or regulatory factors that may affect issuers of Ohio
Obligations. In addition, the specific Ohio Obligations invested in are
expected to change from time to time. The following information constitutes
only a brief summary of some of the many complex factors that may affect the
financial situation of issuers in Ohio, and is not applicable to "conduit"
obligations on which the public issuer itself has no financial responsibility.
This information is derived from official statements published in connection
with the issuance of securities of certain Ohio issuers and from other
publicly available documents, and is believed to be accurate. No independent
verification has been made of any of the following information.

The creditworthiness of Ohio Obligations of local Ohio issuers is
generally unrelated to that of obligations issued by the State itself, and
generally there is no responsibility on the part of the State to make payments
on those local obligations. There may be specific factors that are from time
to time applicable in connection with investment in particular Ohio Obligations
or in those obligations of particular Ohio issuers, and it is possible the
investment will be in particular Ohio Obligations or in those Obligations of
particular issuers as to which those factors apply. However, the information
set forth below is intended only as a general summary and not as a discussion
of any specific factors that may affect any particular issue or issuer of Ohio
Obligations.

Ohio is the seventh most populous state, with a 1990 Census count of
10,847,000 indicating a 0.5% population increase from 1980.

The Ohio economy while diversifying more into the service and other
nonmanufacturing areas, continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity in Ohio, as in many other industrially-developed states, tends to be
more cyclical than in some other states and in the nation as a whole.
Agriculture is an important segment of the economy, with over half the State's
area devoted to farming and approximately 16% of total employment in
agribusiness.

The State's overall unemployment rate has commonly been somewhat higher
than the national figure. However, Ohio reported 1994 average monthly rate of
5.5%, compared to the national figure of 6.1% and l993 average monthly rate of
6.5% compared to the national figure of 6.8% The unemployment rate and its
effects vary among particular geographic areas of the State.

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<PAGE> 29
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the portfolio of the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
obligations.

The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is effectively precluded by law from
ending a fiscal year ending June 30 (FY) or biennium in a deficit position.
Most State operations are financed through the General Revenue Fund (GRF), for
which personal income and sales-use taxes are the major revenue sources.
Growth and depletion of GRF ending fund balances show a consistent pattern
related to economic conditions, with the FY-ending balance reduced during less
favorable economic periods and increased during more favorable economic
periods. The State has established procedures for, and has timely taken,
necessary actions to ensure a resource/expenditure balance during less
favorable economic periods. These include general and selected reductions in
appropriations spending; none have been applied to appropriations needed for
debt service or lease rentals on any State obligations.

As a first step of addressing a $520,000,000 GRF shortfall for Fiscal
Year 1993 then estimated by the Office of Budget and Management (OBM), the
Governor ordered selected GRF appropriations reductions totaling $300,000,000
effective July 1, 1992, expressly excluding appropriations for primary and
secondary education and for debt service (including lease rental
appropriations.) Subsequent executive and legislative actions provided for
positive biennium-ending GRF balances.

The GRF appropriations act for the 1994-1995 biennium provided for total
GRF biennial expenditures of approximately $30.7 billion. Authorized
expenditures in Fiscal Year 1994 were 9.2% higher than in Fiscal Year 1993
(taking into account F fiscal Year 1993 expenditures reductions), and for
Fiscal Year 1995 are 6.6% higher than in Fiscal Year 1994.

The first year of the biennium, Fiscal Year 1994, ended with a GRF fund
balance of over $560,000,000, permitting an additional $260,300,000 to be
deposited in the BSF. Actual Fiscal Year 1994 expenditures were 3.3% below
those authorized, primarily as the result of lower than expected Medicaid
spending, In addition, tax receipts (primarily auto sales and use tax) were
significantly above estimates.

The biennium ending GRF fund balance was $928,000,000. Of that,
$70,000,000 has been retained as an unreserved and undesignated balance, and
$858,000,000 transferred into various funds, including $535,200,000 into the
Budget Stabilization Fund (which has a current balance of $828,300,000).

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<PAGE> 30

The GRF appropriations act for the current biennium was passed on June 28,
1995 and promptly signed (with, however, selective vetoes) by the Governor.
That act provides for total GRF biennial expenditures of approximately $33,5
billion, with the following examples of GRF biennial expenditure increases over
those expenditures for the prior biennium for certain major programs: higher
education, 13.1%; mental health and mental retardation, 4.8%; primary and
secondary education, 15.4%; human services, 9.5%; justice and corrections, 28%.

Necessary GRF debt service and lease-rental appropriations for the entire
biennium were requested in the Governor's proposed budget and incorporated in
the related appropriations bill as introduced, and in the bill's versions as
passed by the House and the Senate and in the act as passed and signed. the
same is true for the separate Department of Transportation/Department of Public
Safety and Bureau of Workers' Compensation appropriations acts, contained
lease-rental appropriations for certain OBA-financed ODOT/DPS and BWC projects.

In accordance with the appropriations act, the significant June 30, 1995
GRF fund balance, after leaving in the GRF an unreserved and undesignated
balance of $70,000,000, has been transferred to a variety of funds, including
$535,200,000 to the BSF. $322,800,000 was transferred to other funds, including
school assistance funds and, in anticipation of possible federal program
changes, a human services stabilization fund.

The incurrence or assumption of debt by the State without a popular vote
is, with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or failures in
revenues or to meet expenses not otherwise provided for, but limited in amount
to $750,000. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception in both cases is
for any debt incurred to repel invasion, suppress insurrection or defend the
State in war.)

By thirteen constitutional amendments, the last adopted in 1993, Ohio
voters have authorized the incurrence of State debt to which taxes or excises
were pledged for payment. At July 1, 1995, $781 million (excluding certain
highway bonds payable primarily from highway use charges) of this debt was
outstanding, with the only such State debt then still authorized to be incurred
being portions of the highway bonds, and the following: (a) up to $100 million
of obligations for coal research and development may be outstanding at any one
time ($30.3 million outstanding); and (b) of $1.2 billion of obligations for
local infrastructure improvements, no more than $120 million may be issued in
any calendar year ($701 million outstanding).

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<PAGE> 31

include bonds and notes issued by, among others, the Ohio Public Facilities
Commission and the Ohio Building Authority; approximately $5.0 billion of
those obligations were outstanding at July 1, 1995.

A 1990 constitutional amendment authorizes greater State and political
subdivision participation in the provision of individual and family housing,
including borrowing for the purpose. The General Assembly may for the purpose
authorize the issuance of State obligations secured by a pledge of all or such
portion as it authorizes of State revenues or receipts, although the
obligations may not be supported by the State's full faith and credit.

The General Assembly has placed on the November 1995 ballot a proposed
constitutional amendment that would extend the local infrastructure bond
program (authorizing an additional $1.2 billion of State full faith and credit
obligations to be issued over 10 years for the purpose) and authorize
additional highway bonds. The latter would supersede the current $500,000,000
highway bonds authorization, and would authorize not more than $1.2 billion to
be outstanding at any time and not more than $220,000,000 to be issued in a
Fiscal Year. It cannot be predicted whether this amendment will be approved by
the electors.

Common resolutions are pending in both houses of the General Assembly that
would submit a constitutional amendment relating to certain other aspects of
State debt. The proposal would authorize, among other things, the issuance of
general obligation State debt for a variety of purposes, with debt service on
all State general obligation debt and GRF-supported obligations not to exceed
5% of the preceding Fiscal Year's GRF expenditures. It cannot be predicted
whether any such amendment will be submitted, or, if submitted, approved by the
electors.

State and local agencies issue revenue obligations that are payable from
revenues from or relating to certain facilities, which obligations are not
"debt" within constitutional provisions or payable from taxes. In general,
payment obligations under lease-purchase agreements of Ohio public agencies (in
which certificates of participation may be issued) are limited in duration to
the agency's fiscal period, and are renewable only upon appropriations being
made available for the subsequent fiscal period.

Local school districts in Ohio receive a major portion (on a statewide
basis, recently approximately 44%) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 115 districts
income taxes, for significant portions of their budgets. Litigation is
pending, similar to that in other states, questioning the constitutionality of
Ohio's system of school funding. A small number of the State's 612 local
school districts have in any year required special assistance to avoid year-end
deficits. A current program provides for school district cash needs borrowing
directly from commercial lenders, with diversion of State subsidy distributions
to repayment if needed; in FY 1995 under this

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<PAGE> 32

program 29 districts borrowed a total of $71.1 million (including over $27
million by one district), and in FY 1994 borrowings totaling $41.1 million were
approved.

Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations, and, with other local governments,
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced
significant financial problems, established procedures provide for a joint
State/local commission to monitor the municipality's fiscal affairs, and for
development of a financial plan to eliminate deficits and cure any defaults.
Since inception in 1979, these procedures have been applied to 23 cities and
villages, in 18 of which the fiscal situation has been resolved and the
procedures terminated.

At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Constitution has since 1934 limited the
amount of the aggregate levy (including a levy for unvoted general obligations)
of property taxes by all overlapping subdivisions, without a vote of the
electors or a municipal charter provision, to 1% of true value in money, and
statutes limit the amount of that aggregate levy to 10 mills per $1 of assessed
valuation (commonly referred to as the "ten-mill limitation"). Voted general
obligations of subdivisions are payable from property taxes unlimited as to
amount or rate.

HEDGING STRATEGIES

As discussed in the Prospectus, the Adviser may use a variety of
financial instruments ("Hedging Instruments"), including certain options,
futures contracts (sometimes referred to as "futures") and options on futures
contracts to attempt to hedge the Fund's portfolio. The particular Hedging
Instruments are described in Appendix A to this Statement of Additional
Information. Any income realized from the use of options and futures would be
taxable to shareholders.

Hedging strategies can be broadly categorized as "short hedges" and "long
hedges". A short hedge is a purchase or sale of a Hedging Instrument intended
to partially or fully offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund
takes a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example,
the Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the

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<PAGE> 33
alternative, because the value of the put option can be expected to increase as
the value of the underlying security declines, the Fund might be able to close
out the put option and realize a gain to offset the decline in the value of the
security.

Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended to partially or fully offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on
a security it intends to purchase to hedge against an increase in the cost of
the security. If the price of the security increased above the exercise price
of the call, the Fund could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transaction costs.
Alternatively, the Fund might be able to offset the price increase by closing
out an appreciated call option and realizing a gain.

Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to
hedge either individual securities or broad market sectors.

The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, the Fund's ability to use Hedging Instruments will
be limited by tax considerations. See "Taxes".

In addition to the products, strategies and risks described below, the
Adviser may discover additional opportunities in connection with options,
futures contracts and other hedging techniques. These new opportunities may
become available as the Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts or other techniques are developed. The Adviser may utilize
these opportunities to the extent that they are consistent with the Fund's
investment objectives and permitted by the Fund's investment limitations and
applicable regulatory authorities. The Fund's Statement of Additional
Information will be supplemented to the extent that new products or techniques
involve materially different risks than those described below or in the
Prospectus.

SPECIAL RISKS OF HEDGING STRATEGIES

The use of Hedging Instruments involves special consideration and risks,
as described below. Risks pertaining to particular Hedging Instruments are
described in the sections that follow.

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<PAGE> 34
(1) Successful use of most Hedging Instruments depends upon the
Adviser's ability to predict movements of the overall securities
and interest rate markets, which requires different skills than
predicting changes in the prices of individual securities. While
the Adviser is experienced in the use of Hedging Instruments,
there can be no assurance that any particular hedging strategy
adopted will succeed.

(2) There might be imperfect correlation, or even no correlation,
between price movements of a Hedging Instrument and price
movements of the investments being hedged. For example, if the
value of a Hedging Instrument used in a short hedge increased by
less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures
on the markets in which Hedging Instruments are traded. The
effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.

(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable
price movements in the investments being hedged. However,
hedging strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements in
the hedged investments. For example, if the Fund entered into a
short hedge because the Adviser projected a decline in the price
of a security in the Fund's portfolio, and the price of that
security increased instead, the gain from that increase might be
wholly or partially offset by a decline in the price of the
Hedging Instrument. Moreover, if the price of the Hedging
Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the
Fund would have been in a better position had it not hedged at
all.

(4) As described below, the Fund might be required to maintain assets
as "cover", maintain segregated accounts or make margin payments
when it takes positions in Hedging Instruments involving
obligations to third parties (i.e., Hedging Instruments other
than purchased options). If the Fund were unable to close out
its positions in such Hedging Instruments, it might be required
to continue to maintain such assets or accounts or make such
payments until the position expired or matured. These
requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise
be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close
out a position in a Hedging Instrument prior to expiration or
maturity depends on

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<PAGE> 35
the existence of a liquid secondary market or, in the absence of such a
market, the ability and willingness of the opposite party to the
transaction to enter into a transaction closing out the position.
Therefore, there is no assurance that any hedging position can be closed
out at a time and price that is favorable to the Fund.

ADDITIONAL INFORMATION ABOUT HEDGING TRANSACTIONS

The Fund will not use Hedging Instruments for speculative purposes or
for purposes of leverage. Transactions using Hedging Instruments, other than
purchased options, expose the Fund to an obligation to another party. The Fund
will comply with SEC guidelines regarding cover for hedging transactions and
will, if the guidelines so require, set aside cash or liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed amount.

Assets held in a segregated account cannot be sold while the position in
the corresponding Hedging Instrument is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of the Fund's
assets to cover or segregated accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.

OPTIONS

The Fund may purchase put and call options, and write (sell) covered call
options and covered put options, on debt securities. The purchase of a call
option serves as a long hedge, and the purchase of a put option serves as a
short hedge.

Writing a covered call option serves as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it
can be expected that the option will be exercised and the Fund will be
obligated to sell the security at less than its market value. If the covered
call option is an OTC option, the securities or other assets used as cover
would be considered illiquid unless the OTC options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC option written subject to this procedure would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option.

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<PAGE> 36
security depreciates to a price lower than the exercise price of the put
option, it can be expected that the option will be exercised and the Fund will
be obligated to purchase the security at more than its market value.

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Options purchased by the Fund that expire
unexercised have no value.

The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit the Fund to realize
profits or limit losses on an option position prior to its exercise or
expiration.

The Fund may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities exist but are relatively new,
and these instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and its contra-party (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when the Fund purchases an OTC option, it relies on the party from whom it
purchased the option or to whom it has written the option (the contra-party) to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the contra-party to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the
transaction.

The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the contra-party, or
by a transaction in the secondary market if any such market exists. Although
the Fund will enter into OTC options only with contra-parties that are expected
to be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency
of the contra-party, the Fund

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<PAGE> 37
might be unable to close out an OTC option position at any time prior to its
expiration.

If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit and
would be unable to limit its losses prior to expiration. The inability to
enter into a closing purchase transaction for a covered call option written by
the Fund could cause material losses because the Fund would be unable to sell
the investment used as cover for the written option until the option expires or
is exercised. The inability to enter into a closing purchase transaction for a
put option written by the Fund could also cause material losses because the
price of the security underlying the option could continue to decline.

As options on indexes of municipal and nonmunicipal debt securities
become available, the Fund may purchase and write put and call options on such
indexes in much the same manner as the more traditional options discussed
above, except that index options may serve as a hedge against overall
fluctuations in the debt securities markets (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.

Because of the limited availability of options on municipal securities,
the Adviser may deem it in the best interest of the Fund to engage in
transactions using exchange-traded options on U.S. government securities.
Options on U.S. Treasury bonds, bills and notes are currently so traded;
additional contracts are likely to be developed. In the opinion of the
Adviser, there is a high degree of correlation between the prices and interest
rates of U.S. government securities and those of municipal securities.
Therefore, the Adviser believes that options on U.S. government securities
could serve as an effective proxy for options on municipal securities.
Therefore, the Fund's options activities may also include options on U.S.
government securities traded on national securities exchanges.

GUIDELINES FOR OPTIONS

In view of the risks involved in using the options strategies described
above, the Trust's Board of Trustees has determined that the Fund may purchase
a put or call option, including any straddles or spreads, only if the value of
its premium, when aggregated with the premiums on all other options held by the
Fund, does not exceed 5% of the Fund's total assets. This guideline may be
modified by the board without shareholder vote. Adoption of this guideline
cannot be guaranteed to limit the percentage of the Fund's assets at risk to
5%.

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<PAGE> 38

FUTURES

The Fund may purchase and sell municipal bond index futures, municipal debt
futures and other interest rate futures contracts. The Fund may also purchase
put and call options and write put and covered call options on futures in which
it is allowed to invest. The purchase of futures or call options thereon can
serve as a long hedge, and the sale of futures or the purchase of put options
thereon can serve as a short hedge. Writing covered call options on futures
contracts can serve as a limited short hedge, using a strategy similar to that
used for writing covered call options on securities or indices. Similarly,
writing put options on futures contracts can serve as a limited long hedge.

Interest rate futures contracts also can be used to manage the average
duration of the Fund's portfolio. If the Adviser wishes to shorten the average
duration of the Fund, the Fund may sell a futures contract or a call option
thereon, or purchase a put option on that futures contract. If the Adviser
wishes to lengthen the average duration of the Fund, the Fund may buy a futures
contract or a call option thereon, or sell a put option thereon.

The Fund may enter into interest rate futures contracts as a hedge against
or to minimize adverse principal fluctuations or as an efficient means of
regulating the Fund's exposure to the municipal bond market. The Fund could
sell interest rate futures as an offset against the effect of expected
increases in interest rates and purchase such futures as an offset against the
effect of expected declines in interest rates.

It is possible that the Fund's hedging activities will occur primarily
through the use of municipal bond index futures contracts because the
uniqueness of that index contract should better correlate with the Fund's
portfolio and thereby be more effective. However, it is also possible that it
may be deemed in the best interest of shareholders to use futures contracts on
U.S. Treasury bonds, bills or notes, and the Fund reserves the right to use
such futures contracts at any time. Use of these futures could occur, as an
example, when both the U.S. Treasury bond futures contract and municipal bond
index futures contract are correlating well with municipal bond prices, but the
U.S. Treasury bond futures contract is trading at a more advantageous price
making the hedge less expensive with the U.S. Treasury bond futures contract
than would be obtained with the municipal bond index futures contract.

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<PAGE> 39
a futures contract, in accordance with applicable exchange rules. Unlike
margin in securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment, and initial
margin requirements might be increased generally in the future by regulatory
action.

Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market". Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund had insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.

Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions and options thereon only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time.

Under the circumstances, futures exchanges may establish daily limits on
the amount that the price of a futures or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.

If the Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in
the case of purchased options, the Fund would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.

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<PAGE> 40
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.

GUIDELINES FOR FUTURES AND RELATED OPTIONS

In view of the risks involved in using the futures and options strategies that
are described above, the Trust's Board of Trustees has determined that the Fund
will not purchase or sell futures contracts or related options if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and initial margin deposits and premiums paid for
related options would exceed 5% of the market value of the Fund's total assets.
This guideline may be modified by the board without shareholder vote. Adoption
of this guideline cannot be guaranteed to limit the percentage of the Fund's
assets at risk to 5%.

In addition, the Fund has represented to the CFTC that it will use
futures contracts and options thereon solely in bona fide hedging transactions
or under other circumstances permitted by the CFTC.

MUNICIPAL LEASES

As described in the Prospectus, the Fund may invest in Municipal
Obligations that constitute participations in a lease obligation or installment
purchase contract obligation (hereafter collectively called "municipal leases)
of a municipal authority or entity. Although municipal leases do not
constitute general obligations of the municipality for which the municipality's
taxing power is pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain municipal leases contain
"nonappropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
nonappropriation municipal leases are secured by

20
<PAGE> 41
the leased property, disposition of the property in the event of foreclosure
might prove difficult. The Fund will seek to minimize the special risks
associated with such securities by not investing more than 10% of its assets in
municipal leases that contain nonappropriation clauses. In evaluating
investments in municipal leases with nonappropriation clauses, the Adviser will
consider such factors as whether (1) the nature of the leased equipment or
property is such that its ownership or use is essential to a governmental
function of the municipality, (2) the lease payments will commence
amortization of principal at an early date resulting in an average life of
seven years or less for the lease obligation, (3) appropriate covenants will be
obtained from the municipal obligor prohibiting the substitution or purchase of
similar equipment if lease payments are not appropriated, (4) the lease obligor
has maintained good market acceptability in the past,(5) the investment is of a
size that will be attractive to institutional investors, and (6) the underlying
leased equipment has elements of portability and/or use that enhance its
marketability in the event foreclosure on the underlying equipment were ever
required. Municipal leases provide a premium interest rate which along with
regular amortization of the principal may make them attractive for a portion of
the assets of the Fund. With respect to evaluating the credit quality of a
municipal lease the Adviser will consider: whether a lease can be canceled; the
level of assurance that leased assets can be sold; the strength of the lessee's
general credit; the potential for an event of nonappropriation; and the legal
recourse in the event of a failure to appropriate.

The Trust's Board of Trustees has established the following guidelines for
determining the liquidity of municipal leases in the Fund's portfolio, and
subject to review by the Board, has delegated that responsibility to the
Adviser. When evaluating the liquidity of Municipal Leases, the Adviser,
pursuant to procedures established by the Board, considers all relevant
factors, including frequency of trading, availability of quotations, the number
of dealers and their willingness to make markets, the nature of trading
activity and the assurance that liquidity will be maintained.

PURCHASE OF SHARES

The Fund reserves the right to impose a charge of $15 for any purchase
check returned to the Fund as uncollectible and to collect such fee by
redeeming shares of the Fund from such shareholder's account.

The Fund reserves the right to limit the amount of any purchase and to
reject any purchase order. Shares of the Fund are offered continuously;
however, the offering of shares of the Fund may be suspended at any time and
resumed at any time thereafter. The Fund intends to waive the initial and
subsequent purchase minimums for employees of McDonald & Company

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<PAGE> 42
Securities, Inc. which through its Gradison Division acts as the Fund's Adviser
and Distributor.

LETTERS OF INTENT (SEE "QUANTITY DISCOUNTS" IN THE PROSPECTUS)

If the total purchases, less redemptions, exceed the amount you specify,
and qualify you for a further quantity discount, Gradison or McDonald will, at
your request, make a retroactive sales charge adjustment and will apply the
adjustment amount to purchase additional shares of the Fund, and, if
applicable, the shares of other Gradison-McDonald funds sold with a sales
charge, for your account at the next computed price. For example:

1. You executed a Letter of Intent for $100,000 of shares and
were, therefore, charged a $2,000 sales charge on purchases in
that amount;

2. During the existence of the Letter of Intent you subsequently
purchased an additional $400,000 of shares thereby qualifying for
purchases at $0 sales charge;

3. You will receive an adjustment of $2,000, the sales charge you
paid on the $100,000 purchase, since you reached the $500,000
purchase level during the existence of the Letter of Intent. The
$2,000 will be applied to purchase additional shares for your
account at the next computed price.

REDEMPTION OF SHARES

The Fund may suspend the right of redemption or may delay payment (a)
during any period when the New York Stock Exchange is closed other than for
customary weekend and holiday closings, (b) when trading in markets normally
utilized by the Fund is restricted, or an emergency exists (determined in
accordance with the rules and regulations of the Securities and Exchange
Commission) so that disposal of the securities held in the Fund or
determination of the net asset value of the Fund is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit for the protection of the Fund's shareholders.

The Fund transmits redemption proceeds only to shareholders names and
addresses on its records (or which it has otherwise verifies), provides written
confirmation of all transactions initiated by telephone (either immediately or
by monthly statement, depending on the circumstances), and requires
identification from individuals picking up checks at its office.

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<PAGE> 43
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES

The distribution declared by the Fund each day will normally be in an
amount equal to that day's proportionate share of the estimated net investment
income for the applicable monthly period, plus, for certain periods,
undistributed amounts of such income from prior periods, minus, for certain
periods, amounts to provide a reserve of undistributed income which could be
paid in subsequent months, divided by the number of days in that period. The
amount of the daily distribution will generally differ from the Fund's daily
book net income computed in accordance with generally accepted accounting
principles. Estimated net investment income for any period will be based on
the Adviser's projections of accrued interest income during such period less
projected expenses of the Fund to be accrued for such period. This procedure
may enable the Fund to avoid fluctuations in the total daily distributions from
period to period and to minimize the possibility of making distributions from
paid-in capital or other capital sources. The reserve may increase the net
asset value of the Fund's shares, thereby causing shareholders to realize
higher capital gains or lower capital losses upon redemption. On occasion, the
Fund may make distributions which constitute the return of capital to
shareholders.

For example, if the Adviser estimates that net investment income for a
31-day month will be $.085 per share, and if the Fund has a reserve of $.01 per
share of undistributed income, the daily distribution might be initially
established at $.09/31 per share for each day during such month, leaving a
reserve of $.005 per share available for distributions in subsequent months if
such estimates are accurate. The Adviser may revise its estimates of the
monthly amounts of such income, in which case the subsequent daily
distributions during such month may be revised accordingly.

TAXES

FEDERAL

The Fund has qualified and intends to qualify in the future for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended ("Code") and to qualify to pay "exempt-interest"
dividends. By so qualifying, the Fund will be relieved of Federal income tax
on that part of its investment company taxable income (consisting generally of
any taxable net investment income and net short-term capital gain) and any net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to Fund shareholders. In order to continue qualify
for treatment as a RIC under the Internal Revenue Code of 1986, as amended
("Code"), the Fund must distribute to its shareholders for each taxable year at
least 90% of the sum of its investment company taxable income (consisting
generally of taxable net investment income and net short-term capital gain)
plus its net

23
<PAGE> 44
interest income excludable from gross income under Section 103(a) of the Code,
and must meet several additional requirements. Among these requirements are
the following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loan, and gains from the sale or other disposition of securities, or other
income (including gains from options or futures) derived with respect to its
business of investing in securities ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, options, or futures that were held for less
than three months ("Short-Short Limitation"); and (3) at the close of each
quarter of the Fund's taxable year, (a) at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs, and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets, and (b) not more than 25% of the value of
its total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.

Dividends paid by the Fund will qualify as exempt-interest dividends,
and thus will be excludable from gross income by its shareholders, if the Fund
satisfies the additional requirement that, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income under Section
103(a); the Fund intends to satisfy this requirement. The aggregate dividends
excludable from the shareholders' gross income may not exceed the Fund's net
tax-exempt income.

If Fund shares are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest
dividends received on those shares and any allowable loss will be treated as
long-term capital loss to the extent of any capital gain distributions received
on those shares. Distributions of the portion of the gain on bonds purchased
at a discount after April 30, 1993, are taxable for Federal income tax purposes
as dividends.

Interest on indebtedness incurred or continued to purchase or carry Fund
shares will not be deductible for Federal income tax purposes to the extent
that the Fund distributes exempt-interest dividends. Purchases of Fund shares
may be deemed to have been made with borrowed funds even though those funds are
not directly traceable to the purchase of those shares. Exempt-interest
dividends paid by the Fund are includable in your tax base for determining the
taxability of social security and railroad retirement benefits. Shares of the
Fund may not be an appropriate investment for "substantial users" of certain
facilities financed by private activity bonds in which the Fund may invest
because interest on such bonds will not be exempt from Federal income tax for
such users and their related persons.

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<PAGE> 45
Tax-exempt interest attributable to certain private activity bonds
(including, in the case of a RIC, such as the Fund, receiving interest on such
bonds, a proportionate part of the exempt-interest dividends paid by that RIC)
is an item of tax preference for purposes of the alternative minimum tax.
Exempt-interest dividends received by a corporate shareholder also may be
indirectly subject to that tax without regard to whether the Fund's tax-exempt
interest was attributable to such bonds.

The Fund may acquire zero coupon municipal securities, which are
securities issued with original issue discount. As the holder of those
securities, the Fund must accrue a portion of the original issue discount
during the taxable year, even if it receives no corresponding payment on the
securities during the year. Because the Fund annually must distribute
substantially all of its tax-exempt income, including any original issue
discount, in order to qualify for treatment as a RIC, the Fund may be required
in some years to distribute as a dividend an amount that is greater than the
total cash it actually receives. Those distributions will be made from the
Fund's other cash assets or from proceeds of sales of portfolio securities.
The Fund may realize capital gains or losses from those sales, which would
increase or decrease its investment company taxable income and/or net capital
gain (the excess of net long-term capital gain over net short-term capital
loss). In addition, any such gains may be realized on the disposition of
securities held for less than three months. Because of the Short-Short
Limitation, any such gains would reduce the Fund's ability to sell other
securities, or options or futures, held for less than three months that it
might wish to sell in the ordinary course of its portfolio management.

The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the character and timing of recognition of the gains and
losses the Fund realizes in connection therewith by the Fund. Income from
transactions in options and futures derived by the Fund with respect to its
business of investing in securities will qualify as permissible income under
the Income Requirement. However, income from the disposition of options and
futures contracts will be subject to the Short-Short Limitation if they are
held for less than three months.

If the Fund satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund may, when it engages in hedging transactions, seek to qualify for this
treatment, but at the present time it is not clear whether this treatment will
be available for all of the Funds' hedging transactions. To the extent this
treatment is not available, the Fund may be forced to defer the closing out of
certain

25
<PAGE> 46
options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to qualify as a RIC.

OHIO STATE AND LOCAL TAX MATTERS

The following reflects Ohio law as of the date of this Statement of
Additional Information.

Individual shareholders who are subject to the Ohio personal income tax,
Ohio school district income tax or Ohio municipal income tax will not be
subject to such taxes on distributions received from the Fund to the extent
such distributions consist of interest on or gain from the sale of debt
obligations issued by or on behalf of the State of Ohio and its political
subdivisions, agencies, and instrumentalities. ("Ohio Obligations") provided
that the Fund continues to qualify as a regulated investment company for
federal income tax purposes and that at all times at least 50% of the value of
the total assets of the Fund consists of Ohio Obligations, or similar
obligations of other states or their subdivisions. It is assumed for purposes
of this discussion of Ohio taxation that these requirements are satisfied.
Gain recognized by such individual shareholders on the sale of shares of the
Fund will be subject to the Ohio personal income tax and Ohio school district
income tax; such gain may be subjected to municipal income tax only by those
three Ohio municipalities (Indian Hill, Wickliffe and Wyoming) that are
authorized by State law to tax intangible income.

Corporate shareholders that are subject to the Ohio corporation
franchise tax will not be required to include distributions received from the
Fund in their net income base for purposes of calculating their Ohio
corporation franchise tax liability to the extent that such distributions are
either excluded from gross income for federal income tax purposes or consist of
interest on or gain from the sale of Ohio Obligations. However, corporate
shareholders will be required to include gain recognized on the sale of shares
of the Fund in their net income base for purposes of calculating their
liability for such tax. In addition, shares of the Fund will be includable in
the computation of net worth for purposes of such tax. Corporate shareholders
that are subject to Ohio municipal income tax will not be subject to such tax
on distributions received from the Fund to the extent such distributions
consist of interest on or gain from the sale of Ohio Obligations but may be
subject to such tax on gain from the sale of shares of the Fund in those three
Ohio municipalities that are authorized by State law to tax intangible income.

Distributions from the Fund that consist of interest on obligations of
the United States or the government of Puerto Rico, the Virgin Islands or Guam
or their authorities or instrumentalities are exempt from Ohio personal income
tax, Ohio school district income taxes and Ohio municipal income taxes and are
excluded from the net income base of the Ohio corporation franchise tax to the
same extent that such interest would be so

26
<PAGE> 47
exempt or excluded if the obligations were held directly by the shareholders.

The Fund is not subject to the Ohio personal income tax, Ohio school
district income taxes, the Ohio corporation franchise tax, or the Ohio dealers
in intangibles tax, provided that, with respect to the Ohio corporation
franchise tax and the Ohio dealers in intangibles tax, the Fund satisfies an
annual reporting requirement imposed by the Ohio Revised Code.

NET ASSET VALUE

The net asset value of the Fund is calculated once daily Monday through
Friday except on days on which changes in the value of the Fund's portfolio
securities will not materially affect the current net asset value of the Fund's
shares and except on the following holidays: New Year's Day, Presidents Day,
Good Friday, Memorial Day Observed, Independence Day, Labor Day, Thanksgiving
Day, Christmas Day, Columbus Day, Martin Luther King Jr. Day, and Veteran's
Day.

The assets and liabilities of the Fund are determined in accordance with
generally accepted accounting principles and the applicable rules and
regulations of the Securities and Exchange Commission.

PURCHASE OF FUND SHARES (SEE "HOW TO PURCHASE SHARES" IN THE PROSPECTUS)

The difference in the price at which the Fund's shares are offered due
to scheduled variations in sales charges as a percentage of both offering price
and amount invested, as described in the Prospectus under the caption "How To
Purchase Shares", results from cost savings inherent in economy of size.
Management of the Fund believes that costs and expenses of sales efforts of the
Fund's principal underwriter and broker-dealers tend to decrease as the size of
the purchase order increases. It is for this reason that the sales charges as
a percentage of the offering price and of the amount invested are reduced with
respect to "breakpoint" purchases and Letter of Intent and Rights of
Accumulation privileges, all as stated in the Prospectus. In addition, because
the exchange privilege is available to all investors whose objectives may have
changed and because it is such investors who initiate the exchange, no
additional sales expenses are incurred, and accordingly, these savings are
passed on to the investor in the form of a net asset value purchase when they
have previously paid a sales load to another fund advised by the Adviser. No
significant sales effort is necessary for sales of shares at net asset value to
trustees of mutual funds as to which Gradison or McDonald act as an investment
adviser (and their families), current and retired employees of the Fund's
investment adviser, and investment advisory accounts managed by Gradison or
McDonald. With respect to sales at net asset value to investors who purchase
Fund shares with the proceeds of redemptions from other mutual

27
<PAGE> 48
funds as to which they have previously paid a sales charge, such waiver of the
Fund's charge is necessary to compensate such investors for the fact that they
have previously paid a sales load on their investment. Sales are made to
investors who have owned mutual fund shares for a year or more (where the
proceeds of disposition of such shares are used to purchase Fund shares)
without payment of a sales load as an additional inducement for purchase of
Fund shares.

PORTFOLIO TRANSACTIONS

In purchasing and selling portfolio securities, it is the policy of the
Fund to select brokers and dealers so as to obtain the most favorable net
results, taking into account various factors, including the price of the
security, the commission rate, the size of the transaction, the difficulty of
execution and other services offered by brokers and dealers which are of
benefit to the Fund. The Adviser selects brokers and dealers to execute
transactions on the basis of its judgment of their professional capability to
provide the service at reasonably competitive rates. The Adviser's
determination of what constitutes reasonably competitive rates is based upon
its professional judgment and knowledge as to rates paid and charged for
similar transactions throughout the securities industry. The Adviser may
consider sales by brokers or dealers of shares of the Fund when selecting
brokers or dealers to execute portfolio transactions as long as the most
favorable net results are obtained.

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<PAGE> 49
Adviser, the Fund will be charged a commission that is at least as favorable as
the rate the Adviser charges to its other customers in similar transactions.
No commission charged to the Fund by the Adviser or any broker affiliated with
the Adviser will include compensation for research services provided by the
Adviser or any such affiliated broker. From the inception of the Fund to the
date of this Statement of Additional Information, the Adviser has not received
any commissions from the Fund for executing transactions in portfolio
securities.

Brokers who provide supplemental investment research to the Adviser may
receive orders for agency transactions in portfolio securities of the Fund.
Such supplemental research services ordinarily consist of assessments and
analyses of the business or prospects of a company, industry, or economic
sector. Information so received is in addition to and not in lieu of the
services required to be performed by the Adviser under the Investment Advisory
Agreement with the Fund. If in the judgment of the Adviser the commission is
reasonable in relation to the brokerage and research services provided, the
Adviser is authorized to pay brokerage commissions in excess of commissions
another broker would have received for effecting the same transaction, subject
to the review of the Board of Trustees. Not all such research services may be
used by the Adviser in connection with managing the Fund. The expenses of the
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information, and the Adviser may use such information in servicing
its other accounts.

Because of its affiliation with the Adviser, the Fund is prohibited from
engaging in certain transactions involving the Adviser except in compliance
with the provisions of the Investment Company Act of 1940, as amended, and the
rules and regulations thereunder and subject to the possible receipt of
exemptive relief from the Securities and Exchange Commission. Accordingly, the
Fund does not purchase or sell portfolio securities from or to the Adviser in
any transaction in which the Adviser acts as principal. Pursuant to
regulations of the Securities and Exchange Commission, the Fund purchases
securities in underwritings in which the Adviser participates as an
underwriter.

The Adviser also serves as the investment adviser to Gradison-McDonald
Cash Reserves Trust ("GMCR"), (a U.S. Government "money market" investment
company), Gradison-McDonald Government Custodian Trust ("GCT") (Government
income investment company), Gradison-McDonald Intermediate Municipal Income
Fund, and Gradison Growth Trust ("GGT") (equity investment company) and
furnishes investment advice to other clients. The assets of the mutual funds
managed by the Gradison Division totaled approximately $1.96 billion as of
September 26, 1995. The Adviser, including its predecessor, Gradison &
Company, Incorporated, has served as investment adviser to investment companies
since 1976. Investment decisions for the Fund are made independently from
those of the other investment companies for which it acts as investment adviser
and other clients of the Adviser. Purchases and

29
<PAGE> 50
sales of particular securities may be effected simultaneously for such entities
and clients. In such instances, the transactions will be allocated as to price
and amount in a manner the Adviser considers equitable to each of the affected
entities or clients, which could have a detrimental effect upon the price or
amount of the securities purchased or sold for the Fund. On the other hand, in
some cases the ability of the Fund to participate in volume transactions may
produce better executions for the Fund. It is the opinion of the Board of
Trustees that the benefits available to the Fund from retaining the Adviser
outweigh any disadvantages that may arise from exposure to simultaneous
transactions.

Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio may be sold whenever the
Adviser believes it appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. For the period from the Fund's inception, September 28, 1992,
through July 31, 1993, the Fund's nonannualized portfolio turnover rate was
45.04%. For the period from August 1, 1993, through June 30, 1994, the Fund's
portfolio turnover rate was 55.84%. For the fiscal year ended June 30, 1995,
the Fund's portfolio turnover rate was 80.19%. The higher portfolio turnover
for the fiscal year ended June 30, 1995 was caused by net redemptions of shares
of the Fund which made it necessary to sell portfolio securities to pay
redemptions and to purchase other portfolio securities.

INVESTMENT ADVISER

The Adviser manages the investment and reinvestment of the assets of the
Fund in accordance with the Fund's investment objective, policies and
restrictions, subject to the general supervision and control of the Board of
Trustees and pursuant to the terms of the Investment Advisory Agreement
("Agreement") between the Trust and Adviser. The Adviser and its officers and
employees, from time to time, enter into transactions with various banks,
including the Fund's custodian bank. It is the Adviser's opinion that the
terms and conditions of those transactions are not influenced by existing or
potential custodial or other Trust relationships.

The Adviser provides to the Trust at its own expense the executive
officers who are necessary for the management and operations of the Fund.

The Adviser, founded in 1924, is the leading underwriter of Ohio
long-term municipal financings as measured by the value of offerings managed by
underwriters according to Securities Data Company for 1994. The Adviser is a
securities broker dealer with 23 retail offices in the state of Ohio and is the
largest investment banking and securities brokerage firm headquartered in Ohio.
The Adviser manages investment advisory accounts,

30
<PAGE> 51
including mutual funds, with assets in excess of $2.5 billion as of June 30,
1995.

ADVISORY AGREEMENT

The Agreement provides that the Adviser will manage the investments of
the Fund, subject to review by the Board of Trustees. The Adviser also bears
the cost of salaries and related expenses of executive officers of the Trust
who are necessary for the management and operation of the Fund and compensates
the Trustees who are affiliated with the Adviser. As compensation for its
services under the Agreement, the Adviser receives from the Fund a monthly fee
based upon the average value of the daily net assets for the month at an annual
rate of .5 of 1% of the Fund's assets. From the inception of the Fund,
September 18, 1992 through July 31, 1993, the Adviser received $40,914 as
investment advisory fees. If not for the waiver of fees, the Adviser would
have received $178,704. From August 1, 1993 through June 30, 1994, the Adviser
received $294,050 as investment advisory fees. If not for the waiver of fees,
the Adviser would have received $358,797. For the fiscal year ended June 30,
1995, the Adviser received $362,864 as investment advisory fees.

The Agreement further provides that in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties
thereunder, or reckless disregard of its obligations thereunder, the Adviser is
not liable to the Fund or any of its shareholders for any act or omission by
the Adviser. The Agreement does not restrict the Adviser from acting as an
investment manager or adviser for others.

The Agreement grants to the Trust the right to use the names "Gradison"
and "McDonald" as a part of its name and the name(s) of its Fund(s), without
charge, subject to withdrawal of such right by the Adviser upon not less than
30 days' written notice to the Trust and subject to the automatic termination
of such right within 30 days after the termination of the Agreement for any
reason. The Agreement does not impair the right of the Adviser to use the name
Gradison or McDonald in the name and the name(s) of its Fund(s) without charge
in connection with any other business enterprise with which it is or may become
associated.

The Agreement will be submitted to a vote at the initial meeting of the
Fund's public shareholders, if and when such meeting is held. The Agreement
continues in effect from year to year if such continuance is specifically
approved at least annually by the vote of the holders of a majority of the
outstanding voting securities of the Fund or by the vote of a majority of the
Trust's Board of Trustees, and in either event by the vote cast in person of a
majority of the Trustees who are not "interested persons" of any party to the
Agreement (as defined in the Act).

The Agreement may be terminated at any time without penalty upon 60
days' written notice by (i) the Board of Trustees, (ii) the vote of the

31
<PAGE> 52
holders of a majority of the outstanding voting securities of the Fund, or
(iii) the Adviser. The Agreement will terminate automatically in the event of
its assignment by the Adviser. The Agreement may be amended at any time by the
mutual consent of the parties thereto, provided that such consent on the part
of the Fund shall have been approved by the vote of the holders of a majority
of its outstanding voting securities and by the vote of a majority of the Board
of Trustees, including the vote cast in person by a majority of the Trustees
who are not "interested persons" of any party to the Agreement (as defined in
the Act).

MASTER DISTRIBUTION AGREEMENT

Shares of the Fund are continuously offered and distributed through the
principal underwriter of the Fund, McDonald (the "Distributor"). Under the
terms of the Master Distribution Agreement, the Distributor, as agent of the
Fund, accepts orders for the purchase of shares of the Fund and, as
compensation therefore, receives the amount of the sales charge described in
the Prospectus. For the respective periods from the inception of the Fund to
July 31, 1993, from August 1, 1993 through June 30, 1994, and for the fiscal
year ended June 30, 1995, McDonald received underwriting commissions in the
respective amounts of $1,073,126, $303,484 and $89,864, all of which was
retained by McDonald. The Distributor is not obligated to sell any certain
number of shares of the Fund. The Distributor may enter into dealer's
agreements with other dealers, pursuant to which such dealers will also sell
shares of the Fund. The Master Distribution Agreement between the Fund and the
Distributor permits the Distributor to reallow up to the full sales charge to
the other dealers entering into dealer's agreements with the Distributor;
accordingly, such dealers may be deemed to be underwriters of the Fund, as that
term is defined in the Securities Act of 1933, as amended (the "1933 Act").
The Fund has agreed to indemnify the Distributor to the extent permitted by
applicable law against certain liabilities under the 1933 Act. The Agreement
also provides for the payment of Distribution Service fees in the annual amount
of .25% of the Fund's average daily net assets.

DISTRIBUTION SERVICE PLAN

The Fund has in effect a Distribution Service Plan (the "Plan") under
Rule 12b-1 of the Investment Company Act of 1940. Rule 12b-1 permits an
investment company to finance, directly or indirectly, activities primarily
intended to result in the sale of its shares only if it does so in accordance
with the provisions of such Rule. The purpose of the Plan is to increase sales
of shares of the Fund to enable it to acquire and retain a sufficient level of
assets to enable it to operate at an efficient level. Higher levels of assets
tend to result in operating efficiencies with respect to the Fund's fixed costs
and portfolio management.

32
<PAGE> 53

The Plan permits the Fund to incur expenses related to the distribution
of its shares, but only as specifically contemplated by the Plan. Under the
Plan, the Fund may pay service fees up to an amount that does not exceed an
annual rate of .25% of its average daily net assets. Such service fees that
may be incurred by the Fund under the Plan within the limitation described
above are limited to payments to broker-dealers (including the Distributor) or
other persons for certain services provided to Fund shareholders (See the
Prospectus for further information). For the respective periods from the
inception of the Fund through July 31, 1993, from August 1, 1993, through June
30, 1994, and for the fiscal year ended June 30, 1995, the Fund paid service
fees to the Distributor in the respective amounts of $87,773, $179,374 and
$181,432. The benefits resulting from the Plan include a more stable or
increasing level of assets which, in turn, reduces the expenses of the Fund on
a per share basis and facilitates portfolio management, among other benefits.

The Plan also specifically authorizes the payment of operational
expenses incurred by the Fund to the extent that such payments might be
considered to be primarily intended to result in the sale of shares of the
Fund. It further specifically authorizes the payment of advisory fees pursuant
to the Advisory Agreement to the extent that the Fund might be deemed to be
indirectly financing the distribution activities through payment of advisory
fees. The Board of Trustees does not believe that the payment of such
operational expenses by the Fund or payment of the advisory fee constitute the
direct or indirect financing of activities primarily intended to result in the
sale of shares of the Fund. Thus, although such payments are authorized by the
Plan as a protective measure, they are not restricted by the .25% limitation
included in the Plan.

In approving the Plan, the Board of Trustees concluded that there was a
reasonable likelihood that the Plan would benefit the Fund and its
shareholders. The Plan will be submitted for approval by the Fund's
shareholders at the Fund's initial shareholders' meeting, if and when such
meeting is held. The Plan (together with any agreements relating to
implementation of the Plan) continues in effect for a period of more than one
year only so long as such continuance is specifically approved at least
annually by the vote of a majority of the Board of Trustees, including the vote
of a majority of the Independent Trustees, cast in person at a meeting called
for such purpose. The Plan may not be amended to materially increase the
amount of distribution expenses incurred by the Fund without the approval of a
majority of the Independent Trustees by votes cast in person at a meeting
called for the purpose of voting on such amendment and without the approval of
a majority of the outstanding voting securities of the Fund. The Plan may be
terminated at any time by a vote of a majority of the Independent Trustees or
by a vote of the majority of the outstanding voting securities of the Fund.
Any agreement implementing the Plan may be terminated at any time, without the
payment of any penalty, by a vote of a majority of the Independent Trustees or
by a vote of a majority of the outstanding voting securities of the Fund, on
not more than sixty days'

33
<PAGE> 54
written notice to the other party to the agreement, and any related agreement
will terminate automatically in the event of its assignment. The Plan requires
that the Board of Trustees receive at least quarterly written reports as to the
amounts expended during each quarter pursuant to the Plan and the purposes for
which such amounts were expended. While the Plan is in effect, the selection
and nomination of those Trustees who are not "interested persons" (as defined
in the Investment Company Act of 1940) of the Trust shall be committed to the
discretion of the disinterested Trustees then in office.

TRANSFER AGENT AND ACCOUNTING SERVICES AGREEMENT

Pursuant to the Transfer Agent and Accounting Services Agreement,
Gradison provides transfer agent, dividend disbursing, and accounting services
for the Fund. Gradison responds to inquiries from shareholders, processes
purchase and redemption requests, maintains shareholder account records and
provides statements and confirmations to shareholders and maintains the Fund's
books and accounting records. For the periods from the inception of the Fund
through July 31, 1993, from August 1, 1993 through June 30, 1994, and for the
fiscal year ended June 30, 1995, the Fund paid Gradison respectively $66,736,
$92,406, and $95,692 for transfer agent, dividend disbursing, and accounting
services.

OTHER COMPENSATION PAID/REIMBURSEMENT MADE TO THE ADVISER

In addition to the advisory fee, transfer agent fee, and distribution
fees paid by the Fund to the Adviser, for the respective periods from the
inception of the Fund through July 31, 1993, from August 1, 1993 through June
30, 1994, and for the fiscal year ended June 30, 1995, the Fund reimbursed the
Adviser, on a cost basis, for costs allocable to services performed by the
Adviser's employees, including salaries and office space, the respective
amounts of $16,940, $4,038, and $851.

TRUSTEES AND OFFICERS OF THE TRUST

The Trustees and officers of the Trust, together with information as to
their principal occupations during the past five years and positions currently
held with GMCR, GGT, GCT, Gradison and McDonald, are listed below. All
principal occupations have been held for at least five years unless otherwise
indicated. Positions held with Gradison were formerly held with Gradison &
Company Incorporated.

*DONALD E. WESTON, 580 Walnut Street, Cincinnati, Ohio. Trustee and
Chairman of the Board; Chairman of Gradison and Director of McDonald &
Company Investments, Inc. (since October 1991). Director of Cincinnati
Milacron Commercial Corp. (financing arm of capital goods manufacturer)
(since January 1993); Trustee and Chairman of the Board of GMCR, GCT, and
GGT.

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<PAGE> 55
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio. Trustee;
Senior Vice President/Finance and Administration of the E.W. Scripps
Company (communications); Director and Treasurer of Scripps Howard
Broadcasting Company; Trustee of GMCR, GCT, and GGT.

THEODORE H. EMMERICH, 1201 Edgecliff Place, Cincinnati, Ohio 45206.
Trustee. Retired; Until 1986, managing partner (Cincinnati office) Ernst
& Young (Public Accountants); Director of Carillon Fund, Inc.(investment
company), American Financial Group, Inc. (insurance), Citicasters, Inc.
(broadcasting), Cincinnati Milacron Commercial Corp.; Trustee of Carillon
Investment Trust and Summit Investment Trust (investment companies);
Trustee of GMCR, GCT, and GGT.

RICHARD A. RANKIN, 1717 Dixie Highway, Suite 600, Fort Wright, Kentucky
41011. Trustee. Partner, Rankin and Rankin (Public Accountants); Trustee
of GMCR, GCT, and GGT.

JEROME E. SCHNEE, 11558 Stablewatch Court, Cincinnati, Ohio 45249.
Trustee. Professor of Management, College of Business Administration,
University of Cincinnati; Director of National Sanitary Supply Co. and Roto
Rooter, Inc.; Trustee of GMCR, GCT, and GGT.

BRADLEY E. TURNER, 580 Walnut Street, Cincinnati, Ohio 45202. President.
Managing Director of McDonald; President of GMCR, GCT, and GGT.

STEPHEN C. DILBONE, 580 Walnut Street, Cincinnati, Ohio 45202. Executive
Vice President. First Vice President of Gradison.

RICHARD S. DEMKO, 800 Superior Avenue, Cleveland, Ohio 44114. Vice
President. Senior Vice President of McDonald since March 1991; prior to
that, Senior Vice President of Prescott, Ball, and Turben.

PATRICIA J. JAMIESON, 800 Superior Avenue, Cleveland, Ohio 44114.
Treasurer. Treasurer and Chief Accounting Officer of McDonald; Treasurer
of GMCR, GCT, and GGT.

MARK A. FRIETCH, 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of GMCR, GCT, and GGT (since May 1995); Controller of
Gradison-McDonald mutual funds (since August 1992); prior to that Financial
Consultant and Assistant Controller of Union Central Life Insurance
Company.

RICHARD M. WACHTERMAN, 580 Walnut Street, Cincinnati, Ohio 45202.
Secretary. Senior Vice President and General Counsel of Gradison.;
Secretary of GMCR, GCT, and GGT.

PAUL J. WESTON, 580 Walnut Street, Cincinnati, Ohio. Senior Vice
President. Executive Vice President of GMCR; Senior Vice President of

35
<PAGE> 56
GCT and GGT; Executive Vice President of Gradison. Mr. Weston is the brother
of Donald E. Weston.
Trustees and officers of the Trust who are affiliated with the Adviser
receive no remuneration from the Trust. Trustees who are not affiliated with
the Adviser receive fees as determined by the Board of Trustees. As of
September 30, 1995, the trustees and officers of the Trust owned an aggregate
of less than 1% of the outstanding securities of the Fund.

TRUSTEE COMPENSATION TABLE

<TABLE>
<CAPTION>
Name of Trustee Aggregate Total Compensation
- --------------- Compensation From Trust and fund
From Trust* complex (3 additional
------------ Trusts) paid to
trustee*
--------
<S> <C> <C>
Theodore H. Emmerich $4,500 $18,833
Richard A. Rankin $4,250 $18,833
Jerome E. Schnee $4,500 $18,833
Daniel J. Castellini $2,833 $10,500
</TABLE>

* Amounts shown as compensation from the Trust are for the period ending June
30, 1995. Amounts shown as compensation from the Trust and the fund complex
are for the year ending December 31, 1994. The Trust maintains a deferred
compensation plan which allows trustees to defer receipt of trustee fees
otherwise payable to them until a future date. Deferred amounts are credited
with interest at a rate equal to the yield of the Gradison-McDonald U.S.
Government Reserves Fund. The Trust does not maintain any other pension or
retirement plans. There are currently no amounts owing to any current trustee
pursuant to the deferred compensation plan. As of June 30, 1995, the amount of
$7990 was payable by the Trust to the beneficiary of a former trustee who is
deceased and as of December 31, 1994, the amount of $30,413.10 was payable to
that trustee by the Trust and the fund complex.

DESCRIPTION OF THE TRUST

The Trust is an open-end management investment company organized under
the laws of the State of Ohio by a Declaration of Trust dated June 11, 1992.
The Declaration of Trust provides for an unlimited number of full and
fractional shares of beneficial interest, without par value, of any series
authorized by the Board of Trustees. The Board of Trustees has authorized the
issuance of shares of two series, representing the Gradison-McDonald Ohio
Tax-Free Income Fund and the Gradison-McDonald Intermediate Municipal Income
Fund. Any additional series of shares must be issued in compliance with the
Investment Company Act of 1940. Upon issuance and sale

36
<PAGE> 57
in accordance with the terms set forth in the Prospectus, each share will be
fully paid and nonassessable. Shares have no preemptive, subscription or
conversion rights and are redeemable as set forth under "How to Redeem Shares."

Holders of shares of the Fund are entitled to vote the full and
fractional shares in the amount of their ownership of Fund shares. Voting
rights are not cumulative, which means that the holders of more than 50% of the
shares voting in any election of Trustees can elect all of the Trustees if they
choose to do so, in which event the holders of the remaining shares will be
unable to elect a Trustee. Under the Declaration of Trust, meetings of
shareholders are not required to elect trustees, unless less than a majority of
trustees holding office have been elected by the shareholders. Shareholders'
meetings will be held only when required pursuant to the Declaration of Trust
or the Investment Company Act of 1940, and when called by the Fund or
shareholders pursuant to the Declaration of Trust. Pursuant to the Declaration
of Trust, shareholders of record of not less than a majority of the outstanding
shares of the Fund may remove a Trustee through a declaration in writing or by
vote cast in person or by proxy at a meeting called for that purpose. The
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the questions of removal of any Trustee when requested in writing
to do so by shareholders of record of not less than 10 percent of the Trust's
outstanding shares. The Trust or any Fund may be terminated by a vote of a
majority of the Trustees. Whenever the approval of a majority of the
outstanding shares of the Fund is required in connection with shareholder
approval of the Investment Advisory Agreement, the Master Distribution
Agreement, or the Distribution Service Plan, or changes in the investment
objective or the investment restrictions, a "majority" shall mean the vote of
(i) 67% or more of the outstanding shares of the Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of the Fund are present
in person or by proxy, or (ii) more than 50% of the outstanding shares of the
Fund, whichever is the lesser.

The assets of the Trust received upon the issuance of the shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to each such series and constitute the
underlying assets of each series. The underlying assets of each series are
segregated on the books of account and are to be charged with the liabilities
in respect to such series and with each series' proportionate share of the
general liabilities of the Trust. In the event of the termination and
liquidation of the Trust, the holders of the shares of any series are entitled
to receive their pro-rata portion of the underlying assets of the series
available for distribution to shareholders.

The Trust is currently operating, and intends to continue to operate, in
compliance with the Ohio law relating to business trusts. Under Ohio law, the
shareholders of a complying business trust have no liability to third persons
for obligations of the Trust, which are to be satisfied

37
<PAGE> 58
solely from the Trust's property. The Declaration of Trust provides that no
Trustee, officer, employee, or agent of the Fund shall be personally liable to
any person for any action or failure to act in connection with the Trust's
property or the affairs of the Trust except (1) for his own willful
misfeasance, bad faith, gross negligence, or reckless disregard of his duties,
(2) with respect to any matters as to which he did not act in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best interests
of the Trust or where he did not act with the care that an ordinarily prudent
person in a like position would use under similar circumstances.

In the Fund's pre-effective registration statement, pursuant to the
requirements of the staff of the Securities and Exchange Commission ("SEC")
applied to all new funds at the time, the Fund undertook to hold a
shareholders' meeting within 16 months of effectiveness for the purpose of
electing trustees, ratifying the selection of independent accountants, and
approving the investment advisory agreement and distribution expense plan,
notwithstanding the fact that such election, ratification, and approvals had
been effected by the sole shareholder of the Fund (the Adviser) prior to the
public offering of its shares in accordance with the requirements of the
Investment Company Act of 1940. Subsequent to that time, the staff of the SEC
has eliminated these requirements for new funds and has determined that funds
which had previously made such undertakings could decide whether or not to hold
such meetings. The Trustees of the Fund have determined that it is in the best
interests of the Fund not to hold such a meeting, until one is otherwise
required, in order to avoid the costs of such a meeting.

CUSTODIAN

Star Bank, N.A., Star Bank Center, Cincinnati, Ohio 45202 acts as the
custodian of the portfolio securities and other assets of the Trust. Star Bank
has no part in determining the investment policies of the Trust or the
securities which are to be purchased, held or sold by the Trust. The Trust may
purchase or sell securities from or to Star Bank.

FINANCIAL STATEMENTS AND ACCOUNTANTS

The firm of Arthur Andersen LLP has been selected as independent public
accountants for the Fund for the fiscal year ending June 30, 1996.

LEGAL COUNSEL

Kirkpatrick & Lockhart LLP acts as legal counsel for the Fund.

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<PAGE> 59

EXCHANGES

Any termination or modification of the exchange privilege will be
preceded by 60 days' notice from the Fund except (1) under extraordinary
circumstances where there is a suspension of the exchanged security under
Section 22(e) of the 1940 Act and the rules and regulations thereunder or the
offering company temporarily ceases or delays sales of the acquired security
because it is unable to invest amounts effectively in accordance with
applicable investment objectives policies and restrictions; or (2) if the only
material effect of an amendment is to reduce or eliminate an administrative
fee, sales load, or redemption fee payable at the time of an exchange.

TELEPHONE ACCESS TO ACCOUNT INFORMATION

Shareholders may access information about their Fund account by
telephone 24 hours a day using a password assigned to them.

INVESTMENT PERFORMANCE

The Fund's yield for the 30 days ended June 30, 1995 was 5.08%. The Fund's
tax-equivalent yield was 9.09% based on combined Federal and Ohio tax rates of
44.1%, the highest marginal tax rates. The tax equivalent yield is the yield
that a taxable investment would have to yield to be equivalent to the Fund's
tax-free yield.

The Average Annual Total Return of the Fund based on purchase at the
maximum offering price (including the 2% sales charge) has been as follows:

From inception (September 18, 1992) through 6/30/95 5.63%
For 12 months ending 6/30/95 5.88%

The Average Annual Total Return of the Fund based on purchase at the net asset
price (not including the 2% sales charge) has been as follows:

From inception (September 18, 1992) through 6/30/95 6.41%
For 12 months ending 6/30/95 8.00%

The performance results shown above assume reinvestment of dividends and
other distributions. The performance quoted above represents historical
performance. The Fund's yield and return will fluctuate and value of an
investment in the Fund will fluctuate so that an investor's shares may be worth
more or less than their cost, when redeemed. During the period prior to July
1, 1994, the Adviser waived fees and/or reimbursed

39
<PAGE> 60
Fund expenses which had the effect of increasing the performance shown above.

40
<PAGE> 61
APPENDIX A

THE FUND MAY USE THE FOLLOWING HEDGING INSTRUMENTS:

OPTIONS ON DEBT SECURITIES -- A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any
time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option during
the option term, to deliver the underlying securing against payment of the
exercise price. A put option is a similar contract which gives its purchaser,
in return for a premium, the right to sell the underlying security at a
specified price during the option term. The writer of the put option, who
receives the premium, has the obligation, upon exercise during the option term,
to buy the underlying security at the exercise price. Options on debt
securities are traded primarily in the over-the-counter market rather than on
any of the several options exchanges.

OPTIONS ON INDEXES OF DEBT SECURITIES -- An index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of such securities. Index options operate in the same way as
more traditional options except that exercises of index options are effected
with cash payments and do not involve delivery of securities. Thus upon
exercise of an index option, the purchaser will realize and the writer will
pay, an amount based on the difference between the exercise price and the
closing price of the index.

BOND INDEX FUTURES CONTRACTS -- A bond index futures contract is a
bilateral agreement pursuant to which one party agrees to accept and the other
party agrees to make delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value at the close of trading of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the bonds comprising the index is made; generally
contracts are closed out prior to the expiration date of the contract.

INTEREST RATE FUTURES CONTRACTS -- Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures
contracts by their terms call for actual delivery or acceptance of debt
securities, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.

OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are similar
to options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to

41
<PAGE> 62
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), rather than to purchase or
sell a security, at a specified price at any time during the option term. Upon
exercise of the option, the delivery of the futures position to the holder of
the option will be accompanied by delivery of the accumulated balance, which
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call, and a long
position in the case of a put.

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<PAGE> 63
PORTFOLIO OF INVESTMENTS June 30, 1995

<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS - 95.39% COUPON MATURITY VALUE
AMOUNT RATE

<S> <C> <C> <C> <C>
$1,000,000 Akron, OH Waterworks System Mortgage Revenue 5.90% 3/01/09 $ 1,016,250
Improvement Series 1994
545,000 Athens Co., OH Community Mental Health Series 1993 I 5.90 3/01/09 539,550
270,000 Athens Co., OH Community Mental Health Series 1993 I 5.95 3/01/11 265,613
1,000,000 Aurora, OH City School District General Obligation ("G.O.") 5.80 12/01/16 975,000
335,000 Avon, OH G.O. 6.50 12/01/15 351,750
1,375,000 Bedford, OH City School District 6.25 12/01/13 1,419,687
Unlimited Tax G.O.
1,075,000 Broadview Heights, OH Industrial Development 6.25 7/01/13 1,089,781
500,000 Buckeye Local School District OH 5.62 12/01/11 493,750
Unlimited Tax G.O.
1,250,000 Cincinnati, OH Urban Redevelopment Improvement G.O. 6.30 12/01/15 1,292,188
2,950,000 Cleveland, OH Certificates of Participation 7.10 7/01/02 3,093,812
500,000 Cleveland, OH Limited Tax G.O. 6.37 7/01/12 515,625
2,055,000 Cleveland, OH Parking
Facilities Revenue 8.00 9/15/12 2,168,025
750,000 Cleveland, OH Public Power System First Mortgage Revenue 7.00 11/15/16 837,187
1,300,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.75 3/15/18 1,291,875
100,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.62 3/15/11 99,250
1,400,000 Copley-Fairlawn, OH City School District 6.25 12/01/15 1,422,750
Unlimited Tax G.O.
1,500,000 Cuyahoga Co., OH Hospital Facilities Revenue 6.25 8/15/10 1,554,375
(Cleveland Fairview General and Lutheran Medical Center)
500,000 Cuyahoga Co., OH Hospital Revenue 6.90 2/15/07 528,125
(Metro Health System Project)
2,185,000 Cuyahoga Co., OH Industrial Development Revenue 6.50 6/01/16 2,245,088
1,500,000 Cuyahoga Co., OH Utility Systems Revenue* 5.85 8/15/10 1,471,875
(The Medical Center Company Project)
500,000 Delaware Co., OH G.O. 5.60 12/01/10 486,250
1,160,000 Eastern Local School District, Brown Co., OH G.O. 6.25 12/01/17 1,212,200
900,000 Erie Co., OH Hospital Facilities Revenue (Firelands Hospital) 6.75 1/01/15 920,250
1,000,000 Fairfield, OH City School District G.O. 7.45 12/01/14 1,172,500
3,330,000 Franklin Co., OH Convention Facilities Authority 5.80 12/01/13 3,317,512
Tax and Lease Revenue Anticipation Refunding
680,000 Franklin Co., OH Hospital Facilities FHA Insured Revenue 7.00 8/01/16 698,700
(Worthington Christian Village)
1,310,000 Franklin Co., OH Industrial Development Refunding Revenue 5.60 8/01/21 1,197,013
(First Community Village Project)
1,310,000 Franklin Co., OH Industrial Development Revenue 6.00 9/01/13 1,296,900
(Columbus College of Art & Design)
2,500,000 Gateway Economic Development Corporation of 6.50 9/15/14 2,446,875
Greater Cleveland Stadium Revenue

See accompanying notes to financial statements.
</TABLE>

Financial Statement Page 1
<PAGE> 64

PORTFOLIO OF INVESTMENTS JUNE 30, 1995

<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS (CONTINUED) COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C> <C>
$2,020,000 Greater Cincinnati, OH Mortgage Revenue Refunding 6.90% 8/01/25 $ 2,083,125
(Walnut Towers Project)
500,000 Hamilton Co., OH Hospital Facilities Revenue 6.75 5/15/09 532,500
(Children's Hospital)
750,000 Hamilton Co., OH Hospital Facilities Revenue 7.00 1/01/12 788,438
(Deaconess Hospital)
1,000,000 Indian Valley Local School District, OH G.O. 5.75 12/01/19 970,000
500,000 Lake Co., OH Limited Tax G.O. 6.60 12/01/10 535,625
1,075,000 Lakota Local School District, OH G.O. 6.12 12/01/17 1,084,406
1,405,000 Lucas-Airport Housing Development Corp. 5.62 12/01/09 1,347,044
Mortgage Revenue Refunding
395,000 Lucas Northgate Housing Development Corp., OH 8.12 1/12/05 415,737
500,000 Mount Vernon, OH City School District 7.50 12/01/14 569,375
Unlimited Tax G.O.
1,130,000 Ohio HFA FHA Insured Mortgage Loan (Oakleaf Village) 5.55 9/01/14 1,048,075
985,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding 7.70 1/01/25 1,040,406
(FHA Section 8 Housing)
920,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding 6.50 7/01/24 922,300
(FHA Section 8 Housing)
Ohio State Air Quality Development Authority Revenue:
2,750,000 Cleveland Electric 8.00 12/01/13 3,203,750
1,150,000 Ohio Power Company 7.40 8/01/09 1,257,813
1,600,000 Ohio State Building Authority Revenue 6.12 10/01/09 1,648,000
(Adult Correctional Building)
1,000,000 Ohio State Building Authority Revenue 6.12 10/01/12 1,017,500
(Adult Correctional Building)
500,000 Ohio State Economic Development Authority Revenue 6.00 6/01/04 508,750
(ABS Industries)
815,000 Ohio State Economic Development Revenue 6.50 12/01/09 815,000
(Ohio Enterprise Bond Fund)
65,000 Ohio State Water Development Authority Revenue 9.25 12/01/12 68,169
1,000,000 Ohio State Water Development Authority Revenue 6.40 8/15/27 1,021,250
(Dayton Power & Light)
450,000 Puerto Rico Commonwealth Highway & 6.62 7/01/12 467,438
Transportation Authority
1,500,000 Puerto Rico Commonwealth Highway & 5.50 7/01/15 1,400,625
Transportation Authority
500,000 Ross Co., OH Hospital Facilities Revenue 5.60 12/01/14 480,000
2,000,000 Springdale, OH Hospital Facilities Revenue 5.87 11/01/12 1,820,000
(Southwestern Ohio Seniors' Services Inc.)
</TABLE>

See accompanying notes to financial statements.

Financial Statement
Page 2
<PAGE> 65

PORTFOLIO OF INVESTMENTS June 30, 1995

<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS (CONTINUED) COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C> <C>
$1,000,000 Student Loan Funding Corporation, Cincinnati, OH 6.15% 8/01/10 $ 968,750
Senior Subordinated Revenue Series 1993A
500,000 Summit Co., OH Limited Tax G.O. 6.90 8/01/12 535,625
500,000 Toledo, OH Sewage System Revenue 6.35 11/15/17 518,750
1,055,000 Wapakoneta, OH Limited Tax G.O. 5.45 12/01/13 994,337
725,000 Warren, OH Limited Tax G.O. 6.55 12/01/14 785,719
1,760,000 Westlake, OH Industrial Development Revenue 6.40 8/01/09 1,788,600
1,000,000 Willoughby Hills, OH Limited Tax G.O. 6.37 12/01/12 1,048,750
-----------
Total Municipal Bonds
(Amortized Cost $66,866,764) 67,105,613
-----------

SHORT-TERM INVESTMENTS - 4.61%

3,245,000 Ohio Municipal Cash Trust** (Amortized Cost $3,245,000) 3.77 -- 3,245,000
-----------
TOTAL INVESTMENTS, at value
(Amortized Cost $70,111,764) - 100% $70,350,613
===========
<FN>
* Security purchased on a delayed delivery basis. See Note 1.
** Ohio Municipal Cash Trust is a money market mutual fund the investment
objective of which is to provide current income exempt from federal regular and
Ohio state income taxes consistent with stability of principal. Interest is
accrued daily and paid to the Fund monthly. The coupon rate disclosed is the
daily rate on June 30, 1995.
</TABLE>

FEDERAL INCOME TAX INFORMATION

During the year ended June 30, 1995, the Fund made total distributions of
$0.662 per share all of which was from net investment income. All such
distributions from net investment income were entirely exempt from federal
regular income tax and income taxation in Ohio.

See accompanying notes to financial statements.

Financial Statement Page 3
<PAGE> 66
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1995

<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (Note 1) (amortized cost $70,111,764) $70,350,613
Cash 116,719
Interest receivable 1,085,643
Organization expenses, net (Note 1) 25,524
Prepaid expenses and other assets 5,072
------------
TOTAL ASSETS 71,583,571
------------
LIABILITIES
Payable for securities purchased 1,480,695
Payable for Fund shares redeemed 63,373
Accrued investment advisory fee (Note 2) 29,179
Other accrued expenses payable to adviser (Note 2) 22,327
Other accrued expenses and liabilities 5,380
------------
TOTAL LIABILITIES 1,600,954
------------
NET ASSETS $69,982,617
============
Net assets consist of:
Aggregate paid-in capital $71,241,819
Accumulated undistributed net investment income 1,229
Accumulated net realized loss (1,499,280)
Net unrealized appreciation of investments 238,849
------------
Net Assets $69,982,617
============
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 5,478,886
============
Net asset value and redemption price per share (Note 1) $12.77
=======
Maximum offering price per share (Note 1) $13.03
=======

See accompanying notes to financial statements.
</TABLE>
Financial Statement Page 4
<PAGE> 67
<TABLE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995

<CAPTION>
<S> <C> <C>
INTEREST INCOME $4,520,751

EXPENSES
Investment advisory fee (Note 2) $ 362,864
Distribution (Note 2) 181,432
Transfer agency and accounting services fees (Note 2) 95,692
Professional fees 29,940
Amortization of organization expense (Note 1) 11,515
Trustees' fees (Note 2) 10,568
Insurance 4,367
ICI dues 3,434
Custodian fees 1,664
Registration fees 1,647
Other 2,103
---------
TOTAL EXPENSES 705,226
---------

NET INVESTMENT INCOME 3,815,525

NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (1,353,239)
Net increase in unrealized appreciation of investments 2,903,704
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,550,465
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,365,990
==========

See accompanying notes to financial statements.
</TABLE>
Financial Statement Page 5
<PAGE> 68
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS

YEAR ELEVEN MONTHS
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994
(NOTE 1)
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,815,525 $ 3,542,727
Net realized gain (loss) on investments (1,353,239) 413,640
Net increase (decrease) in unrealized
appreciation/depreciation of investments 2,903,704 (5,300,214)
------------- ------------
Net increase (decrease) in net assets resulting from operations 5,365,990 (1,343,847)
------------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (3,825,971) (3,547,479)
Net realized capital gains - (624,994)
------------- ------------
Decrease in net assets from distributions to shareholders (3,825,971) (4,172,473)
------------- ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 9,722,003 29,858,508
Net asset value of shares issued as distributions 3,154,243 3,478,053
Payments for shares redeemed (22,071,088) (19,800,740)
------------ -----------
Net increase (decrease) in net assets from Fund share transactions (9,194,842) 13,535,821
------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (7,654,823) 8,019,501

NET ASSETS:
Beginning of period 77,637,440 69,617,939
------------ -----------
End of period (including undistributed net investment
income of $1,229 and $11,675, respectively) (Note 1) $69,982,617 $77,637,440
=========== ===========
NUMBER OF FUND SHARES:
Sold 781,164 2,237,725
Issued as distributions to shareholders 254,251 262,658
Redeemed (1,784,364) (1,500,873)
------------ -----------
Net increase (decrease) in shares outstanding (748,949) 999,510
Outstanding at beginning of period 6,227,835 5,228,325
------------ -----------
Outstanding at end of period 5,478,886 6,227,835
============ ===========

See accompanying notes to financial statements.

</TABLE>
Financial Statement Page 6
<PAGE> 69

NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Gradison-McDonald Municipal Custodian Trust (the "Trust") is registered under
the Investment Company Act of 1940, as amended, as a management investment
company. The Trust was created under Ohio law by a Declaration of Trust dated
June 11, 1992. The Trust consists of two series, the Gradison-McDonald Ohio
Tax-Free Income Fund and the Gradison-McDonald Intermediate Municipal Income
Fund; each of which is a diversified, open-end series representing a separate
fund with its own investment policies. This Annual Report to Shareholders
pertains only to Gradison-McDonald Ohio Tax-Free Income Fund (the "Fund"), the
public offering of shares of which commenced on September 18, 1992.

The Fund changed its fiscal year end to June 30, effective with the June 30,
1994 Annual Report.

The following is a summary of the Trust's significant accounting policies:

SECURITIES VALUATION - Securities are valued in accordance with procedures
established by the Board of Trustees by using market quotations provided by an
independent pricing service, prices provided by market makers, or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Short-term securities with remaining maturities
of less than 60 days are valued at amortized cost which approximates market
value.

FUTURES CONTRACTS - At the time the Fund enters into a futures contract, it may
be required to make a margin deposit with its custodian of a specified amount
of cash or eligible securities. During the period that the futures contract is
open, changes in the value of the contract are recognized as unrealized gains
or losses by "marking to market" on a daily basis to reflect the market value
of the contract at the end of each day's trading. Variation margin payments are
made or received on a weekly basis, depending upon whether unrealized gains or
losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transaction and the Fund's basis in the contract.

The Fund's investments in futures contracts involve, to varying degrees,
elements of market risks in excess of the amount recognized in the Statement of
Assets and Liabilities. Risks may be caused by an imperfect correlation between
movements in the price of the futures contracts and the price of the securities
being hedged. Risks may also arise if there is an illiquid secondary market for
the contracts.

At June 30, 1995, the Fund had no outstanding
futures contracts.

SECURITIES TRANSACTIONS - Securities transactions are accounted for on the
trade date (the date the order to buy or sell is executed). Gains and losses on
sales of securities are calculated on the identified cost basis for financial
reporting and tax purposes.

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 marked to market daily and begin earning interest on
the settlement date. In the event that the seller fails to deliver the
securities, the Fund could experience a loss to the extent of any appreciation,
or a gain to the extent of any depreciation, in the price of the securities.

The Fund will maintain, in a segregated account with its custodian, cash or
high-grade portfolio securities having an aggregate value at least equal to the
amount of such purchase commitments. At June 30, 1995, the Fund had committed
$1,477,770 to the purchase of a delayed delivery security; the market value of
the security segregated as collateral for this purchase is $2,083,125.

INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS - Interest income is
accrued as earned. Interest income includes interest earned, net of premium and
original issue discount, as required by the Internal Revenue Code.

Dividends arising from net investment income are declared daily and paid
monthly. Net realized capital gains, if any, are distributed at least annually.

Financial Statement Page 7

<PAGE> 70

NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995

TAXES - It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least 90%
of 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 taxable 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 equal to the amortized cost as shown on the
Statement of Assets and Liabilities.

For both financial reporting and tax purposes, gross unrealized appreciation
and gross unrealized depreciation of investments at June 30, 1995 were
$1,023,507 and $784,658, respectively.

As of June 30, 1995, the Fund had a capital loss carryforward for federal
income tax purposes of $1,499,280 which can be used to offset future capital
gains.

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 maximum offering price per share is equal to
the net asset value per share plus 2.04% of net asset value (or 2% of the
offering price). The offering price is reduced on sales of $250,000 or more.
The redemption price per share is equal to the net asset value per share.

EXPENSES - Common expenses incurred by the Trust are allocated to the Fund
based on the ratio of the net assets of the Fund to the combined net assets of
the Trust. In all other respects, expenses are charged to the Fund as incurred
on a specific identification basis.

ORGANIZATION EXPENSES - Expenses of organization have been capitalized and are
being amortized on a straight-line basis over 60 months commencing upon the
public offering of the Fund's shares.

NOTE 2 - TRANSACTIONS WITH AFFILIATES

The Fund's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities,
Inc. ("McDonald"), 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 McDonald a fee computed and
accrued daily and paid monthly based upon the Fund's average daily net assets
at the annual rate of .50%.

The Agreement provides that McDonald 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, McDonald bears the costs of preparing,
printing and mailing sales literature and other advertising materials, the cost
of space and equipment rental, and compensates the Trust's trustees who are
affiliated with McDonald. All expenses not specifically assumed by McDonald are
borne by the Fund.

Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, McDonald provides transfer agent, dividend disbursing,
accounting services and administrative services to the Trust. The Fund pays
McDonald a monthly fee for transfer agency and administrative services at an
annual rate of $26.50 per shareholder non-zero balance account, plus
out-of-pocket costs for statement paper, statement and reply envelopes and
reply postage. The Fund pays McDonald a monthly fee for accounting services
based on the Fund's average daily net assets at an annual rate of .035% on the
first $100 million, .025% on the next $100 million and .015% on any amount in
excess of $200 million, with a minimum annual fee of $48,000.

Financial Statement Page 8

<PAGE> 71

NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995

Under the terms of an Expense Reimbursement Agreement, McDonald has agreed to
forego fees owed to it under the Advisory Agreement or any other agreement with
the Trust and to reimburse the Fund if, and to the extent that, expenses
(excluding brokerage commissions, taxes, interest and extraordinary items)
borne by the Fund in any fiscal year exceed 1.25% of the average net assets of
the Fund. This agreement is subject to termination at any time without notice.
In addition, McDonald may, at its discretion, agree to waive fees and/or
reimburse the Fund for other expenses in order to limit the Fund's expenses to
a specified percentage of average net assets lower than 1.25%. For the year
ended June 30, 1995, no fees were waived or expenses reimbursed.

In accordance with the terms of a Distribution Service Plan adopted under Rule
12b-1 of the Investment Company Act of 1940, the Fund pays McDonald a service
fee for providing personal services to shareholders of the Fund, including
responding to shareholder inquiries and providing information to shareholders
about their Fund accounts. This fee is computed and paid at an annual rate of
..25% of the Fund's average daily net assets.

During the year ended June 30, 1995, McDonald received sales charges
aggregating $89,864 on sales of shares of the Fund.

The officers of the Trust are also officers of McDonald.

Each trustee of the Trust who is not affiliated with McDonald 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 and (b) $250 for each Board of Trustees or committee meeting
attended.

NOTE 3 - SUMMARY OF INVESTMENT TRANSACTIONS

For the year ended June 30, 1995, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $55,436,867 and
$67,019,037, respectively.

NOTE 4 - PORTFOLIO COMPOSITION

The concentration of investments as of June 30, 1995, classified by revenue
source and credit rating, was as follows:

<TABLE>
<S> <C> <C> <C>
S&P Moody's:
General Obligations 22.5% ------------
Revenue Bonds: AAA/Aaa 47.0%
Health Care 16.3 AA/Aa 10.4
Housing 14.0 A/A 18.8
Utilities 13.4 BBB/Baa 9.7
State Agency 3.8 Unrated (2) 9.5
Higher Education 3.2 Money Market (3) 4.6
Other (1) 17.8 -----
Money Market 4.6 Total 100.0%
Municipal Lease 4.4 =====
-----
Total 100.0%
=====
<FN>
(1) Individually less than 3%.
(2) Unrated obligations have been determined by the adviser to be of equivalent
quality to the rated securities in which the Fund is permitted to invest.
(3) Money market funds in the Fund's portfolio invest in obligations rated in
one of the two highest short-term rating categories or unrated obligations
of comparable quality.

See the Fund's Portfolio of Investments for additional information
on portfolio composition.
</TABLE>

Financial Statement Page 9

<PAGE> 72

ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO, SC

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Trustees of the
Gradison-McDonald Ohio Tax-Free Income Fund
of the Gradison-McDonald Municipal Custodian Trust:

We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald Ohio Tax-Free Income Fund of the Gradison-McDonald Municipal
Custodian Trust (an Ohio business trust), including the portfolio of
investments, as of June 30, 1995, and the related statement of operations for
the year then ended, and the statements of changes in net assets and the
financial highlights for the periods indicated thereon. 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 audit 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 June
30, 1995, 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-McDonald Ohio Tax-Free Income Fund of the Gradison-McDonald Municipal
Custodian Trust as of June 30, 1995, the results of its operations for the year
then ended, and the changes in its net assets and the financial highlights for
the periods indicated thereon, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
August 4, 1995

Financial Statement Page 10

<PAGE> 73
COVER PAGE
- ----------

OHIO TAX-FREE
INCOME FUND

GRADISON-MCDONALD

[Graphic of collage of blueprint , hammer, nails, picture of street with
houses, and logo "Your Future Starts Today."]

A MUNICIPAL BOND FUND WITH DOUBLE TAX-FREE BENEFITS TO OHIO INVESTORS
<PAGE> 74
INSIDE COVER
- ------------

FAMILY OF MUTUAL FUNDS

OHIO TAX-FREE
INCOME

INTERMEDIATE ESTABLISHED
MUNICIPAL VALUE

INTERNATIONAL GOVERNMENT
INCOME

MONEY MARKET OPPORTUNITY
VALUE

GROWTH
& INCOME
<PAGE> 75

PAGE 1
- ------

[Graphic of portion of above described collage with logo "Your Future Starts
here.]

Whatever your goals or ASPIRATIONS
Whatever your objective. One thing is certain.
An INVESTMENT made today brings
you that much closer to meeting that OBJECTIVE
and reaching that GOAL ...
whether it's buying a house, starting a family,
SAVING for a college education,
or planning for retirement. Hesitate and
time will pass you by.

Increasingly, MUTUAL FUNDS are the
PREFERRED VEHICLE for starting and building
an investment program.
And today, GRADISON-MCDONALD is a
preferred name in mutual funds
for a GROWING number of investors.

1-800-869-5999 [Telephone information logo.]
<PAGE> 76
PAGE 2
- ------

OHIO TAX-FREE
INCOME FUND

GRADISON-McDONALD OHIO TAX-FREE INCOME
FUND SEEKS TO PROVIDE OHIO RESIDENTS REGULAR
MONTHLY INCOME THAT IS FREE FROM BOTH
REGULAR FEDERAL 1 AND OHIO STATE INCOME
TAXES. THE FUND IS PROFESSIONALLY MANAGED
BY EXPERIENCED GRADISON-McDONALD PORTFOLIO
MANAGERS.

THE TAX-FREE ADVANTAGE

Gradison-McDonald Ohio Tax-Free Income Fund's
double tax-free dividends can help you keep more of
what you earn. The table below illustrates how the
income from a tax-free investment compares with that
of a taxable investment after taxes.

THE TAX-FREE ADVANTAGE FOR OHIO INVESTORS
REFLECTS THE NEW 36% AND 39.6% FEDERAL TAX RATES

<TABLE>
<CAPTION>
TAXABLE INCOME COMBINED A TAX-EXEMPT YIELD OR
TAX 4.50% 5.00% 5.50%
JOINT SINGLE BRACKET EQUALS A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C>
$ 40,000-80,000 $ 40,000-53,500 31.74% 6.59% 7.33% 8.06%

80,001-89,150 ............... 32.28 6.64 7.38 8.12

............... 53,501-80,000 34.59 6.88 7.64 8.41

89,151-100,000 80,001-100,000 35.10** 6.93 7.70 8.47

100,001-140,000 100,001-115,000 35.76** 7.01 7.78 8.56

140,001-200,000 115,001-200,000 40.42** 7.55 8.39 9.23

200,001-250,000 200,001-250,000 40.80** 7.60 8.45 9.29

250,001 AND UP 250,001 AND UP 44.13** 8.05 8.95 9.84

<FN>
This table is for illustrative purposes only and does not project or guarantee
future yields of the Fund. *The combined brackets include the effect of
deducting state taxes on your federal tax return. **Does not reflect the
phase-out of exemptions for federal tax purposes or the reduction of otherwise
allowable deductions that occur when adjusted gross income exceeds certain
levels.

1 Some income may be subject to Alternative Minimum Taxation for taxpayers
subject to such tax.

</TABLE>

<PAGE> 77
PAGE 3
- ------

[Graphic of portion of collage described above showing model of house and
blueprint.]

THE MAGIC OF COMPOUNDING
- ------------------------

Dividends from the Gradison-McDonald Tax-Free Income Fund can be paid to you
each month or reinvested to purchase additional shares of the Fund Remember
that money that is reinvested will compound tax-free. The following chart
illustrates the effect of tax-free compounding

CHART - THE POWER OF TAX-FREE COMPOUNDING -
A CHART SHOWING A $10,000 INVESTMENT YIELDING A TAX-FREE FIXED RETURN OF 5.5%
WITH DIVIDENDS PAID OUT AND AGAIN WITH DIVIDENDS REINVESTED OVER A 1,2,3,4 AND
5 YEAR PERIOD.

The above chart is based on a hypothetical investment of $10,000 receiving
fixed annual returns of 5.5%. Based on the 40.4% federal and Ohio state income
tax bracket. This table is for illustrative purposes only and does not project
or guarantee future fund dividends.

HIGH QUALITY, DIVERSIFIED PORTFOLIO
- -----------------------------------

Gradison-McDonald Ohio Tax-Free Income Fund invests by nationally recognized
service. It focuses on bonds with a maturity of 10 years or longer, which can
return a higher yield but are more sensitive to interest rate fluctuations The
Fund's managers use a range of bond maturities to attempt to reduce those
fluctuations.
1-800-869-5999 [Telephone information logo.]

<PAGE> 78
PAGE 4
- ------

LOW MINIMUM INVESTMENT
- ----------------------

The Gradison-McDonald Ohio Tax-Free Income Fund has a low minimum initial
investment of $1,000. Additional investments can be made for as little as $50.

MONTHLY PAYMENT & REINVESTMENT
- ------------------------------

Dividends are paid monthly. You may choose to receive monthly dividends
automatically reinvested in the Fund.

EXCHANGES
- ---------

You can move money from one Gradison-McDonald fund to another at any time
without a service charge. The Gradison-McDonald funds currently include:

Established Value Fund
Opportunity Value Fund
Government Income Fund
U.S. Government Reserves
Intermediate Municipal Income Fund

Gradison-McDonald funds planned for 1995 and sold
by prospectus only include:

Growth & Income Fund
International Fund

ACCESS
- ------
_____[Graphic of postcard of tree lined street.]
You can redeem shares on any business day.
<PAGE> 79
INSIDE BACK COVER
- -----------------

A TRUSTED NAME

Gradison-McDonald
is headquartered in Cincinnati and has
managed mutual funds since 1976.
The parent company, McDonald & Company
Investments, was founded in 1924
and has been listed on the
New York Stock Exchange since 1983.
It operates a leading regional
investment advisory, investment banking,
and investment brokerage firm
with offices throughout
Ohio, Michigan and Indiana,
and in Atlanta, Boston, Dallas, Chicago,
Los Angeles, the New York City area
and Naples, Florida.

1-800-869-5999 [Telephone information logo.]
<PAGE> 80
BACK COVER
- ----------
[Graphic of portable phone and envelopes.]

To find out more about the
GRADISON-MCDONALD
OHIO TAX-FREE INCOME FUND
or other funds in the family

CALL

1-800-869-5999

OR WRITE

Gradison-McDonald Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202

GRADISON-MCDONALD

You may obtain a prospectus containing complete information about the funds
from a Gradison . McDonald Mutual Funds representative or your Investment
Consultant. Read it carefully before investing.

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. Under rare circumstances, a small portion of the Fund's income
may be subject to Federal and State taxes.
McDonald & Company Securities, Inc.--Distributor
<PAGE> 81
To find out more about the

GRADISON-MCDONALD

INTERMEDIATE

MUNICIPAL INCOME FUND

or other funds in the family

CALL

1-800-869-5999

OR WRITE

Gradison-McDonald Mutual Funds

580 Walnut Street

Cincinnati, Ohio 45202

GRADISON-MCDONALD

The investments 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.
McDonald & Company Securities, Inc. -- Distributor

INTERMEDIATE
MUNICIPAL INCOME
FUND

GRADISONY-MCDONALD

Duotone of postcards, rope, shells, sand and fabric with abstract shell motif
on wooden floor. Tagline reads Your Future Starts Today.

YOUR
FUTURE
STARTS
TODAY

P R O S P E C T U S

November 1,1995

<PAGE> 82
SIGNIFICANT FEATURES

Professional Management
Portfolio Diversification
Dividends Paid in Additional Shares or Cash
Daily Liquidity at Net Asset Value
$1,000 Minimum Initial Investment
$50 Minimum Additional Investment

LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995

INTERMEDIATE
MUNICIPAL INCOME FUND

AN INTERMEDIATE MUNICIPAL BOND FUND
SEEKING A HIGH LEVEL OF AFTER-TAX INCOME

The Gradison-McDonald Intermediate Municipal Income Fund ("Fund") is a
diversified open-end management investment company which seeks to provide as
high a level of after-tax current income exempt from regular Federal income tax
as is consistent with preservation of capital by investing primarily in
intermediate maturity municipal securities. The Fund's dollar-weighted average
portfolio maturity will range between three and ten years under normal
conditions. McDonald & Company Securities, Inc. ("McDonald" or the "Adviser")
is the investment adviser and principal underwriter for the Fund. The Gradison
Division of McDonald ("Gradison") acts as transfer agent of the Fund. The Fund
is a series of the Gradison-McDonald Municipal Custodian Trust.

For all information (including purchases, redemptions, and most recent yield),
call 579-5700 from Cincinnati, Ohio or 1-800-869-5999 toll free. 1-800-869-5999
toll free.

<PAGE> 83

TABLE OF CONTENTS
Expense Summary 2

Financial Highlights 3

Investment Objective 4

Risk Factors and For Whom the Fund

May Be Appropriate 4

Investment Policies 4

Purchases and Redemptions 8

Net Asset Value 11

Optional Shareholder Services 12

Distributions 12

Taxes 12

General Information 13

Management of the Fund 13

Distribution Service Plan 14

Performance Calculations 14

EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge on purchases
(as a percentage of offering price)
- ----------------------------------------------

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C>
Management Fees (after waiver) .25
12b-1 Fees .25
Other Expenses (after reimbursement) .75

TOTAL FUND OPERATING EXPENSES 1.25
(after waiver and reimbursement)
- ----------------------------------------------

</TABLE>

The "management fee" category and Oother expenses category would be .50%, and
..93%, respectively, absent fee waiver and expense reimbursement by the Adviser
and it is estimated that total expenses of the Fund absent fee waiver and
expense reimbursement would be 1.68%. The fee waiver and expense reimbursement
will be in effect through December 31, 1996, and may be continued thereafter.
For further information about fee waiver and expense reimbursement see
"Management of the Fund."

The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly and
indirectly. (For more information about expenses, see "Purchases and
Redemptions," "Distribution Service Plan" and "Management of the Fund.")

Example: You would pay the following expenses on a $1,000 investment assuming
5% annual return* and redemption at the end of each period:

1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
$32 59 $87 $168

* The 5% annual return is a standardized rate prescribed for use by all mutual
funds for the purpose of this example and does not represent the past or future
return of the Fund.

The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.

</TABLE>

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<PAGE> 84

FINANCIAL HIGHLIGHTS

The table below presents the financial highlights of the Fund's operations. The
information is expressed in terms of a single share outstanding throughout the
periods. The financial highlights have been audited by Arthur Anderson LLP,
independent public accountants, as indicated in their report which appears in
the Statement of Additional Information.

YEAR FOR THE PERIOD
ENDED APRIL 15, 1994* TO
JUNE 30,1995 JUNE 30, 1994
<S> <C> <C>
Net asset value at beginning of period $ 12.718 $ 12.500
--------- ---------
Income from investment operations:
Net investment income .633 .119
Net realized and unrealized gain on investments .196 .217
--------- ---------
Total income from investment operations .829 .336
--------- ---------
Distributions to shareholders:
Dividends from net investment income (.629) (.118)
--------- ---------
Total distributions to shareholders (.629) (.118)
--------- ---------
Net asset value at end of period $ 12.918 $ 12.718
========= =========
Total return (1) 6.72% 2.76%
========= =========
Ratios/Supplemental data:
Net assets at end of period (in millions) $ 14.0 $ 7.3
Ratios net of expenses waived by the adviser (2):
Ratio of expenses to average net assets .50% .13% (3)
Ratio of net investment income to average net assets 4.95% 4.40% (3)
Ratios assuming no adviser waiver of expenses (2):
Ratio of expenses to average net assets 1.68% 2.94% (3)
Ratio of net investment income to average net assets 3.77% 1.58% (3)
Portfolio turnover rate 137.98% 10.38%

(1) Total returns are based upon an initial investment purchased without the
applicable sales charge, represent actual returns over those periods, and have
not been annualized.
(2) The Adviser absorbed expenses of the Fund through
waiver of fees and reimbursement of certain expenses.
(3) Annualized.
*Date of public offering

</TABLE>

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<PAGE> 85
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of after-tax
current income as is consistent with preservation of capital through investment
primarily in obligations the interest from which is exempt from regular Federal
income taxation.

RISK FACTORS AND FOR WHOM
THE FUND MAY BE APPROPRIATE
The net asset value and yield of the Fund's shares will fluctuate depending on
market conditions and other factors, with the value of shares normally
fluctuating inversely with changes in interest rates. There are risks
associated with investment in municipal securities, options and financial
futures transactions including changes by rating services of the rating of
portfolio securities and in the ability of issuers to make payment of principal
and interest. See "Investment Policies" at pages 4-8 of this Prospectus. There
can be no assurance that the investment objective of the Fund will be achieved.

The Fund may be appropriate for investors seeking income free of federal income
tax, who can accept the fluctuations in the value inherent in investment in
intermediate maturity debt securities. The Fund focuses on intermediate
maturity investment grade securities. The Fund has a lower risk level and lower
yield/return potential than fixed income investments with longer maturities
and/or lower grade securities, and compared to equity investments. The Fund has
a higher risk level and yield/return potential than fixed income investments
with shorter maturities and/or higher grade securities, including money market
investments.

INVESTMENT POLICIES

The Fund normally invests substantially all (at least 80%) of the value of its
net assets in securities, the interest from which is exempt from regular
Federal income tax. The interest from some municipal securities which the Fund
invests in is subject to the federal alternative minimum tax ("AMT"). (See
"Taxes.") For the year ended June 30, 1995, 100% of the Fund's income
dividends were free from regular Federal income taxes and 21% were subject to
AMT. The Fund does not anticipate that it will ordinarily invest in securities
subject to regular Federal income tax. However, the Fund's trustees or the
Adviser may determine that conditions in the markets for tax-exempt securities
make pursuing the Fund's basic investment strategy inconsistent with the best
interests of its shareholders. At such times, the Fund may invest up to 100% of
its assets in investments subject to Federal income tax for temporary defensive
purposes to reduce fluctuations in the value of the Fund's assets. The taxable
securities the Fund may invest in for temporary defensive purposes are United
States Treasury securities with maturities of less than three years. The
investment objective of the Fund and the policy set forth in the first sentence
of this paragraph cannot be changed without the approval of a "majority of the
outstanding voting securities" of the Fund as defined in the Investment Company
Act of 1940 (the "1940 Act"). All other policies and limitations described in
this Prospectus, unless denominated as fundamental policies or restrictions
which may not be changed without shareholder approval, may be changed without
shareholder approval. See "Description of the Trust" in the Statement of
Additional Information.

The Fund invests in municipal bonds issued by or on behalf of states,
territories or possessions of the U.S. and their political subdivisions,
agencies and instrumentalities. Municipal bonds are generally issued to finance
public works such as airports, bridges, highways, schools and housing.
Municipal bonds are also used to repay outstanding obligations, to raise funds
for general operating expenses and to make loans to other public institutions
and facilities. Certain types of "private activity" municipal bonds are issued
to obtain funding for privately operated facilities. There are two general
categories of municipal bonds: general obligation and revenue. General
obligation bonds are backed by the taxing power of the issuing municipality.
Revenue bonds are backed by the revenue of a project or facility. Payment of
principal and interest on such bonds is dependent solely on the revenue
generated by the facility financed by the bond or other specified sources of
revenue or collateral. Private activity bonds are typically one type of revenue
bond.

<PAGE> 86
The Fund may also invest in short-term tax-exempt securities, usually for
temporary purposes. Short-term tax-exempt securities are generally issued as
interim financing in anticipation of tax collections, revenue receipts or bond
sales to finance public purposes. From time to time, the Fund may also invest
up to 10% of its assets in tax-exempt mutual funds, including tax-exempt money
market funds, which have investment criteria equal to or higher than those of
the Fund, subject to the requirements of applicable law. Such investments will
result in shareholders, in effect, paying duplicate or multiple fees, since
such mutual funds incur expenses similar to those of the Fund. The 1940 Act
limits the Fund's investment in any other mutual fund to a maximum of 3% of the
outstanding voting stock of that mutual fund and an amount which may not
represent more than 5% of the assets of the Fund. The Adviser will only invest
in such funds when it believes that the yields on such funds are advantageous.

The Fund may invest in participations in lease obligations or installment
purchase contract obligations of municipal authorities or entities ("Municipal
Leases"). Certain Municipal Leases contain "nonappropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Although nonappropriation Municipal Leases are secured by
the leased property, disposition of the property in the event of foreclosure
might prove difficult. Nonappropriation leases may present special risks
because the municipality's obligation to make future lease or installment
payments depends on money being appropriated in the future. The Fund will limit
its investment in nonappropriation leases to a maximum of 10% of its assets.
The Fund invests in such leases according to guidelines of the Fund as set
forth in the "Municipal Leases" section of the Statement of Additional
Information.

With respect to unrated Municipal Leases, credit quality will be determined by
the Adviser (pursuant to procedures established by the Board of Trustees
("Board"), and subject to review by the Board) on an ongoing basis, including
an assessment of the likelihood that a lease will be cancelled. For further
information, see "Municipal Leases" in the Statement of Additional Information.

The Fund may invest in zero coupon municipal bonds. Such bonds are debt
obligations which do not require the periodic payment of interest and are
issued at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity at a rate of interest reflecting the market rate of the security
at the time of issuance. Zero coupon bonds benefit the issuer by reducing its
need to use cash for debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such bonds
experience greater volatility in market value due to changes in interest rates
than debt obligations which provide for regular payments of interest. The Fund
will accrue income on such bonds for tax and accounting purposes, in accordance
with applicable law,

<PAGE> 87
which is distributable to shareholders. Because no cash is received at the time
such income is accrued, the Fund may be required to liquidate other portfolio
securities to satisfy its distribution obligations. The Fund does not intend to
invest more than 25% of its total assets in zero coupon bonds.

The Fund may purchase and sell securities on a "when-issued" and "delayed
delivery" basis, that is, obligate itself to purchase or sell securities with
delivery and payment to occur at a later date. Such securities are subject to
market fluctuation and the yields on securities so purchased may be lower than
those available in the market at the time of delivery. "When issued" and
"delayed delivery" transactions may be expected to occur a month or more before
delivery is due. The Fund will maintain, in a segregated account with its
custodian, cash or liquid high-grade debt securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent the Fund acquires securities in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for the
Fund's portfolio and not for the purpose of investment leverage. The Fund does
not accrue income on securities purchased on a when-issued or delayed delivery
basis until delivery occurs. The Fund may enter into delayed delivery sales of
securities in order to accommodate purchasers of portfolio securities from the
Fund in transactions effected at an advantageous price to the Fund. The Fund
will limit its outstanding purchases of securities on a "when-issued" or
"delayed delivery" basis to no more than 33 1/3 % of its total assets.

QUALITY (RATINGS)

The Fund invests in municipal bonds judged by the Adviser to be of investment
grade quality. Investment grade bonds are those rated Baa or better by Moody's
Investors Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's
("S&P") or Fitch Investor Services, Inc. ("Fitch"). Investment grade bonds
have adequate to strong protection of principal and interest payments. Bonds
rated Baa are considered by Moody's to be medium grade obligations which lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well, while municipal obligations rated BBB are regarded by
S&P and Fitch as having an adequate capacity to pay principal and interest.
Bonds rated BBB or Baa are at the lower end of the investment grade category
and may be more sensitive to economic changes and changes in the financial
condition of issuers. The Fund may also invest in unrated obligations
determined by the Adviser to be of equivalent quality to the rated securities
in which it is permitted to invest. See the Statement of Additional
Information for more detailed information concerning securities ratings. If the
rating of a bond held by the Fund drops below investment grade or if an unrated
bond deemed by the Adviser to be of equivalent quality to investment grade
ceases to be considered investment grade, the Fund will normally sell such bond
in a reasonable period of time.

In the case of short-term notes, the Fund will invest in notes rated SP-1
through SP-2 by S&P or MIG 1 through MIG 3 by Moody's. In the case of
tax-exempt commercial paper, the Fund will invest in such when rated A-1+
through A-2 by S&P or Prime-1 or Prime-2 by Moody's.

MATURITY

Under normal conditions, the Fund's dollar-weighted average portfolio maturity
will be between three and ten years. The maturity of the Fund's investments may
be varied within this range according to the Adviser's outlook for interest
rates and other conditions. The Fund may hold securities with maturities of
less than three years or more than ten years as long as its dollar-weighted
average maturity is between three and ten years. On June 30, 1995, the weighted
average maturity of the Fund's portfolio was 6.42 years.

PORTFOLIO TURNOVER

Although the Fund does not normally intend to invest for the purpose of seeking
short-term profits, it may do so when it is consistent with the Fund's
investment objectives. Securities in its portfolio will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's investment
objective, without

6
<PAGE> 88
regard to the length of time a particular security may have been held.

DIVERSIFICATION
The Fund will not, as a fundamental policy, with respect to 75% of its assets,
invest more than 5% of its assets in securities of any one issuer or acquire
more than 10% of the voting securities of any issuer, except securities issued
by the U.S. Government or its agencies or instrumentalities. The Fund does not
intend to invest in securities backed by letters of credit of any one bank to
the extent that such securities constitute more than 10% of the assets of the
Fund. For this purpose, the "issuer" of a security is deemed to be the entity
whose assets and revenues are committed to the payment of principal and
interest on that security, provided that the guarantee of an instrument will be
considered a separate security except when the value of all securities issued
or guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of
the value of the total assets of the Fund.

CONCENTRATION
It is possible that the Fund will invest more than 25% of its assets in a
particular segment of the municipal bond market such as Hospital Revenue Bonds,
Housing Agency Revenue Obligations, Airport Revenue Obligations or in
securities the issuers of which are located in one state. (As of June 30,
1995, 40.1% of the Fund's assets were invested in securities, the issuers of
which were located in Ohio.) This would only be the case if the Adviser
determined that the yields available from such obligations justified the
additional risks associated with such concentration. Economic, business,
political and other developments generally affecting the revenue of such
issuers (for example, proposed legislation or pending court decisions affecting
the financing of such projects and market factors affecting the demand for
their services or products) may have a general adverse effect on all
obligations in such a market segment.

OHIO ECONOMIC CONSIDERATIONS

Because a substantial portion of the Fund's assets are invested in securities
of Ohio issuers, political and economic factors affecting Ohio could affect the
creditworthiness and the value of the securities in its portfolio. The Ohio
economy, while diversifying more into service and other nonmanufacturing areas
in recent years, continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products
and household appliances. As a result, general economic activity in Ohio, as in
many other industrially developed states, tends to be more cyclical than in
some other states and in the nation as a whole. Agriculture is an important
segment of the economy, with over half the State's area devoted to farming and
approximately 16% of total employment involved in agribusiness. The State's
overall unemployment rate is commonly somewhat higher than the national figure
although in recent years the reverse has been true. The unemployment rate and
its effects vary among particular geographic areas of the State. Future
statewide or regional economic difficulties, and the resulting impact on State
or local government finances generally, could adversely affect the market value
of Ohio Obligations held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on those
obligations. See "Factors Relating to Ohio" in the Statement of Additional
Information.

OTHER INVESTMENT RESTRICTIONS
The Fund may not borrow money, except from banks as a temporary measure or for
extraordinary or emergency purposes, and then only in amounts not exceeding 10%
of its total assets. While any borrowing of greater than 5% of assets occurs,
the Fund will not purchase additional portfolio securities. This restriction
may not be changed without shareholder approval. The Fund may not invest more
than 15% of its assets in securities that are not readily marketable nor may it
pledge more than 15% of its assets.

HEDGING
The Fund may engage in certain hedging transactions involving the use of
financial futures contracts, options

7
<PAGE> 89
on financial futures or options based on either an index of tax-exempt
securities or on debt securities the prices of which, in the opinion of the
Adviser, correlate with the prices of the Fund's investments. These hedging
transactions are designed to limit the risk of price fluctuations of the Fund's
investments. The Fund may purchase and sell financial futures contracts and
related options. Futures contracts on a Municipal Bond Index are traded on the
Chicago Board of Trade. This Index is designed to represent a numerical measure
of market performance for long-term tax-exempt bonds.

The Fund may purchase and sell futures contracts on this Index or any other
tax-exempt bond index approved for trading by the Commodity Futures Trading
Commission to hedge against general changes in market values of portfolio
securities which the Fund owns or expects to purchase. The Fund may also
purchase and sell put and call options on index futures for hedging purposes.
The Adviser believes that, under certain market conditions, price movements in
U.S. Treasury security futures and related options may correlate closely with
price movements in tax-exempt securities and may as a result provide
significant hedging opportunities for the Fund. The Fund may also purchase and
sell futures contracts and related options with respect to such U.S. Treasury
securities when the Adviser believes that the price movements of Treasury
securities will correlate with price movements in tax-exempt securities. The
Fund will enter into hedging transactions only when it either owns an
offsetting position in the underlying securities, options or futures contracts
or maintains cash or liquid high-grade debt securities with a value sufficient
at all times to cover its obligations, which assets are segregated by the
Fund's custodian. The Fund might not employ any of the strategies herein, and
there can be no assurance that any strategy used will succeed. The use of these
strategies involves certain special risks, including (1) the fact that the
skills needed to use hedging instruments are different from those needed to
select the Fund's securities, (2) possible imperfect correlation, or even no
correlation, between price movements of the investments being hedged, (3) the
fact that, while hedging strategies can reduce the risk of loss, they can also
reduce the opportunity for gain, or even result in losses, by offsetting
favorable price movements in hedged investments and (4) the possible inability
of the Fund to purchase or sell a portfolio security at a time that otherwise
would be favorable to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
segregate securities in connection with hedging transactions and the possible
inability of the Fund to close out or liquidate its hedged position. New
financial products and risk management instruments and techniques continue to
be developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objective and regulatory and tax considerations.

See the Statement of Additional Information for further information about
futures and options and associated risks.

PORTFOLIO MANAGER

Stephen C. Dilbone, Executive Vice President of the Trust, is primarily
responsible for the day-to-day management of the Fund's portfolio. Mr. Dilbone
has been portfolio manager of the Fund since its inception and of the
Gradison-McDonald Ohio Tax-Free Income Fund since its inception in September
1992. He is a First Vice President of Gradison with responsibility for
tax-exempt securities trading.

PURCHASES AND REDEMPTIONS

HOW TO PURCHASE SHARES
You may purchase shares of the Fund by bringing or mailing funds to McDonald or
Gradison, the principal underwriter of the Fund. The minimum investment
required to open an account is $1,000 and additional

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<PAGE> 90
The public offering price is the net asset value plus a sales charge. The sales
charge varies depending on the size of the purchase. The current sales changes
are:

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
------------------------------ AMOUNT OF SALES CHARGE
AS PERCENTAGE AS PERCENTAGE REALLOWED TO DEALERS
SIZE OF TRANSACTION OF OFFERING OF NET ASSET AS A PERCENTAGE OF
AT OFFERING PRICE PRICE VALUE OFFERING PRICE
<S> <C> <C> <C>
Less than $250,000 2.00% 2.04% 2.00%
$250,000 or more but less than $500,000 1.00% 1.01% 1.00%
$500,000 or more 0.00% 0.00% 0.00%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

investments must be at least $50. These minimums may, however, be waived for
certain group purchases. Purchase orders become effective when the Fund receives
the necessary information about your account and provision for payment has
been made. No share certificates will be issued. Share purchases are confirmed
by issuance of account statements. Shares are sold at the public offering price
based on the net asset value next determined after the Fund receives your order.
See the table above for additional information about sales charges.

The Fund receives the net asset value from purchases. The sales charge is
retained by McDonald or reallowed by McDonald to your investment dealer. In
accordance with a distribution service plan adopted pursuant to Rule 12b-1,
McDonald also receives an annual service fee as Distributor in the amount of
..25% of the average net assets of the Fund (see "Distribution Service Plan").
The Fund sells shares without a sales charge to the trustees of any investment
company as to which McDonald is investment adviser (and their families), current
and retired employees of McDonald and affiliates (and their families), advisory
accounts managed by McDonald or Gradison, and bank or trust company trust
accounts.

Investors may purchase shares of the Fund without payment of a sales charge to
the extent that the investment represents the proceeds of a redemption of any
other mutual fund's shares, the purchase of which involved an initial sales
charge. Additionally, investors may purchase shares of the Fund without payment
of a sales load to the extent that the investment represents the proceeds of a
redemption of any other mutual fund, except a Gradison-McDonald fund or a money
market fund, so long as the investor has been invested in such fund for at
least one year prior to the purchase of Fund shares. Investors must inform
Gradison or McDonald of their eligibility for these no-load purchases and
provide appropriate documentation to demonstrate their eligibility. Call
Gradison or McDonald for details.

Within six months of a redemption of shares of the Fund, shareholders may
reinvest all or part of the redemption proceeds in shares of the Fund without
the payment of a sales charge. The amount which may be so reinvested is limited
to an amount up to the redemption proceeds. In order to exercise this privilege,
you must make a written request for reinstatement which must accompany the
reinvestment. Gradison, McDonald, and the Fund do not assume any responsibility
for your receipt of the reinvestment credit in the absence of such written
notice from you, or for ensuring that you provide such written notice. This
reinstatement privilege can be exercised only once for all or a portion of the
shares redeemed. The tax treatment of a gain realized on a redemption will not
be affected by exercise of the reinstatement privilege, but a loss may be
nullified by a reinvestment in the Fund within 30 days before or after the
redemption (see "Taxes"). The Fund may amend or cease offering this privilege at
any time as to shares redeemed after the date of such amendment or change.

QUANTITY DISCOUNTS

<PAGE> 91
McDonald whenever a quantity discount is applicable to your purchase and, if
necessary, provide sufficient information to verify that your purchase
qualifies for a discount. Upon such notification, you will receive the lowest
applicable sales charge. The purchases or share balances of all accounts
managed by an investment adviser may be aggregated for purposes of determining
the amount of sales charge due on purchases. Gradison, McDonald, and the Fund
shall not be responsible for failure to obtain such a quantity discount in the
absence of such notification. Quantity discounts may be modified or terminated
at any time. For more information about quantity discounts, contact Gradison or
McDonald.

1. Combination of Investments. You may combine your purchase of shares of the
Fund on any day with purchases of shares of the Fund or any other
Gradison-McDonald funds sold with a sales charge made by you, your spouse and
your children under the age of 21 to qualify for a quantity discount. The
aggregate investments of a trustee or custodian for the benefit of you or any
of the individuals described above may also be considered in determining
whether a reduced sales charge is available.

2. Rights of Accumulation. Under your Rights of Accumulation, in determining
the sales charge to be paid for your current purchase you may combine your
current purchase with the current public offering price of shares of the Fund
or any other Gradison-McDonald funds sold with a sales charge (or the original
amount invested, whichever is greater) that are currently owned by you, your
spouse, your children under the age of 21, or the aggregate investment of a
trustee or other fiduciary, for the benefit of you or any of the individuals
described above.

When you sign a Letter of Intent, shares purchased by you with a value of 3%
of the amount you specify in the Letter of Intent will be restricted, that is,
these shares cannot be sold or redeemed until the Letter of Intent is satisfied
or the additional sales charges have been paid. If the total purchases you make
under the Letter of Intent, less redemptions, equal or exceed the amount you
specify in the Letter of Intent, the shares will no longer be restricted. If
the total purchases, less redemptions, exceed the amount you specify, and
qualify you for further quantity discount, Gradison or McDonald will, at your
request, make a retroactive share adjustment and will apply the adjustment to
purchase additional shares of the Fund for your account at the next computed
price. If you do not complete your purchases under the Letter of Intent, your
sales charge will be adjusted upward, and if, after written notice, you do not
pay the increased sales charge, restricted shares will be redeemed to pay such
charge.

HOW TO REDEEM SHARES

You may redeem shares of the Fund without charge or penalty by sending a
written redemption request to the Fund identifying the name of the Fund, the
account name and number and the number of shares or dollar amount to be
redeemed. You may redeem shares by telephone and have the proceeds of your
redemption mailed to the address on the FundGs records. All redemptions are
effected at the next net asset value calculated after the Fund receives the
redemption request in good order. The Fund normally makes payment for redeemed
shares within one business day, and, except in extraordinary circumstances,
within seven days after receipt of a properly executed redemption request.
Shareholders may make special arrangements for wire transfer of redemption
proceeds by contacting the Fund in advance of a contemplated share redemption.
The Fund reserves the right to delay payment for the redemption of shares where
the shares were purchased with a personal check, but only until the purchase
payment has cleared, which may take up to 15 days from the day the check is
received by the Fund. If you need more immediate access to your investment,
you should

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<PAGE> 92

consider purchasing shares by wire, cash, or other immediately available
funds.

All redemption information and authorizations (except those effected by
McDonald or Gradison) should be mailed or delivered to Gradison-McDonald Mutual
Funds, 580 Walnut Street, Cincinnati, Ohio 45202.

Under extraordinary circumstances, such as periods of drastic economic or
market changes, it is possible that you might not be able to reach the Fund by
telephone to effect a redemption. In the event of such a situation, you can
mail or personally deliver a written redemption request to the Fund's offices.
Shareholders who have brokerage accounts with McDonald or Gradison can also
request that their Investment Consultants arrange the redemption. The telephone
redemption feature may be terminated or modified upon 30 days' notice to
shareholders.

The Fund, Gradison, McDonald, and their officers and employees, will not be
liable for following instructions communicated by telephone that are reasonably
believed to be genuine. The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine, and if it does not, in
the view of the Securities and Exchange Commission, it may be liable for any
losses resulting from unauthorized instructions. Telephone transactions are
available to all shareholders automatically.

REDEMPTIONS THROUGH MCDONALD
AND GRADISON

Investors who maintain brokerage accounts with McDonald or Gradison may
redeem shares of the Fund through their Investment Consultants.

EXCHANGES

Shares of the Fund may be exchanged, without administrative fees, for shares of
any other Gradison-McDonald fund and for shares of certain Federal and/or Ohio
tax-free or municipal income money market funds.

You may request exchanges by telephoning or writing the Fund. Before making an
exchange, you should read the prospectus of the fund in which you are investing
which is available upon request. An exchange may not be made from the Fund to
the fund in which you are investing unless the shares of such fund are
registered for sale in the state in which you reside. Exchanges of Fund shares
for shares of funds sold subject to an initial sales charge will be subject to
such sales charge except to the extent that a sales charge has previously been
paid in connection with the shares. The terms of the exchange feature are
subject to change and the exchange feature is subject to termination, both upon
60 days' written notice, except that no notice shall be required under certain
circumstances provided for by rules of the Securities and Exchange Commission.

NET ASSET VALUE

The net asset value per share of the Fund is determined by calculating the
total value of the Fund's assets, deducting its total liabilities, and dividing
the result by the number of shares outstanding. The net asset value is
generally computed once daily as of the close of regular trading on the New
York Stock Exchange, normally 4:00 p.m. Eastern time, on each day when the New
York Stock Exchange is open for business and on any other day there is a
sufficient degree of trading in the Fund's portfolio securities that the net
asset value might be materially affected by changes in the value of portfolio
securities.

Securities are valued by using market quotations, prices provided by market
makers or pricing services, or estimates of market values obtained from yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost which approximates market value. Other assets are valued at
fair value as determined pursuant to procedures approved by the Board.

11
<PAGE> 93
OPTIONAL SHAREHOLDER SERVICES

AUTOMATIC INVESTMENT PLAN

You may arrange for a fixed amount of money to be transferred automatically on
a regular basis from your bank or other depository account to your Fund
account. For additional information, obtain the Gradison-McDonald Automatic
Investment Plan form from the Fund.

MONTHLY DISTRIBUTION PLAN

AUTOMATIC PAYMENT PLAN

DISTRIBUTIONS

The Fund declares dividends from net investment income daily, immediately prior
to the close of business. These dividends are credited to fully paid shares of
record at the time of declaration. (Fund shares begin earning dividends on the
business day after the Fund receives payment for the purchase of such shares.)
Dividends representing the amounts credited to Fund shares are paid monthly.
Net realized capital gains, if any, will be distributed at least annually. The
Fund distributes substantially all of its net investment income and capital
gains (if any) to shareholders each year.

Unless you select the Monthly Distribution Plan, all income dividends and net
realized capital gain distributions are automatically paid in additional shares
at the net asset value of such shares on the date the dividends or
distributions are payable. There is no sales charge for shares issued in this
manner. Gradison acts as the Fund's transfer agent and dividend disbursing
agent.

TAXES

Federally tax-free interest earned by the Fund is federally tax-free when
distributed to you as income dividends. Any taxable income earned on the Fund's
investments would be distributed to you as a taxable dividend. Distributions of
short-term capital gains and a portion of the gain on bonds purchased at a
discount after April 30, 1993, are taxable for Federal income tax purposes as
dividends, and distributions of net capital gains, when designated as such, are
taxable for those purposes as long-term capital gains, regardless of the length
of time you have owned your shares. Distributions of any taxable dividends or
realized capital gains are taxable when they are paid, whether you take them in
cash or additional Fund shares, except that any distributions declared in
December and paid in January are treated as if paid on December 31.

The interest from some municipal securities is subject to the federal
alternative minimum tax. There is no limit on the percentage of its assets
which the Fund may invest in these securities. Individuals who are subject to
the tax must report this interest on their tax returns.

Each year, the Fund will provide a statement informing you of the Federal tax
status of dividends and other distributions paid during the previous year. You
may be subject to state or local taxes on your investment, depending on the
laws in your area. Because some states exempt their own municipal obligations
from tax, you will receive tax information each year showing the allocation of
the Fund's income and/or investments by state.

12
<PAGE> 94
withhold 31% of all taxable dividends, capital gain distributions, and
redemption proceeds if you do not furnish the Fund with a correct taxpayer
identification number and in certain other circumstances.

Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your
adjusted basis for the redeemed shares (which normally includes any sales
charge paid). An exchange of Fund shares for shares of any other fund generally
will have similar tax consequences. However, special rules apply (1) when you
dispose of Fund shares through an exchange within 90 days after your purchase
and acquire shares of another fund without paying a sales charge, or (2) if you
redeem shares of another fund within 90 days after purchase and then acquire
Fund shares without paying a sales charge. In these cases, any gain on
disposition of shares would be increased, or loss decreased, by the amount of
the sales charge you paid when those shares were acquired, and that amount will
increase the adjusted basis of the shares subsequently acquired. In addition,
if you purchase Fund shares within 30 days after redeeming other Fund shares at
a loss, that loss will not be deductible and will increase the basis of the
newly purchased shares.

The foregoing is only a summary of some important generally applicable Federal
and state income tax provisions in effect as of the date of this Prospectus;
see the Statement of Additional Information for a further discussion. There may
be other Federal, state or local tax considerations applicable to a particular
investor.

GENERAL INFORMATION

The Fund is a series of the Gradison-McDonald Municipal Custodian Trust (the
"Trust"), which is an Ohio business trust organized under the laws of the State
of Ohio by a Declaration of Trust dated June 11, 1992. The Fund is a
diversified portfolio of the Trust which is registered with the Securities and
Exchange Commission as an open-end management investment company. Each share of
the Fund has one vote and represents an equal pro rata interest in the Fund. As
an Ohio business trust, the Trust is not required to hold annual shareholder
meetings, although special shareholder meetings may be called for purposes such
as electing or removing trustees. Special meetings shall be called upon the
written request of shareholders owning at least 10% of the outstanding shares
of the Fund. The Fund's fiscal year ends June 30th. Shareholder inquiries
should be directed to the telephone number or address of the Fund listed on the
first page of this Prospectus.

MANAGEMENT OF THE FUND

The Trust's Board of Trustees is responsible for the direction and supervision
of the Fund's operations. McDonald acts as the Fund's investment adviser and
principal underwriter. McDonald is a wholly owned subsidiary of McDonald &
Company Investments, Inc., McDonald Investment Center, 800 Superior Avenue,
Cleveland, Ohio 44114. Subject to the authority of the Board, McDonald manages
the investment and reinvestment of the assets of the Fund, and provides its
employees to act as the officers of the Fund who are responsible for the
overall management of the Fund. McDonald is an investment adviser and a
securities broker-dealer. McDonald, including Gradison's predecessor, has
served as an investment adviser to investment companies since 1976.

The Fund pays the Adviser a fee of one half of 1% of its average daily net
assets for acting as its investment adviser. Gradison also acts as the Fund's
transfer agent, dividend disbursing agent, and accounting services provider.
For providing such services, Gradison receives an annual fee of $26.50 per
shareholder non-zero balance account plus out of pocket costs for acting as
transfer agent and dividend disbursing agent and an accounting services fee of
..035% of the first $100 million of average daily net assets, .025% of the next
$100 million of average daily net assets and .015% of average daily net assets
in excess of $200 million, with a minimum fee of $48,000 per year. Gradison's
address is 580 Walnut Street, Cincinnati, Ohio 45202.

All expenses not specifically assumed by the Adviser, Distributor, or transfer
agent and incurred in the oper-

<PAGE> 95
ation of the Fund are borne by the Fund. These expenses include expenses for
the cost of preparing, printing and mailing registration statements,
prospectuses, periodic reports and other documents furnished to shareholders
and regulatory authorities; registration, filing and similar fees; legal
expenses; auditing and accounting expenses; taxes and other fees; brokers'
commissions chargeable to the Fund in connection with securities transactions;
expenses of Trustees who are not affiliated with the Adviser; charges and
expenses of any transfer and dividend disbursing agent, registrar, custodian or
depository appointed by the Fund; expenses of shareholders' and Trustees'
meetings; and fees and other expenses incurred by the Fund in connection with
its membership in any organization. The Fund reimburses the Adviser for all
costs, direct and indirect, which are fairly allocable to services performed by
the Adviser's employees for which the Fund is responsible.

McDonald may, from time to time, agree to waive the receipt of management or
transfer agent fees from the Fund and/or reimburse the Fund for other expenses
in order to limit the Fund's expenses to a specified percentage of average net
assets. Through December 31, 1996, McDonald has agreed to waive fees and
reimburse the Fund's expenses necessary to limit the Fund's annual expenses to
a maximum of 1.25% of average net assets, excluding taxes, interest, and
extraordinary items. Waiver and reimbursement arrangements, which may be
terminated at any time without notice, will increase the Fund's yield. If
McDonald discontinues a waiver or reimbursement arrangement, the Fund's
expenses will increase and its yield will be reduced. McDonald retains the
ability to be repaid by the Fund for fees waived and expenses reimbursed if
expense ratios fall below the specified limit prior to the end of the fiscal
year. McDonald may waive or reimburse fees in a greater amount than is required
by an applicable fee waiver arrangement.

DISTRIBUTION SERVICE PLAN

PERFORMANCE CALCULATIONS

From time to time the Fund may advertise its "yield," "taxable equivalent
yield," and "total return." Both yield and total return figures are based on
historical figures and are not intended to indicate future performance. The
yield of the Fund is computed by dividing the net investment income per share
during the period stated in the advertisement by the maximum offering price per
share on the last day of the period (using the average number of shares
entitled to receive dividends). The yield formula provides for semiannual
compounding which assumes that net investment income is earned and reinvested
at a constant rate and annualized at the end of the six-month period. The
Fund's taxable equivalent yield is the yield that a taxable investment would
have to generate in order to equal the Fund's yield for an investor in a stated
tax bracket.

The total return of the Fund (including the effect of deduction of the maximum
2% sales charge) refers to the average annual compounded rate of return over
specified time periods (which periods will be stated in the advertisement) that
would equate an initial amount of money invested in the Fund (prior to
deduction of the sales charge) at the beginning of a stated period to the
ending redeemable value of the investment. The Fund may also calculate a total
return which assumes that no sales charge was charged on the initial investment
and aggregate total returns over various periods of time. The calculations of
total return assume the payment of all dividends and other distributions in
additional Fund shares.

14
<PAGE> 96

GRADISON-MCDONALD INTERMEDIATE MUNICIPAL INCOME FUND

GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST

___________________________________________________________________________

STATEMENT OF ADDITIONAL

INFORMATION

___________________________________________________________________________

For information, call: 579-5700 from Cincinnati, Ohio

Toll free (800) 869-5999 from outside Cincinnati

Information may also be obtained from the Fund at:
580 Walnut Street
Cincinnati, Ohio 45202

___________________________________________________________________________

This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated November
1, 1995, which has been filed with the Securities and Exchange Commission. The
Prospectus is available upon request without charge from the Fund at the above
address or by calling the phone numbers provided above.

The date of this Statement of Additional Information is November 1, 1995.

___________________________________________________________________________

<PAGE> 97

<TABLE>
<CAPTION>
Contents Page Location in Prospectus
- -------- ----
<S> <C>
INVESTMENT POLICIES AND RESTRICTIONS . . . . 4 Investment Objective and
Diversification . . . . . . . . . . . . 6 Policies
Tax-Exempt Securities Ratings . . . . . 6

FACTORS RELATING TO OHIO . . . . . . . . . . . 8 Ohio Economic Considerations

HEDGING STRATEGIES . . . . . . . . . . . . . 13 Investment Objective and
Policies
Special Risks of Hedging Strategies . . 14
Additional Information
About Hedging Transactions. . .. . . . 15
Options . . . . . . . .. . . . . . . . 16
Guidelines for Options . . . . . . . . 18
Futures . . . . . . . . . . . . . . . 18
Guidelines for Futures and
Related Options . . . . . . . . . . . 21

MUNICIPAL LEASES . . . . . . . . . . . . . . 21 Investment Objective and
Policies

PURCHASE OF SHARES . . . . . . . . . . . . . 22 How to Purchase Shares

LETTERS OF INTENT . . . . . . . . . . . . . 23 Quantity Discounts

REDEMPTION OF SHARES . . . . . . . . . . . . 23 How to Redeem Shares
Redemptions through Gradison
and McDonald
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES . 24 Distributions

TAXES . . . . . . . . . . . . . . . . . . . . 24 Taxes
</TABLE>

2
<PAGE> 98

<TABLE>
<S> <C> <C>
NET ASSET VALUE . . . . . . . . . . . . . . . 27 Net Asset Value

PURCHASE OF FUND SHARES . . . . . . . . . . . 27 How to Purchase Shares

PORTFOLIO TRANSACTIONS . . . . . . . . . . . 28

INVESTMENT ADVISER . . . . . . . . . . . . . 30 Management of the Fund
Advisory Agreement . . . . . . . . . . . 31
Master Distribution Agreement . . . . . 32
Distribution Service Plan . . . . . . . 33
Transfer Agent and
Accounting Services Agreement . . . . 34
Other Compensation Paid/
Reimbursement Made to the Adviser . . 35

TRUSTEES AND OFFICERS OF THE TRUST . . . . 35

DESCRIPTION OF THE TRUST . . . . . . . . . .37 General Information

CUSTODIAN . . . . . . . . . . . . . . . . . 38

INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . 39

LEGAL COUNSEL . . . . . . . . . . . . . . . 39

EXCHANGES . . . . . . . . . . . . . . . . . 39 Exchanges

TELEPHONE ACCESS TO
INFORMATION . . . . . . . . . . . . . . . .40

INVESTMENT PERFORMANCE . . . . . . . . . 40 Investment Performance

APPENDIX A . . . . . . . . . . .. . . . . . 41

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS. . . . Following page 42

SALES BROCHURE INFORMATION . . . . . . .Following Financial Statements
</TABLE>

3
<PAGE> 99

INVESTMENT POLICIES AND RESTRICTIONS

Gradison-McDonald Intermediate Municipal Income Fund (the "Fund")
invests primarily in securities issued by state and local municipalities the
interest from which is free from regular Federal income tax. In addition to
the investment restrictions described in the Prospectus, the Fund has adopted
the following investment restrictions and limitations, which may not be changed
without the approval of the holders of a majority of the outstanding voting
securities of the Fund, (as defined in the Investment Company Act of l940, as
amended, the "Act".) See "Description of the Trust." The Fund will not:

(2) Make loans, except that the purchase of securities as allowed by
the Fund's investment objective and other investment restrictions
and the entering into of repurchase agreements shall not be prohibited
by this restriction;

(3) Purchase or sell real estate, including real estate partnerships owning
an equity interest in real estate. The purchase of securities secured
by real estate which are otherwise allowed by the Fund's investment
objective and other investment restrictions shall not be prohibited by
this restriction;

(4) Underwrite the securities of other issuers, except insofar as the
Fund may technically be deemed an underwriter under the Securities
Act of 1933 in connection with the acquisition of portfolio securities;

(5) Purchase or sell commodities or commodity contracts or interests
in oil, gas or other mineral exploration or development programs or
leases. The purchase or sale of financial futures contracts or options
on financial futures contracts for the purposes and within the limits
set forth in the Prospectus and this Statement of Additional Information
shall not be prohibited by this restriction;

4
<PAGE> 100

(6) Issue senior securities as defined in the Act, except to the
extent that such issuance might be involved with respect to borrowings
subject to item (1) above or with respect to transactions involving
futures contracts or the writing of options within the limits described
in the Prospectus and this Statement and provided that the Fund may
issue shares of additional series or classes that the Trustees may
establish.

The following limitations are not fundamental and may be changed without
shareholder approval: (1) With respect to the purchase of securities of other
investment companies, the Fund will not (a) purchase more than 3% of the
outstanding voting shares of an investment company; (b) invest more than 5% of
its assets in securities of any one investment company; or (c) invest more than
10% of its assets in securities of all investment companies. (2) The Fund will
not make short sales of securities, or purchase securities on margin, except
for short-term credit as is necessary for the clearance of transactions. The
deposit or payment by the Fund of initial or maintenance margin in connection
with futures contracts or related options transactions is not considered the
purchase of a security on margin. (3) The Fund will not purchase or retain in
its portfolio any securities issued by an issuer, if to the Fund's knowledge,
those Trustees and officers of the Trust or of the Fund's investment adviser,
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities. (4) The Fund will not mortgage, pledge or hypothecate
securities in amounts exceeding 15% of the value of the assets of the Fund
(taken at market value). Notwithstanding this restriction the Fund may enter
into "when issued" and "delayed delivery" transactions. The deposit of
underlying securities and other assets in escrow or other collateral
arrangements in connection with the writing of options or margin for futures
contracts or options on futures contracts are not deemed to be pledges or
hypothecations subject to this restriction. (5) The Fund may not invest more
than 5% of its assets in securities of unseasoned issuers which with their
predecessors have had less than three years of continuous operations. (6) The
Fund will not purchase any security if, as a result, more than 10% of its total
assets would be invested in securities subject to legal restrictions upon
resale.

5
<PAGE> 101

DIVERSIFICATION

A bond for which the payments of principal and interest are secured by
an escrow account of securities backed by the full faith and credit of the U.S.
Government (defeased) will not be treated as an obligation of the original
municipality for purposes of determining concentration. When a security is
insured by bond insurance, it is not considered a security guaranteed by the
insurer and there is no limit on the percentage of the Fund's assets that may
be invested in securities insured by a single insurer.

TAX-EXEMPT SECURITIES RATINGS

Moody's Investors Services, Inc. ("Moodys"), Standard & Poor's ("S&P"),
and Fitch Investors Services, Inc. ("Fitch"), are private services that provide
ratings of the credit quality of debt obligations, including issues of
municipal securities. A description of the investment grade ratings assigned
to municipal securities and tax-free commercial paper is set forth below. The
Fund may use these ratings in determining whether to purchase, sell or hold a
security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, municipal securities with the
same maturity, interest rate and rating may have different market prices.
Subsequent to its purchase by the Fund, an issue of municipal securities may
cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The Adviser will consider such an event in
determining whether the Fund should continue to hold the obligation.

6
<PAGE> 102
changes in circumstances and economic conditions. The BBB rating, which is the
lowest "investment grade" security rating by S&P, indicates an adequate
capacity to pay principal and interest. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest for Municipal Obligations in this category than for
Municipal Obligations in the A category.

Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. Bonds rated AA by Fitch are considered to be
investment grade and of very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite as strong as
bonds rated AAA. Bonds rated A by Fitch are considered to be investment grade
and of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment.

7
<PAGE> 103
Issuers rated Prime-2 by Moody's (or related supporting institutions)
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample liquidity is
maintained.

A-2 - Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".

FACTORS RELATING TO OHIO

The following information constitutes only a brief summary of some of
the many complex factors that may affect the financial situation of issuers in
Ohio, and is not applicable to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements published in connection with the issuance of securities of
certain Ohio issuers and from other publicly available documents, and is
believed to be accurate. No independent verification has been made of any of
the following information.

Ohio is the seventh most populous state, with a 1990 Census count of
10,847,000 indicating a 0.5% population increase from 1980.

The Ohio economy while diversifying more into the service and other
nonmanufacturing areas, continues to rely in part on durable goods

8
<PAGE> 104
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity in Ohio, as in many other industrially-developed states, tends to be
more cyclical than in some other states and in the nation as a whole.
Agriculture is an important segment of the economy, with over half the State's
area devoted to farming and approximately 16% of total employment in
agribusiness.

There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the portfolio of the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
obligations.

The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is effectively precluded by law from
ending a fiscal year ending June 30 (Fiscal Year "FY") or biennium in a deficit
position. Most State operations are financed through the General Revenue Fund
(GRF), for which personal income and sales-use taxes are the major revenue
sources. Growth and depletion of GRF ending fund balances show a consistent
pattern related to economic conditions, with the FY-ending balance reduced
during less favorable economic periods and increased during more favorable
economic periods. The State has established procedures for, and has timely
taken, necessary actions to ensure a resource/expenditure balance during less
favorable economic periods. These include general and selected reductions in
appropriations spending; none have been applied to appropriations needed for
debt service or lease rentals on any State obligations.

The GRF appropriations act for the 1994-1995 biennium provided for total
GRF biennial expenditures of approximately $30.7 billion. Authorized

9
<PAGE> 105

expenditures in Fiscal Year 1994 were 9.2% higher than in Fiscal Year 1993
(taking into account F fiscal Year 1993 expenditures reductions), and for
Fiscal Year 1995 are 6.6% higher than in Fiscal Year 1994.

10
<PAGE> 106
limited in amount to $750,000. The Constitution expressly precludes the State
from assuming the debts of any local government or corporation. (An exception
in both cases is for any debt incurred to repel invasion, suppress insurrection
or defend the State in war.)

The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which are not given the right to have excises
or taxes levied to pay debt services. Those special obligations include bonds
and notes issued by, among others, the Ohio Public Facilities Commission and
the Ohio Building Authority; approximately $5.0 billion of those obligations
were outstanding at July 1, 1995.

The General Assembly has placed on the November 1995 ballot a proposed
constitutional amendment that would extend the local infrastructure bond
program (authorizing an additional $1.2 billion of State full faith and credit
obligations to be issued over 10 years for the purpose) and authorize
additional highway bonds. The latter would supersede the current $500,000,000
highway bonds authorization, and would authorize not more than $ 1.2 billion to
be outstanding at any time and not more than $220,000,000 to be issued in a
Fiscal Year. It cannot be predicted whether this amendment will be approved by
the electors.

11
<PAGE> 107

with debt service on all State general obligation debt and GRF-supported
obligations not to exceed 5% of the preceding Fiscal Year's GRF expenditures.
It cannot be predicted whether any such amendment will be submitted, or, if
submitted, approved by the electors.

12
<PAGE> 108

mill limitation"). Voted general obligations of subdivisions are payable from
property taxes unlimited as to amount or rate.

HEDGING STRATEGIES

As discussed in the Prospectus, the Adviser may use a variety of financial
instruments ("Hedging Instruments"), including certain options, futures
contracts (sometimes referred to as "futures") and options on futures contracts
to attempt to hedge the Fund's portfolio. The particular Hedging Instruments
are described in Appendix A to this Statement of Additional Information. Any
income realized from the use of options and futures would be taxable to
shareholders.

Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the

13
<PAGE> 109

Fund owns or intends to acquire. Hedging Instruments on debt securities may be
used to hedge either individual securities or broad market sectors.

SPECIAL RISKS OF HEDGING STRATEGIES

The use of Hedging Instruments involves special consideration and risks, as
described below. Risks pertaining to particular Hedging Instruments are
described in the sections that follow.

(1) Successful use of most Hedging Instruments depends upon the Adviser's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the prices
of individual securities. While the Adviser is experienced in the use of
Hedging Instruments, there can be no assurance that any particular hedging
strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation, between price
movements of a Hedging Instrument and price movements of the investments being
hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur
due to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded. The effectiveness of hedges using Hedging Instruments on indices will

14
<PAGE> 110
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.

(3) Hedging strategies, if successful, can reduce risk of loss by whollym or
partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because the Adviser projected a decline in the price of a security
in the Fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the Hedging Instrument. Moreover, if the price of the Hedging
Instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss. In either such case, the Fund would have been in a
better position had it not hedged at all.

(4) As described below, the Fund might be required to maintain assets as
"cover", maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The Fund's ability to close out
a position in a Hedging Instrument prior to expiration or maturity depends on
the existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of the opposite party to the transaction to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to the Fund.

ADDITIONAL INFORMATION ABOUT HEDGING TRANSACTIONS

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liquid, high-grade debt securities in a segregated account with its custodian
in the prescribed amount.

OPTIONS

The Fund may purchase put and call options, and write (sell) covered
call options and covered put options, on debt securities. The purchase of a
call option serves as a long hedge, and the purchase of a put option serves as
a short hedge.

Writing a put option serves as a limited long hedge because increases in
the value of a security the Fund intends to purchase would be offset to the
extent of the premium received for writing the option. However, if the
security depreciates to a price lower than the exercise price of the put
option, it can be expected that the option will be exercised and the Fund will
be obligated to purchase the security at more than its market value.

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<PAGE> 112
expiration dates of up to nine months. Options purchased by the Fund that
expire unexercised have no value.

The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.

The Fund may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities exist but are relatively new,
and these instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, guarantees
completion of every exchange- traded option transaction. In contrast, OTC
options are contracts between the Fund and its contra-party (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when the Fund purchases an OTC option, it relies on the party from whom it
purchased the option or to whom it has written the option (the contra-party) to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the contra-party to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the
transaction.

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<PAGE> 113
inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund
would be unable to sell the investment used as cover for the written option
until the option expires or is exercised. The inability to enter into a closing
purchase transaction for a put option written by the Fund could also cause
material losses because the price of the security underlying the option could
continue to decline.

Because of the limited availability of options on municipal securities,
the Adviser may deem it in the best interest of the Fund to engage in
transactions using exchange-traded options on U.S. government securities.
Options on U.S. Treasury bonds, bills and Notes are currently so traded;
additional contracts are likely to be developed. In the opinion of the
Adviser, there is a high degree of correlation between the prices and interest
rates of U.S. government securities and those of municipal securities.
Therefore, the Adviser believes that options on U.S. government securities
could serve as an effective proxy for options on municipal securities.
Therefore, the Fund's options activities may also include options on U.S.
government securities traded on national securities exchanges.

GUIDELINES FOR OPTIONS

FUTURES

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<PAGE> 114
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities or
indices. Similarly, writing put options on futures contracts can serve as a
limited long hedge.

The Fund may enter into interest rate futures contracts as a hedge
against or to minimize adverse principal fluctuations or as an efficient means
of regulating the Fund's exposure to the municipal bond market. The Fund could
sell interest rate futures as an offset against the effect of expected
increases in interest rates and purchase such futures as an offset against the
effect of expected declines in interest rates.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in
the nature of a performance

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<PAGE> 115
bond or good-faith deposit that is returned to the Fund at the termination of
the transaction if all contractual obligations have been satisfied. Under
certain circumstances, such as periods of high volatility, the Fund may be
required by an exchange to increase the level of its initial margin payment,
and initial margin requirements might be increased generally in the future by
regulatory action.

If the Fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in
the case of purchased options, the Fund would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.

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<PAGE> 116
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.

GUIDELINES FOR FUTURES AND RELATED OPTIONS

In view of the risks involved in using the futures and options
strategies that are described above, the Trust's Board of Trustees has
determined that the Fund will not purchase or sell futures contracts or related
options if, immediately thereafter, the sum of the amount of initial margin
deposits on the Fund's existing futures positions and initial margin deposits
and premiums paid for related options would exceed 5% of the market value of
the Fund's total assets. This guideline may be modified by the board without
shareholder vote. Adoption of this guideline cannot be guaranteed to limit the
percentage of the Fund's assets at risk to 5%.

In addition, the Fund has represented to the CFTC that it will use
futures contracts and options thereon solely in bona fide hedging transactions
or under other circumstances permitted by the CFTC.

MUNICIPAL LEASES

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<PAGE> 117
municipal leases contain "nonappropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a yearly
basis. Although nonappropriation municipal leases are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. The Fund will seek to minimize the special risks associated with
such securities by not investing more than 10% of its assets in municipal
leases that contain nonappropriation clauses. In evaluating investments in
municipal leases with nonappropriation clauses, the Adviser will consider such
factors as whether (1) the nature of the leased equipment or property is such
that its ownership or use is essential to a governmental function of the
municipality, (2) the lease payments will commence amortization of principal at
an early date resulting in an average life of seven years or less for the lease
obligation, (3) appropriate covenants will be obtained from the municipal
obligor prohibiting the substitution or purchase of similar equipment if lease
payments are not appropriated, (4) the lease obligor has maintained good market
acceptability in the past,(5) the investment is of a size that will be
attractive to institutional investors, and (6) the underlying leased equipment
has elements of portability and/or use that enhance its marketability in the
event foreclosure on the underlying equipment were ever required. Municipal
leases provide a premium interest rate which along with regular amortization of
the principal may make them attractive for a portion of the assets of the Fund.
With respect to evaluating the credit quality of a municipal lease the Adviser
will consider: whether a lease can be canceled; the level of assurance that
leased assets can be sold; the strength of the lessee's general credit; the
potential for an event of nonappropriation; and the legal recourse in the event
of a failure to appropriate.

The Trust's Board of Trustees has established the following guidelines
for determining the liquidity of municipal leases in the Fund's portfolio, and
subject to review by the Board, has delegated that responsibility to the
Adviser. When evaluating the liquidity of Municipal Leases, the Adviser,
pursuant to procedures established by the Board, considers all relevant
factors, including frequency of trading, availability of quotations, the number
of dealers and their willingness to make markets, the nature of trading
activity and the assurance that liquidity will be maintained.

PURCHASE OF SHARES

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<PAGE> 118
The Fund reserves the right to limit the amount of any purchase and to
reject any purchase order. Shares of the Fund are offered continuously;
however, the offering of shares of the Fund may be suspended at any time and
resumed at any time thereafter. The Fund intends to waive the initial and
subsequent purchase minimums for employees of McDonald & Company Securities,
Inc. which through its Gradison Division acts as the Fund's Adviser and
Distributor.

LETTERS OF INTENT (SEE "HOW TO PURCHASE SHARES" IN THE PROSPECTUS)

1. You executed a Letter of Intent for $100,000 of shares and were,
therefore, charged a $2,000 sales charge on purchases in that amount;

2. During the existence of the Letter of Intent you subsequently purchased
an additional $400,000 of shares thereby qualifying for purchases at
$0 sales charge;

3. You will receive an adjustment of $2,000, the sales charge you paid on
the $100,000 purchase, since you reached the $500,000 purchase level
during the existence of the Letter of Intent. The $2,000 will be
applied to purchase additional shares for your account at the next
computed price.

REDEMPTION OF SHARES

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The Fund transmits redemption proceeds only to shareholder names and
addresses on its records (or which it has otherwise verified), provides written
confirmation of all transactions initiated by telephone (either immediately or
by monthly statement, depending on the circumstances), and requires
identification from individuals picking up checks at its offices.

DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES

TAXES

The Fund has qualified, and intends to qualify in the future, for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended ("Code") and to qualify to pay "exempt-interest"
dividends. By so qualifying, the Fund will be relieved of Federal income tax
on that part of its investment company taxable income

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<PAGE> 120
(consisting generally of any taxable net investment income and net short-term
capital gain) and any net capital gain (the excess of net long- term capital
gain over net short-term capital loss) distributed to Fund shareholders. In
order to qualify for treatment as a RIC under the Internal Revenue Code of
1986, as amended ("Code"), the Fund must distribute to its shareholders for
each taxable year at least 90% of the sum of its investment company taxable
income (consisting generally of taxable net investment income and net
short-term capital gain) plus its net interest income excludable from gross
income under Section 103(a) of the Code, and must meet several additional
requirements. Among these requirements are the following: (1) the Fund must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loan, and gains from the sale or
other disposition of securities, or other income (including gains from options
or futures) derived with respect to its business of investing in securities
("Income Requirement"); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities,
options, or futures that were held for less than three months ("Short-Short
Limitation"); and (3) at the close of each quarter of the Fund's taxable year,
(a) at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. government securities, securities of other RICs, and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets,
and (b) not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer.

Dividends paid by the Fund will qualify as exempt-interest dividends,
and thus will be excludable from gross income by its shareholders, if the Fund
satisfies the additional requirement that, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income under Section
103(a); the Fund has satisfied and intends to satisfy this requirement in the
future. The aggregate dividends excludable from the shareholders' gross income
may not exceed the Fund's net tax-exempt income.

Tax-exempt interest attributable to certain private activity bonds
(including, in the case of a RIC, such as the Fund, receiving interest on such
bonds, a proportionate part of the exempt-interest dividends paid by

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<PAGE> 121
that RIC) is an item of tax preference for purposes of the alternative minimum
tax. Exempt-interest dividends received by a corporate shareholder also may be
indirectly subject to that tax without regard to whether the Fund's tax-exempt
interest was attributable to such bonds.

Interest on indebtedness incurred or continued to purchase or carry Fund
shares will not be deductible for Federal income tax purposes to the extent
that the Fund distributes exempt-interest dividends. Purchases of Fund shares
may be deemed to have been made with borrowed funds even though those funds are
not directly traceable to the purchase of those shares. Exempt-interest
dividends paid by the Fund are includible in your tax base for determining the
taxability of social security and railroad retirement benefits. Shares of the
Fund may not be an appropriate investment for "substantial users" of certain
facilities financed by private activity bonds in which the Fund may invest
because interest on such bonds will not be exempt from Federal income tax for
such users and their related persons.

Congress may propose to restrict or eliminate the Federal income
exemption for interest on municipal securities. If such a proposal were
enacted, the available of municipal securities for investment by the Fund would
be adversely affected. In such event, the Fund would reevaluate its investment
objective and policies.

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<PAGE> 122
of the gains and losses the Fund realizes in connection therewith. Income from
transactions in options and futures derived by the Fund with respect to its
business of investing in securities will qualify as permissible income under
the Income Requirement. However, income from the disposition of options and
futures contracts will be subject to the Short-Short Limitation if they are
held for less than three months.

If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Fund may, when it engages in hedging transactions, seek to qualify for this
treatment, but at the present time it is not clear whether this treatment will
be available for all of the Funds' hedging transactions. To the extent this
treatment is not available, the Fund may be forced to defer the closing out of
certain options and futures contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Fund to qualify as a RIC.

NET ASSET VALUE

The net asset value of the Fund is calculated once daily Monday through
Friday except on the following holidays: New Year's Day, Presidents Day, Good
Friday, Memorial Day Observed, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day, Columbus Day, Martin Luther King Jr. Day, and Veteran's Day.

The assets and liabilities of the Fund are determined in accordance with
generally accepted accounting principles and the applicable rules and
regulations of the Securities and Exchange Commission.

PURCHASE OF FUND SHARES (SEE "HOW TO PURCHASE SHARES" IN THE PROSPECTUS)

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Letter of Intent and Rights of Accumulation privileges, all as stated in the
Prospectus. In addition, because the exchange privilege is available to all
investors whose objectives may have changed and because it is such investors
who initiate the exchange, no additional sales expenses are incurred, and
accordingly, these savings are passed on to the investor in the form of a net
asset value purchase when they have previously paid a sales load to another
fund advised by the Adviser. No significant sales effort is necessary for sales
of shares at net asset value to trustees of mutual funds as to which Gradison
or McDonald act as an investment adviser (and their families), current and
retired employees of the Fund's investment adviser, and investment advisory
accounts managed by Gradison or McDonald. With respect to sales at net asset
value to investors who purchase Fund shares with the proceeds of redemptions
from other mutual funds as to which they have previously paid a sales charge,
such waiver of the Fund's charge is necessary to compensate such investors for
the fact that they have previously paid a sales load on their investment.
Sales are made to investors who have owned mutual fund shares for a year or
more (where the proceeds of disposition of such shares are used to purchase
Fund shares) without payment of a sales load as an additional inducement for
purchase of Fund shares.

PORTFOLIO TRANSACTIONS

The Adviser is responsible for making the Fund's portfolio
decisions,including allocation of the Fund's brokerage business andnegotiation
of brokerage commissions, subject to policies established by the Board of
Trustees. The Fund places orders for transactions with a number of brokers and
dealers. Most of the Fund's purchases and sales of portfolio securities are
principal transactions with securities dealers and underwriters. Purchases of
securities from underwriters, however, include a concession paid by the issuer
to the underwriter and purchases or sales of securities from/to a dealer
include a spread between the bid and ask prices. For the respective periods
from the Fund's inception (April 15, 1994) through June 30, 1994 and for the
fiscal year ended June 30, 1995, the Fund's unannualized portfolio turnover
rates were 10.4% and 138.0%. The higher portfolio turnover for the fiscal year
ended June 30, 1995 was caused by net redemptions of shares of the Fund which
made it necessary to sell portfolio securities to pay redemptions and to
purchase other portfolio securities.

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which are of benefit to the Fund. The Adviser selects brokers and dealers to
execute transactions on the basis of its judgment of their professional
capability to provide the service at reasonably competitive rates. The
Adviser's determination of what constitutes reasonably competitive rates is
based upon its professional judgment and knowledge as to rates paid and charged
for similar transactions throughout the securities industry. The Adviser may
consider sales by brokers or dealers of shares of the Fund when selecting
brokers or dealers to execute portfolio transactions as long as the most
favorable net results are obtained.

The Adviser may receive commissions from the Fund for effecting
transactions on an agency basis only in accordance with procedures adopted by
the Board of Trustees. Any procedures adopted by the Trustees will incorporate
the standard contained in Rule 17e-1 under the Investment Company Act of 1940
that the commissions paid must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Pursuant to Rule 17e-1, the Board of
Trustees must review at least annually the appropriateness of any procedures in
effect and must conduct compliance reviews at least quarterly and maintain
records in connection with such reviews. The Adviser has assured the Fund that
in all transactions placed with the Adviser, the Fund will be charged a
commission that is at least as favorable as the rate the Adviser charges to its
other customers in similar transactions. No commission charged to the Fund by
the Adviser or any broker affiliated with the Adviser will include compensation
for research services provided by the Adviser or any such affiliated broker.
From the inception of the Fund to the date of this Statement of Additional
Information, the Adviser has not received any commissions from the Fund for
executing transactions in portfolio securities.

Brokers who provide supplemental investment research to the Adviser
may receive orders for agency transactions in portfolio securities of the Fund.
Such supplemental research services ordinarily consist of assessments and
analyses of the business or prospects of a company, industry, or economic
sector. Information so received is in addition to and not in lieu of the
services required to be performed by the Adviser under the Investment Advisory
Agreement with the Fund. If in the judgment of the Adviser the commission is
reasonable in relation to the brokerage and research services provided, the
Adviser is authorized to pay brokerage commissions in excess of commissions
another broker would have received for effecting the same transaction, subject
to the review of the Board of Trustees. Not all such research services may be
used by the Adviser in connection with managing the Fund. The expenses of the
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental

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<PAGE> 125
information, and the Adviser may use such information in servicing its other
accounts.

Because of its affiliation with the Adviser, the Fund is prohibited
from engaging in certain transactions involving the Adviser except in
compliance with the provisions of the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder and subject to the possible
receipt of exemptive relief from the Securities and Exchange Commission.
Accordingly, the Fund does not purchase or sell portfolio securities from or to
the Adviser in any transaction in which the Adviser acts as principal.
Pursuant to regulations of the Securities and Exchange Commission, the Fund may
purchase securities in underwritings in which the Adviser participates as an
underwriter.

The Adviser, through its Gradison Division, also serves as the
investment adviser to Gradison-McDonald Cash Reserves Trust ("GMCR"), (a U.S.
Government "money market" investment company), Gradison-McDonald Government
Income Fund ("GIF") of the Gradison Custodian Trust ("GCT") (Government income
investment company) Gradison Growth Trust ("GGT") (equity investment company),
and to the Gradison-McDonald Ohio Tax-Free Income Fund ("GMO") of the Trust and
furnishes investment advice to other clients. The assets of the mutual funds
managed by the Gradison Division totaled approximately $1.96 billion as of
September 26, 1995. The Adviser, including its predecessor, Gradison & Company
Incorporated, has served as investment adviser to investment companies since
1976.

Investment decisions for the Fund are made independently from those
for the other investment companies for which the Adviser acts as investment
adviser, and other clients of the Adviser. Purchases and sales of particular
securities may be effected simultaneously for such entities and clients. In
such instances, the transactions will be allocated as to price and amount in a
manner the Adviser considers equitable to each of the affected entities or
clients, which could have a detrimental effect upon the price or amount of the
securities purchased or sold for the Fund. On the other hand, in some cases
the ability of the Fund to participate in volume transactions may produce
better executions for the Fund. It is the opinion of the Board of Trustees
that the benefits available to the Fund from retaining the Adviser outweigh any
disadvantages that may arise from exposure to simultaneous transactions.

INVESTMENT ADVISER

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of Trustees and pursuant to the terms of the Investment Advisory Agreement
("Agreement") between the Trust and Adviser. The Adviser and its officers and
employees, from time to time, enter into transactions with various banks,
including the Fund's custodian bank. It is the Adviser's opinion that the
terms and conditions of those transactions are not influenced by existing or
potential custodial or other Trust relationships.

The Adviser provides to the Trust at its own expense the executive
officers who are necessary for the management and operations of the Fund.

The Adviser, founded in 1924, is the leading underwriter of Ohio
long-term municipal financings as measured by the value of offerings managed by
underwriters (calculating full credit to each manager) according to Securities
Data Company for 1994. The Adviser is a securities broker dealer with 23
retail offices in the state of Ohio and is the largest investment banking and
securities brokerage firm headquartered in Ohio. The Adviser manages
investment advisory accounts, including mutual funds, with assets in excess of
$2.5 billion as of June 30, 1995.

ADVISORY AGREEMENT

The Agreement provides that the Adviser will manage the investments of
the Fund, subject to review by the Board of Trustees. The Adviser also bears
the cost of salaries and related expenses of executive officers of the Trust
who are necessary for the management and operation of the Fund and compensates
the Trustees who are affiliated with the Adviser. As compensation for its
services under the Agreement, the Adviser receives from the Fund a monthly fee
based upon the average value of the daily net assets for the month at an annual
rate of .5 of 1% of the Fund's assets. For the period from the Fund's inception
(April 15, 1994) through June 30, 1994, and for the fiscal year ended June 30,
1995, the Adviser did not receive any payment as investment advisory fees. If
not for the waiver of fees, the Adviser would have received $4,856 as
investment advisory fees for the period from the Fund's inception through June
30, 1994 and $62,925 for the fiscal year ended June 30, 1995. The Agreement
further provides that in the absence of willful misfeasance, bad faith or gross
negligence in the performance of its duties thereunder, or reckless disregard
of its obligations thereunder, the Adviser is not liable to the Fund or any of
its shareholders for any act or omission by the Adviser. The Agreement does
not restrict the Adviser from acting as an investment manager or adviser for
others.

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<PAGE> 127
automatic termination of such right within 30 days after the termination of the
Agreement for any reason. The Agreement does not impair the right of the
Adviser to use the name Gradison or McDonald in the name and the name(s) of its
Fund(s) without charge in connection with any other business enterprise with
which it is or may become associated.

The Agreement continues in effect from year to year if such continuance is
specifically approved at least annually by the vote of the holders of a
majority of the outstanding voting securities of the Fund or by the vote of a
majority of the Trust's Board of Trustees, and in either event by the vote cast
in person of a majority of the Trustees who are not "interested persons" of any
party to the Agreement (as defined in the Act.)

The Agreement may be terminated at any time without penalty upon 60
days' written notice by (i) the Board of Trustees, (ii) the vote of the holders
of a majority of the outstanding voting securities of the Fund, or (iii) the
Adviser. The Agreement will terminate automatically in the event of its
assignment by the Adviser. The Agreement may be amended at any time by the
mutual consent of the parties thereto, provided that such consent on the part
of the Fund shall have been approved by the vote of the holders of a majority
of its outstanding voting securities and by the vote of a majority of the Board
of Trustees, including the vote cast in person by a majority of the Trustees
who are not "interested persons" of any party to the Agreement (as defined in
the Act.)

MASTER DISTRIBUTION AGREEMENT

Shares of the Fund are continuously offered and distributed through
the principal underwriter of the Fund, McDonald (the "Distributor"). Under the
terms of the Master Distribution Agreement, the Distributor, as agent of the
Fund, accepts orders for the purchase of shares of the Fund and, as
compensation therefore, receives the amount of the sales charge described in
the Prospectus. For the respective periods from the Fund's inception (April 15,
1994) through June 30, 1994, and for the fiscal year ended June 30, 1995, the
Distributor received underwriting commissions in the amounts of $116,620, and
$124,492, all of which was retained by it. The Distributor is not obligated
to sell any certain number of shares of the Fund. The Distributor may enter
into dealer's agreements with other dealers, pursuant to which such dealers
will also sell shares of the Fund. The Master Distribution Agreement between
the Fund and the Distributor permits the Distributor to reallow up to the full
sales charge to the other dealers entering into dealer's agreements with the
Distributor; accordingly, such dealers may be deemed to be underwriters of the
Fund, as that term is defined in the Securities Act of 1933, as amended (the
"1933 Act"). The Fund has agreed to indemnify the Distributor to the extent
permitted by applicable law against certain liabilities under the 1933 Act.

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<PAGE> 128

The Agreement also provides for the payment of Distribution Service Fees in the
annual amount of .25 of 1% of the Fund's average daily net assets.

DISTRIBUTION SERVICE PLAN

The Plan permits the Fund to incur expenses related to the
distribution of its shares, but only as specifically contemplated by the Plan.
Under the Plan, the Fund may pay service fees up to an amount that does not
exceed an annual rate of .25 of 1% of its average daily net assets. Such
service fees that may be incurred by the Fund under the Plan within the
limitation described above are limited to payments to broker-dealers (including
the Distributor) or other persons for certain services provided to Fund
shareholders. (See the Prospectus for further information.) The benefits
resulting from the Plan include a more stable or increasing level of assets
which, in turn, reduces the expenses of the Fund on a per share basis and
facilitates portfolio management, among other benefits.

In approving the Plan, the Board of Trustees concluded that there was a
reasonable likelihood that the Plan would benefit the Fund and its
shareholders. The Plan (together with any agreements relating to
implementation of the Plan) continues in effect only so long as such

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<PAGE> 129

continuance is specifically approved at least annually by the vote of a
majority of the Board of Trustees, including the vote of a majority of the
Independent Trustees, cast in person at a meeting called for such purpose. The
Plan may not be amended to materially increase the amount of distribution
expenses incurred by the Fund without the approval of a majority of the
Independent Trustees by votes cast in person at a meeting called for the
purpose of voting on such amendment and without the approval of a majority of
the outstanding voting securities of the Fund. The Plan may be terminated at
any time by a vote of a majority of the Independent Trustees or by a vote of
the majority of the outstanding voting securities of the Fund. Any agreement
implementing the Plan may be terminated at any time, without the payment of any
penalty, by a vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities of the Fund, on not more than
sixty days' written notice to the other party to the agreement, and any related
agreement will terminate automatically in the event of its assignment. The
Plan requires that the Board of Trustees receive at least quarterly written
reports as to the amounts expended during each quarter pursuant to the Plan and
the purposes for which such amounts were expended. While the Plan is in
effect, the selection and nomination of those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) of the Trust shall
be committed to the discretion of the disinterested Trustees then in office.
For the periods from the Fund's inception (April 15, 1994) through June 30,
1994, McDonald did not receive any distribution fees. For the fiscal year
ended June 30, 1995 McDonald received $2,059 as distribution fees. If not for
the fee waiver, McDonald would have received $2,414 and $31,463 respectively
as distribution fees for the respective periods from the Fund's inception
through June 30, 1994, and the fiscal year ended June 30, 1995.

TRANSFER AGENT AND ACCOUNTING SERVICES AGREEMENT

Pursuant to the Transfer Agent and Accounting Services Agreement, Gradison
provides transfer agent, dividend disbursing, and accounting services for the
Fund. Gradison responds to inquiries from shareholders, processes purchase and
redemption requests, maintains shareholder account records and provides
statements and confirmations to shareholders and maintains the Fund's books and
accounting records. For the respective periods from the Fund's inception (April
15, 1994) through June 30, 1994, and the fiscal year ended June 30, 1995,
McDonald did not receive any fees pursuant to the Transfer Agent and Accounting
Services Agreement and would have received $10,624 and $55,793 if not for the
waiver of fees.

34
<PAGE> 130
OTHER COMPENSATION PAID/REIMBURSEMENT MADE TO THE ADVISER

In addition to the advisory fee, transfer agent fee, and distribution
fees paid by the Fund to the Adviser, the Fund reimburses the Adviser, on a
cost basis, for costs allocable to services performed by the Adviser's
employees, including salaries and office space, including legal services.

TRUSTEES AND OFFICERS OF THE TRUST

The Trustees and officers of the Trust, together with information as
to their principal occupations during the past five years and positions
currently held with GMCR, GGT, GCT, Gradison and McDonald, are listed below.
All principal occupations have been held for at least five years unless
otherwise indicated. Positions held with Gradison were formerly held with
Gradison & Company Incorporated.

DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio. Trustee;
Senior Vice President/Finance and Administration of the E.W. Scripps
Company (communications); Director and Treasurer of Scripps Howard
Broadcasting Company; Trustee of GMCR, GCT, and GGT.

THEODORE H. EMMERICH, 1201 Edgecliff Place, Cincinnati, Ohio 45206.
Trustee. Retired; Until 1986, managing partner (Cincinnati office) Ernst &
Young (Public Accountants); Director of Carillon Fund, Inc.(investment
company), American Financial Group, Inc.(insurance), Citicasters, Inc.
(broadcasting), Cincinnati Milacron Commercial Corp.; Trustee of Carillon
Investment Trust and Summit Investment Trust(investment companies);
Trustee of GMCR, GCT, and GGT.

RICHARD A. RANKIN, 1717 Dixie Highway, Suite 600, Fort Wright, Kentucky
41011. Trustee. Partner, Rankin and Rankin (Public Accountants);
Trustee of GMCR, GCT, and GGT.

35
<PAGE> 131

BRADLEY E. TURNER, 580 Walnut Street, Cincinnati, Ohio 45202. President.
Managing Director of McDonald; President of GMCR, GCT, and GGT.

STEPHEN C. DILBONE, 580 Walnut Street, Cincinnati, Ohio 45202. Executive
Vice President. First Vice President of Gradison.

RICHARD S. DEMKO, 800 Superior Avenue, Cleveland, Ohio 44114. Vice
President. Senior Vice President of McDonald since March 1991; prior to
that, Senior Vice President of Prescott, Ball, and Turben.

PATRICIA J. JAMIESON, 800 Superior Avenue, Cleveland, Ohio 44114.
Treasurer. Treasurer and Chief Accounting Officer of McDonald; Treasurer
of GMCR, GCT, and GGT.

MARK A. FRIETCH, 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of GMCR, GCT, and GGT (since May 1995); Controller of
Gradison-McDonald mutual funds (since August 1992); prior to that
Financial Consultant and Assistant Controller of Union Central Life
Insurance Company.

RICHARD M. WACHTERMAN, 580 Walnut Street, Cincinnati, Ohio 45202.
Secretary. Senior Vice President and General Counsel of Gradison;
Secretary of GMCR, GCT, and GGT.

PAUL J. WESTON, 580 Walnut Street, Cincinnati, Ohio. Senior Vice
President. Executive Vice President of GMCR; Senior Vice President of GCT
and GGT; Executive Vice President of Gradison. Mr. Weston is the
brother of Donald E. Weston.

- -------------------------------
*Trustee who is an interested and affiliated person of the Trust and the
Adviser because of employment with and stock ownership of the Adviser.

Trustees and officers of the Trust who are affiliated with the Adviser receive
no remuneration from the Trust. Trustees who are not affiliated with the
Adviser receive fees as determined by the Board of Trustees. As of September
30, 1995, the Trustees and officers of the Trust owned an aggregate of less
than 1% of the outstanding voting securities of the Fund.

36
<PAGE> 132

Trustee Compensation Table
- --------------------------

<TABLE>
<CAPTION>
Name of Trustee Aggregate Total Compensation
- --------------- Compensation From Trust and fund
From Trust* complex (3 additional
----------- Trusts) paid to
trustee*
--------
<S> <C> <C>
Theodore H. Emmerich $4,500 $18,833
Richard A. Rankin $4,250 $18,833
Jerome E. Schnee $4,500 $18,833
Daniel J. Castellini $2,833 $10,500

<FN>
* Amounts shown as compensation from the Trust are for the period ending June
30, 1995. Amounts shown as compensation from the Trust and the fund complex
are for the year ending December 31, 1994. The Trust maintains a deferred
compensation plan which allows trustees to defer receipt of trustee fees
otherwise payable to them until a future date. Deferred amounts are credited
with interest at a rate equal to the yield of the Gradison-McDonald U.S.
Government Reserves Fund. The Trust does not maintain any other pension or
retirement plans. There are currently no amounts owing to any current trustee
pursuant to the deferred compensation plan. As of June 30, 1995, the amount of
$7990 was payable by the Trust to the beneficiary of a former trustee who is
deceased and as of December 31, 1994, the amount of $30,413.10 was payable to
that trustee by the Trust and the fund complex.
</TABLE>

As of September 30, 1995, the trustees and officers of the Fund in the
aggregate owned less than 1% of the outstanding shares of the Fund and Mr.
Charles Peter Koch, 8390 Crestdale Court, Cincinnati, Ohio 45236, owned 6.10%
of the Fund's outstanding shares.

DESCRIPTION OF THE TRUST

37
<PAGE> 133
in accordance with the terms set forth in the Prospectus, each share will be
fully paid and nonassessable. Shares have no preemptive, subscription or
conversion rights and are redeemable as set forth under "How to Redeem Shares."

Holders of shares of the Fund are entitled to vote the full and
fractional shares in the amount of their ownership of Fund shares. Voting
rights are not cumulative, which means that the holders of more than 50% of the
shares voting in any election of Trustees can elect all of the Trustees if they
choose to do so, in which event the holders of the remaining shares will be
unable to elect a Trustee. Under the Declaration of Trust, meetings of
shareholders are not required to elect trustees, unless less than a majority of
trustees holding office have been elected by the shareholders. Shareholders'
meetings will be held only when required pursuant to the Declaration of Trust
or the Investment Company Act of 1940, and when called by the Fund or
shareholders pursuant to the Declaration of Trust. Pursuant to the Declaration
of Trust, shareholders of record of not less than a majority of the outstanding
shares of the Fund may remove a Trustee through a declaration in writing or by
vote cast in person or by proxy at a meeting called for that purpose. The
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the questions of removal of any Trustee when requested in writing
to do so by shareholders of record of not less than 10 percent of the Trust's
outstanding shares. The Trust or any Fund may be terminated by a vote of a
majority of the Trustees. Whenever the approval of a majority of the
outstanding shares of the Fund is required in connection with shareholder
approval of the Investment Advisory Agreement, the Master Distribution
Agreement, or the Distribution Expense Plan, or changes in the investment
objective or the investment restrictions, a "majority" shall mean the vote of
(i) 67% or more of the outstanding shares of the Fund present at a meeting, if
the holders of more than 50% of the outstanding shares of the Fund are present
in person or by proxy, or (ii) more than 50% of the outstanding shares of the
Fund, whichever is the lesser.

The assets of the Trust received upon the issuance of the shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to each such series and constitute the
underlying assets of each such series. The underlying assets of each series are
segregated on the books of account and are to be charged with the liabilities
in respect to each such series and with each series' proportionate share of the
general liabilities of the Trust. In the event of the termination and
liquidation of the Trust, the holders of the shares of any series are entitled
to receive their pro-rata portion of the underlying assets of the series
available for distribution to shareholders.

38
<PAGE> 134
The Trust is currently operating, and intends to continue to operate, in
compliance with the Ohio law relating to business trusts. Under Ohio law, the
shareholders of a complying business trust have no liability to third persons
for obligations of the Trust, which are to be satisfied solely from the Trust's
property. The Declaration of Trust provides that no Trustee, officer,
employee, or agent of the Fund shall be personally liable to any person for
any action or failure to act in connection with the Trust's property or the
affairs of the Trust except (1) for his own willful misfeasance, bad faith,
gross negligence, or reckless disregard of his duties, (2) with respect to any
matters as to which he did not act in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the Trust or where
he did not act with the care that an ordinarily prudent person in a like
position would use under similar circumstances.

CUSTODIAN

INDEPENDENT PUBLIC ACCOUNTANTS

The firm of Arthur Andersen LLP has been selected as independent public
accountants for the Fund for the fiscal year ending June 30, 1996.

LEGAL COUNSEL

Kirkpatrick & Lockhart LLP acts as legal counsel for the Fund.

EXCHANGES

39
<PAGE> 135
administrative fee, sales load, or redemption fee payable at the time of an
exchange.

TELEPHONE ACCESS TO ACCOUNT INFORMATION

Shareholders may access information about their Fund account by
telephone 24 hours a day using a password assigned to them.

INVESTMENT PERFORMANCE

The Fund's yield for the 30 days ending June 30, 1995, was 4.33%. The
Fund's tax-equivalent yield for that period was 7.17% based on a Federal tax
rate of 39.6%, the highest marginal tax rate. The tax equivalent yield is the
yield that a taxable investment would have to yield to be equivalent to the
Fund's tax-exempt yield.

The Average Annual Total Return of the Fund based on purchase at the
maximum offering price (including the 2% sales charge) has been as follows:

From inception (April 15, 1994) through 6/30/95 6.06%
For 12 months ending 6/30/95 4.59%

The Average Annual Total Return of the Fund based on purchase at the net asset
price (not including the 2% sales charge) has been as follows:

From inception (April 15, 1994) through 6/30/95 7.88%
For 12 months ending 6/30/95 6.72%

The performance results shown above assume reinvestment of dividends and
other distributions. The performance quoted above represents historical
performance. The Fund's yield and return will fluctuate and value of an
investment in the Fund will fluctuate so that an investor's shares may be worth
more or less than their cost, when redeemed. During the periods for which
performance figures are provided above, the Adviser waived fees and/or
reimbursed Fund expenses, resulting in a substantial increase in the
performance shown above.

40
<PAGE> 136
APPENDIX A

THE FUND MAY USE THE FOLLOWING HEDGING INSTRUMENTS:

41
<PAGE> 137
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are similar
to options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the
option, the delivery of the futures position to the holder of the option will
be accompanied by delivery of the accumulated balance, which represents the
amount by which the market price of the futures contract exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the future. The writer of an option, upon exercise, will assume a
short position in the case of a call, and a long position in the case of a put.

42
<PAGE> 138
<TABLE>
STATEMENT OF NET ASSETS JUNE 30, 1995

<CAPTION>
FACE MUNICIPAL BONDS - 98.50% COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C>
$500,000 Baton Rouge, LA Public Improvement Sales Tax Revenue 9.00% 8/01/98 $ 560,625
200,000 Butler Co., PA Industrial Development Authority Revenue 5.87 6/15/98 201,500
(K-Mart Corporation)
500,000 Colorado River Municipal Water District Texas 5.30 1/01/08 485,625
500,000 Columbus, OH General Obligation ("G.O.") 5.05 6/15/05 495,000
500,000 Cook & Du Page Co., IL School District #113A 6.20 12/01/96 502,500
480,000 Cuyahoga Co., OH Industrial Development 5.90 6/01/04 491,400
Refunding Revenue (Southwest Associates Project)
480,000 Eaton Rapids, MI Public Schools 5.45 5/01/08 473,400
500,000 Fairfield, OH City School District 7.75 12/01/09 548,750
500,000 Franklin Co., OH Industrial Development Revenue Refunding 5.85 6/01/02 510,000
(Hoover Universal Inc. Project)
500,000 Hamilton Co., OH Hospital Facilities Revenue 6.75 5/15/09 532,500
(Children's Hospital)
500,000 Harris Co., TX Housing Finance Corporation Multifamily 5.60 9/01/99 499,375
Housing (Colonial House Apartment Project)
500,000 Hawaii State Airports System Revenue 6.30 7/01/01 530,000
490,000 Huntington, NY G.O. 5.25 6/15/08 477,750
500,000 Indiana Health Facility Financing Authority 7.10 9/01/03 561,875
(Sisters of St. Francis Health Services, Inc.)
500,000 Louisville, KY Housing Assistance Corporation 7.00 1/01/10 525,625
(FHA Insured Mortgage Loan-Carrousel Properties)
500,000 Maine Educational Loan Marketing Corporation 6.05 11/01/04 510,625
Senior Student Loan Revenue
575,000 Metropolitan Council Minnesota Minneapolis/St. Paul G.O. 5.50 6/01/09 569,969
500,000 Michigan State Housing Development Authority 6.00 4/01/01 508,125
Rental Housing Revenue
300,000 Ohio State Economic Development Revenue 6.50 12/01/09 300,000
(Ohio Enterprise Bond Fund)
400,000 Ohio State Public Facilities Commission 7.00 11/01/98 428,000
Higher Education Facilities
450,000 Ohio State Public Facilities Commission 7.00 11/01/02 476,437
Higher Education Facilities
500,000 Port Authur, TX G.O. 5.50 2/15/09 490,000
400,000 Puerto Rico Highway & Transportation Authority 6.37 7/01/08 417,500

See accompanying notes to financial statements.
</TABLE>
Financial Statement Page 1
<PAGE> 139
<TABLE>
STATEMENT OF NET ASSETS JUNE 30, 1995

<CAPTION>
FACE MUNICIPAL BONDS (CONTINUED) COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C>
$500,000 Shelby Co., TN Health Facilities Revenue 7.37% 6/01/01 $ 543,125
(Methodist Health Systems, Inc.)
400,000 South Dakota Student Loan Finance 5.50 8/01/98 404,500
400,000 Student Loan Funding Corporation, Cincinnati, OH 5.95 8/01/05 399,000
Senior Subordinated Revenue
400,000 Westlake, OH Industrial Development Revenue Refunding 6.00 8/01/04 414,000
(Westbay Manor I and II Projects) FHA
400,000 West Clermont, OH Local School District 6.00 12/01/00 418,000
500,000 Youngstown, OH City School District Revenue 5.50 6/15/96 506,380
Anticipation Notes -----------

TOTAL INVESTMENTS, at value (Note 1)
(Amortized Cost = $13,563,988) - 98.50% 13,781,586

Interest Receivable - 1.52% 212,439
Payable for Fund Shares Redeemed - (0.08%) (11,072)
Accrued Expenses Payable to Adviser (Note 2) - (0.13%) (17,795)
Other Assets & Liabilities, Net - 0.19% 25,713
-----------
Net Assets - Applicable to 1,083,058 outstanding shares
(no par value - unlimited number of shares authorized)
(Note 4) - 100% $13,990,871
===========

Net Asset Value and Redemption Price per Share (Note 1) $12.92
===========
Maximum Offering Price per Share (Note 1) $13.18
===========

See accompanying notes to financial statements.
</TABLE>

Financial Statement Page 2
<PAGE> 140

<TABLE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995

<CAPTION>
<S> <C> <C>
INTEREST INCOME $685,495

EXPENSES
Investment advisory fee (Note 2) $ 62,925
Transfer agency and accounting services fees (Note 2) 55,793
Distribution (Note 2) 31,463
Registration fees 27,607
Professional fees 18,161
Trustees' fees (Note 2) 11,467
Amortization of organization expense (Note 1) 2,042
Other 1,549
--------
Total expenses 211,007
Less fees waived by the adviser (Note 2) (148,122)
--------
Net expenses 62,885
--------
NET INVESTMENT INCOME 622,610

NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 11,539
Net increase in unrealized appreciation of investments 220,153
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 231,692
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $854,302
========

During the year ended June 30, 1995, the Fund made total distributions of
$0.629 per share, all of which was from net investment income. All
distributions were entirely exempt from federal regular income tax.

See accompanying notes to financial statements.

</TABLE>
Financial Statement Page 3
<PAGE> 141

STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)

For The
Year Period
Ended April 15, 1994*
June 30, 1995 To June 30, 1994
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 622,610 $ 42,688
Net realized gain on investments 11,539 742
Net increase (decrease) in unrealized appreciation/depreciation
of investments 220,153 (2,555)
------------- --------------
Net increase in net assets resulting from operations 854,302 40,875
------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (617,514) (42,012)
------------- --------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 10,710,665 11,430,908
Net asset value of shares issued as distributions 532,240 25,285
Payments for shares redeemed (4,752,618) (4,191,260)
------------ -------------
Net increase in net assets from Fund share transactions 6,490,287 7,264,933
------------ -------------
TOTAL INCREASE IN NET ASSETS 6,727,075 7,263,796

NET ASSETS:
Beginning of period 7,263,796 --
------------ -------------
End of period (including undistributed net investment
income of $5,772 and $676, respectively) (Note 1) $13,990,871 $ 7,263,796
============ =============
NUMBER OF FUND SHARES:
Sold 844,755 896,461
Issued as distributions to shareholders 41,982 1,977
Redeemed (374,835) (327,282)
------------ -------------
Net increase in shares outstanding 511,902 571,156
Outstanding at beginning of period 571,156 --
------------ -------------
Outstanding at end of period 1,083,058 571,156
============ =============
*Date of public offering.

See accompanying notes to financial statements.
</TABLE>

Financial Statement Page 4

<PAGE> 142

NOTES TO FINANCIAL STATEMENTS June 30, 1995

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Gradison-McDonald Municipal Custodian Trust (the "Trust") is registered under
the Investment Company Act of 1940, as amended, as a management investment
company. The Trust was created under Ohio law by a Declaration of Trust dated
June 11, 1992. The Trust consists of two series, the Gradison-McDonald
Intermediate Municipal Income Fund and the Gradison-McDonald Ohio Tax-Free
Income Fund; each of which is a diversified, open-end series representing a
separate fund with its own investment policies. This Annual Report to
Shareholders pertains only to Gradison-McDonald Intermediate Municipal Income
Fund (the "Fund"), the public offering of shares of which commenced on April
15, 1994.

The following is a summary of the Trust's significant accounting policies:

The Fund will maintain, in a segregated account with its custodian, cash or
high-grade portfolio securities having an aggregate value at least equal to the
amount of such purchase commitments. At June 30, 1995, the Fund was not
committed to the purchase of any when-issued or delayed delivery securities.

Dividends arising from net investment income are declared daily and paid
monthly. Net realized capital gains, if any, are distributed at least
annually.

TAXES - It is the Fund's policy to comply with the provisions of the
Internal Revenue Code available to regulated investment companies. As provided
therein, in any fiscal year in which the Fund so qualifies, and distributes at
least 90% of 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 taxable 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 equal to the amortized cost as shown on the
Statement of Net Assets.

For both financial reporting and tax purposes, gross unrealized appreciation
and gross unrealized depreciation of investments at June 30, 1995 were $242,435
and $24,837, respectively.

Financial Statement Page 5
<PAGE> 143

NOTES TO FINANCIAL STATEMENTS June 30, 1995

ORGANIZATION EXPENSES - Expenses of organization have been capitalized and are
being amortized on a straight-line basis over 60 months commencing upon the
public offering of the Fund's shares.

NOTE 2 - TRANSACTIONS WITH AFFILIATES

The Agreement provides that McDonald 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, McDonald bears the costs of
preparing, printing and mailing sales literature and other advertising
materials, the cost of space and equipment rental, and compensates the Trust's
trustees who are affiliated with McDonald. All expenses not specifically
assumed by McDonald are borne by the Fund.

During the year ended June 30, 1995, McDonald received sales charges
aggregating $124,492 on sales of shares of the Fund.

The officers of the Trust are also officers of McDonald.

Financial Statement Page 6
<PAGE> 144

June 30, 1995

NOTE 3 - SUMMARY OF INVESTMENT TRANSACTIONS

For the period ended June 30, 1995, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $22,623,385 and
$16,380,809, respectively.

NOTE 4 - NET ASSETS

At June 30, 1995, net assets of the Fund consisted of:
<TABLE>
<S> <C>
Aggregate paid-in capital $13,755,220
Accumulated undistributed net investment income 5,772
Accumulated undistributed net realized gains 12,281
Net unrealized appreciation of investments 217,598
-----------
Net assets $13,990,871
===========

</TABLE>
NOTE 5 - PORTFOLIO COMPOSITION

The concentration of investments as of June 30, 1995, classified by state,
credit rating and revenue source, was as follows:

<TABLE>
<CAPTION>
<S> <C> <C>
Investments by State Investments by Rating Investments by Revenue Source
- ------------------------------ ------------------------------- -----------------------------------
Ohio 40.1% S&P/Moody's General Obligations 28.9%
Texas 10.7 AAA/Aaa 55.8% Revenue Bonds:
Michigan 7.1 AA/Aa 7.4 Health Care 15.5
Indiana 4.1 A/A 25.0 Housing 14.1
Louisiana 4.1 BBB/Baa 4.5 Higher Education 9.5
Minnesota 4.1 Unrated (2) 7.3 Industrial Development 7.3
Hawaii 3.9 ------- Transportation 6.9
Tennessee 3.9 Total 100.0% State Agency 6.6
Kentucky 3.8 ======= Water Works 3.5
Illinois 3.7 Other 7.7
Maine 3.7 -------
New York 3.5 Total 100.0%
Other (1) 7.3 =======
------
Total 100.0%
======
<FN>
(1) Individually less then 3%.
(2) Unrated obligations have been determined by the adviser to be of equivalent
quality to the rated securities in which the Fund is permitted to invest.

See the Fund's Statement of Net Assets for additional information on portfolio composition.

</TABLE>

Financial Statement Page 7
<PAGE> 145

ARTHUR
ANDERSEN
Arthur Andersen & Co, SC

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Trustees of the
Gradison-McDonald Intermediate Municipal Income Fund
of the Gradison-McDonald Municipal Custodian Trust:

We have audited the accompanying statement of net assets of the
Gradison-McDonald Intermediate Municipal Income Fund of the Gradison-McDonald
Municipal Custodian Trust (an Ohio business trust), as of June 30, 1995, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and the financial highlights for the periods indicated
thereon. 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 audit 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 June
30, 1995, by correspondence with the custodian. 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-McDonald Intermediate Municipal Income Fund of the Gradison-McDonald
Municipal Custodian Trust as of June 30, 1995, the results of its operations
for the year then ended, and the changes in its net assets and the financial
highlights for the periods indicated thereon, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN, LLP
Cincinnati, Ohio,
August 4, 1995

Financial Statement Page 8

<PAGE> 146
COVER PAGE
- ----------
INTERMEDIATE
MUNICIPAL INCOME
FUND

GRADISON-MCDONALD

[Collage of picture post card, sand, and shells. "Your Future Starts Today"
graphic]

A INTERMEDIATE MUNICIPAL BOND FUND SEEKING A HIGH LEVEL OF AFTER-TAX INCOME
<PAGE> 147
INSIDE COVER
- ------------

FAMILY OF MUTUAL FUNDS

INTERMEDIATE
MUNICIPAL

INTERNATIONAL OHIO TAX-FREE
INCOME

OPPORTUNITY GOVERNMENT
VALUE INCOME

ESTABLISHED MONEY
VALUE MARKET

GROWTH &
INCOME
<PAGE> 148
PAGE 1
- ------
[ Portion of collage, "Your Future Starts Here" graphic]

Whatever your goals or ASPIRATIONS.
Whatever your objective. One thing is certain.
An INVESTMENT made today brings
you that much closer to meeting that OBJECTIVE
and reaching that GOAL ...
whether it's buying a house, starting a family,
SAVING for a college education,
or planning for retirement. Hesitate and
time will pass you by.

1-800-869-5999 [Call for information logo]
<PAGE> 149
PAGE 2
- ------
INTERMEDIATE
MUNICIPAL INCOME
FUND
GRADISON-MCDONALD INTERMEDIATE MUNICIPAL
INCOME FUND SEEKS TO PROVIDE HIGH MONTHLY
INCOME, FREE FROM FEDERAL TAX, AND PRESERVATION
OF CAPITAL BY INVESTING IN HIGH QUALITY,
INTERMEDIATE-TERM MUNICIPAL BONDS. THE FUND
IS PROFESSIONALLY MANAGED BY EXPERIENCED
GRADISON-MCDONALD PORTFOLIO MANAGERS.

KEEP MORE OF WHAT YOU EARN
Municipal bonds are one of the few remaining sources of
tax-free income---whatever your tax bracket. They are
issued by state and local governments to finance the con-
struction of schools, hospitals, roads, airports, and other
facilities. Because municipal bonds are used to finance
various projects that build our communities, their divi-
dends are exempt from federal income taxes. So you keep
more of the dividend income you earn.
THE REWARDS OF TAX-FREE INVESTING
<TABLE>
<CAPTION>
IF YOUR TAXABLE YOUR
INCOME IS ... FEDERAL TAX TO EARN A TAX FREE YIELD OF :
RATE IF ... 3.5% 4.5% 5.5%

SINGLE A TAXABLE INVESTMENT MUST EARN.....
<S> <C> <C> <C> <C>
$0-22,100 15.0% 4.1% 5.3% 6.5%
22,100-53,500 28.0 4.9 6.3 7.6
53,500-115,000 31.0 5.1 6.5 8.0
115,000-250,000 36.0 5.5 7.0 8.6
250,000 AND OVER 39.6 5.8 7.5 9.1

JOINT

$0-36,900 15.0% 4.1% 5.3% 6.5%
36,900-89,150 28.0 4.9 6.3 7.6
89,150-140,000 31.0 5.1 6.5 8.0
140,000-250,000 36.0 5.5 7.0 8.6
250,000 AND OVER 39.6 5.8 7.5 9.1
</TABLE>

This table is for illustrative purposes only and does not reflect performance
of the Gradison-McDonald Intermediate Municipal Income Fund. The Fund's net
asset value and yield will vary, and there can be no assurance that it will
achieve and particular tax-exempt yield. Income may be subject to some state
and local taxes. For certain investors, some income may be subject to the
federal alternative minimum tax. Capital gains distributions, if any, are
taxable.
<PAGE> 150
PAGE 3
- ------
[Portion of collage graphic]]
THE INTERMEDIATE ADVANTAGE
- --------------------------

The Gradison-McDonald Intermediate Municipal Income Fund maintains a
dollar-weighted average portfolio of 3 to 10 years. These intermediate bonds
yield significantly higher rates than short-term bonds. They also provide
better price stability than long-term bonds.

CHART - A MODEST POSITION ON THE YIELD CURVE
SHOWING THE SHAPE OF A YIELD CURVE. NO YIELDS ARE SPECIFIED.

This chart shows the Fund's expected position on an average yield curve for an
A-rated municipal bond. Intermediate-term bonds generally offer higher yields
than short-term bonds and lower yields than long-term bonds.

CHART -WITH LESS VOLATILITY THAN LONG-TERM BOND FUNDS
BAR CHART SHOWING EFFECT OF A 1% INCREASE AND A DECREASE IN INTEREST RATES ON
THE PRICE OF 3 YEAR, 7 YEAR AND 30 YEAR BONDS.

Money market funds offer more price stability than intermediate-term bonds.
Hypothetical example based on noncallable general obligation par bond as of May
1995. Assumes reinvestment of interest income at current yield.

1-800-869-5999 [Call for information logo]
<PAGE> 151
PAGE 4
- ------

A DIVERSIFIED, HIGH QUALITY PORTFOLIO
- -------------------------------------

The Gradison-McDonald Intermediate Municipal Income Fund attempts to preserve
capital through a diversified portfolio of maturities and municipalities
throughout the nation.* The Fund's experience managers continually assess the
portfolio and adjust its mix of securities to take advantage of changing market
conditions.

The securities in the portfolio are primarily investment grade municipal bonds
rated BBB or better by Standard & Poor's corporation. Moody's Investors
Service, or other nationally recognized rating agencies or are of comparable
quality.
*The Fund may maintain up to 40% or more of its assets in Ohio Municipal
Securities.

LOW MINIMUM INVESTMENT
- ----------------------

Gradison-McDonald Intermediate Municipal Income Fund has a low minimum initial
investment of $1,000. Additional investments can be made for as little as $50.

MONTHLY PAYMENT & REINVESTMENT
- ------------------------------

Dividends are paid monthly. You may choose to receive dividends or elect to
have them automatically reinvested in the Fund.

EXCHANGES
- ---------

You can move money from one Gradison.McDonald fund to another at any time. The
Gradison-McDonald funds currently include:

Growth & Income Fund
Established Value Fund
Opportunity Value Fund [Three shells graphic]
International Fund
Ohio Tax-Free Income Fund
Government Income Fund
U.S. Government Reserves

ACCESS
- ------

You can redeem shares on any business day at the closing net asset value.

<PAGE> 152
INSIDE BACK COVER
- -----------------

A TRUSTED NAME
--------------

1-800-869-5999 [Call for information logo]
<PAGE> 153
BACK COVER
- ----------
[Portable phone and two envelopes graphic]

To find out more about the
GRADISON-McDONALD INTERMEDIATE
MUNICIPAL INCOME FUND
or other funds in the family

CALL

1-800-869-5999

OR WRITE

Gradison-McDonald Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202

GRADISON-MCDONALD
-----------------

You may obtain a prospectus containing complete information about the Fund from
a Gradison-McDonald Mutual Funds representative or your Investment Consultant.
Read it carefully before investing. Upon redemption, the value of an
investment in the Fund may be worth more or less than its cost.
McDonald & Company Securities, Inc.--Distributor
<PAGE> 154
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS

(a)(1) Financial Statements (included in prospectus of Gradison-McDonald Ohio
Tax-Free Income Fund and Gradison-McDonald Intermediate Municipal Income Fund).
Financial Highlights

(a)(2) Financial Statements (included in statement of additional
information).
Gradison-McDonald Ohio Tax-Free Income Fund
Portfolio of Investments as of June 30, 1995.
Statement of Assets and Liabilities as of June 30, 1995.
Statement of Operations for the period ended June 30, 1995.
Statement of Changes in Net Assets for the period ended
June 30, 1994 and June 30, 1995.
Notes to financial statements.
Report of Independent Accountants
Gradison-McDonald Intermediate Municipal Income Fund
Statement of Net Assets as of June 30, 1995.
Statement of Operations for the year ended June 30, 1995.
Statement of Changes in Net Assets for the periods ended
June 30, 1994 and June 30, 1995.
Notes to financial statements.
Report of Independent Accountants
(b)Exhibits
( 1) Declaration of Trust.**
( 2) By-Laws of Trust.**
( 5)(a) Form of Investment Advisory Agreement.***
( 5)(b) Notice dated April 14, 1994 adding Gradison-McDonald
Intermediate Municipal Income Fund to Investment Advisory
Agreement).++
( 6) Form of Master Distribution Agreement.***

( 6)(b) Form of Dealer's Agreement.***
( 6)(c) Amendment to Master Distribution Agreement Dated April
14, 1994.++
( 6)(d) Notice dated April 14, 1994, adding Gradison-McDonald
Intermediate Municipal Income Fund to Transfer Agency
Agreement.++
( 8) Form of Custodian Agreement.*
( 9a) Form of Transfer Agency Agreement.***
( 9b) Form of Expense Reimbursement Agreement.***
( 9c) Amended Appendix B to Transfer Agency Agreement Dated April
14, 1994.+*
( 9d) Amended Appendix C to Transfer Agency Agreement Dated February
25, 1994.+*
(10) Opinion of Counsel, is filed yearly with Registrant's Rule
24f-2. Notice was filed most recently on August 23, 1995.

C-1
<PAGE> 155
(11) Consent of Independent Accountant (included herein)
(13) Letter of Investment Intent.***
(15) Distribution Service Plan Dated February 25, 1994.++
(15a) Addition of Gradison-McDonald Intermediate Municipal Income
Fund to Distribution Service Plan ++.
(16) Schedule of Performance Calculations.+
(18) Powers of Attorney of Bradley E. Turner and Daniel Castellini.++
(18a) Power of Attorney of Patricia J. Jamieson (included herein).

* Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on August 31, 1992.

** Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on June 16, 1992.

*** Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on August 3, 1992.

+ Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on November 23, 1993.

++ Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on November 25, 1994.

+*Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on September 29, 1994.

Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.

Item 26. NUMBER OF HOLDERS OF SECURITIES

<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of September 27, 1995
-------------- -------------------------

<S> <C>
Shares of beneficial
interest of Registrant

Gradison-McDonald Ohio Tax-Free Income Fund 1,666

Gradison-McDonald Intermediate Municipal Income Fund 282
</TABLE>

C-2
<PAGE> 156

Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Reference is made to the captions "Management of the Trust" on page 15 of
the Prospectus that is Part A of this Registration Statement, "Trustees and
Officers of the Trust" on page 34 of the Statement of Additional Information of
the Gradison-McDonald Ohio Tax-Free series of the Trust that is part of Part B
of this Registration Statement and to Item 29(b) of this Part C of the
Registration Statement.

Item 29. PRINCIPAL UNDERWRITERS

(a) The principal underwriter of the Registrant is McDonald & Company
Securities, Inc., which also serves as the principal underwriter and
investment adviser for Gradison-McDonald Cash Reserves Trust, Gradison
Custodian Trust, and Gradison Growth Trust.

(b) Information pertaining to the underwriter's directors and officers is
contained in the following table.

<TABLE>
<CAPTION>
Principal Positions and
Positions and Offices Business Offices with
Name With Underwriter Address Registrant
- ---- -------------------- ------------------------------
<S> <C> <C> <C>
Daniel F. Austin Director, Vice 800 Superior Avenue None
Chairman Cleveland Ohio 44114

Jack N. Aydin Director, Managing One Evertrust Plaza None
Director Jersey City, NJ 07302

Eugene H. Bosart, Director, Managing 260 East Brown Street None
III Director Birmingham, MI 48009

Thomas G. Clevidence Director, Managing 800 Superior Avenue None
Director Cleveland, OH 44114

Robert Clutterbuck Director, President, 800 Superior Avenue None
Chief Operating, Cleveland, OH 44114
Officer, Chief
Financial Officer

Dennis J. Donnelly Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114

David W. Ellis, III Director, and Sr. 580 Walnut Street None
Vice President Cincinnati, OH 45202
(Gradison Division)

David W. Knall Director, Managing One American Square None
Director Indianapolis, IN 46282
</TABLE>

C-3
<PAGE> 157

Thomas M. McDonald Director, Managing 800 Superior Avenue
Director, Cleveland, OH 44114

John F. O'Brien Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114

Thomas M. O'Donnell Director 800 Superior Avenue None
Cleveland, OH 44114

Lawrence T. Oakar Director and 800 Superior Avenue None
Sr. Vice President Cleveland, OH 44114

James C. Redinger Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114

William Summers, Jr. Director, Chairman 800 Superior Avenue None
Chief Executive Cleveland, OH 44114
Officer

David D. Sutcliffe Director, Sr. Vice 800 Superior Avenue None
President Cleveland, OH 44114

Francis S. Tobias Director, Managing 800 Superior Avenue None
Director Cleveland, OH 44114

Donald E. Weston Chairman 580 Walnut Street Trustee and
(Gradison Div.) Cincinnati OH 45202 Chairman
</TABLE>

Item 30 LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and documents required to be maintained by the Registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31(a) thereunder are maintained at the offices of the Registrant, 580
Walnut Street, Cincinnati, Ohio 45202, except as indicated below opposite the
applicable reference to the aforesaid Rules.

Rule In Possession of:
- ---- ----------------

31a-1(b)(1), 31a-1(b)(2)(i)(a)-(f), Star Bank, N.A., Star Bank
Center,
31a-1(b)(2)(ii), 31a-1(b)(5) and Cincinnati, Ohio 45202.
31a-1(b)(8)

Item 31. MANAGEMENT SERVICES

Not applicable.

C-4
<PAGE> 158
Item 32. UNDERTAKINGS

The Registrant hereby undertakes to provide, without cost, a copy of its most
recent annual report upon request.

Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction, the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

C-5
<PAGE> 159
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Cincinnati and State of Ohio on the 27th day of October 1995.

Registrant hereby certifies that this Amendment to Registration Statement meets
all of the requirements for effectiveness pursuant to paragraph (b) of Rule
485.

GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
(Registrant)

By */S/ DONALD E. WESTON
--------------------
Chairman

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*DONALD E. WESTON Chairman of the Board October 27, 1995
(Principal Executive
Officer and Trustee)

*DANIEL J. CASTELLINI Trustee "

*THEODORE EMMERICH Trustee "

*RICHARD RANKIN Trustee "

*JEROME SCHNEE Trustee "

*BRADLEY E. TURNER President "

*PATRICIA J. JAMIESON Treasurer
(Principal Financial and "
Accounting Officer)

<FN>
*By /S/ Richard M. Wachterman
Richard M. Wachterman
Attorney-in-Fact
</TABLE>

S-1
<PAGE> 160

Exhibit List

Exhibit Number Description
- -------------- -----------

11 Consent of Arthur Andersen LLP
18(a) Power of Attorney of Patricia J. Jamieson

<PAGE> 1
Exhibit 11

Consent of Independent Public Accountants
-----------------------------------------

As independent public accountants, we hereby consent to the use of our report
dated August 4, 1995 and to all references to our Firm included in or made a
part of this registration statement, post-effective amendment no. 6.

|S| Arthur Andersen LLP

Cincinnati, Ohio,
October 27, 1995

<PAGE> 1
Exhibit 18a

GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST

Power of Attorney of Trustees and Officers
------------------------------------------

The undersigned, an officer or Trustee, or both an
officer and Trustee, of Gradison-McDonald Municipal Custodian Trust an Ohio
business trust (the "Trust"), which has filed with the Securities and Exchange
Commission under the provisions of the Securities Act of 1933, as amended, and
the provisions of the Investment Company Act of 1940, as amended, a
Registration Statement on N-1A (which together with any and all subsequent
amendments, including post-effective amendments, thereto is hereinafter called
the "Registration Statement") for the principal purpose of registering the
public offering by the Trust of shares of beneficial interest without par value
of its series, hereby constitutes and appoints Paul J. Weston, Richard M.
Wachterman, Robert Clutterbuck, Donald E. Weston and Robert Zutz, and each of
them, with full power and substitution or resubstitution, the attorney or
attorneys to execute and file on behalf of the undersigned in his capacity as
an officer and/or trustee of the trust, the Registration Statement as
aforesaid, and any and all exhibits, applications and other documents to be
filed with the Securities and Exchange Commission pertaining thereto, with full
power and authority to do and perform any and all acts and things whatsoever
required or necessary to be done in the premises, as fully to all intents and
purposes as he could do if personally present, hereby ratifying and approving
the acts of said attorneys or any of them and any such substitute.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 23rd day of May 1995.

/S/ Patricia J. Jamieson
________________________

<ARTICLE> 6
<RESTATED>
<CIK> 0000888850
<NAME> GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
<SERIES>
<NUMBER> 2
<NAME> GRADISON-MCDONALD INTERMEDIATE MUNICIPAL INCOME FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 13,563,988
<INVESTMENTS-AT-VALUE> 13,781,586
<RECEIVABLES> 212,439
<ASSETS-OTHER> 25,713
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,019,738
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 28,867
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,755,220
<SHARES-COMMON-STOCK> 1,083,058
<SHARES-COMMON-PRIOR> 571,156
<ACCUMULATED-NII-CURRENT> 5,772
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,281
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 217,598
<NET-ASSETS> 13,990,871
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 685,495
<OTHER-INCOME> 0
<EXPENSES-NET> 62,885
<NET-INVESTMENT-INCOME> 622,610
<REALIZED-GAINS-CURRENT> 11,539
<APPREC-INCREASE-CURRENT> 220,153
<NET-CHANGE-FROM-OPS> 854,302
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 617,514
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 844,755
<NUMBER-OF-SHARES-REDEEMED> 374,835
<SHARES-REINVESTED> 41,982
<NET-CHANGE-IN-ASSETS> 6,727,075
<ACCUMULATED-NII-PRIOR> 676
<ACCUMULATED-GAINS-PRIOR> 742
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 62,925
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 211,007
<AVERAGE-NET-ASSETS> 12,585,085
<PER-SHARE-NAV-BEGIN> 12.718
<PER-SHARE-NII> 0.633
<PER-SHARE-GAIN-APPREC> 0.196
<PER-SHARE-DIVIDEND> 0.629
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 12,918
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000888850
<NAME> GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
<SERIES>
<NUMBER> 1
<NAME> GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 70,111,764
<INVESTMENTS-AT-VALUE> 70,350,613
<RECEIVABLES> 1,085,643
<ASSETS-OTHER> 147,315
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 71,583,571
<PAYABLE-FOR-SECURITIES> 1,480,695
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 120,259
<TOTAL-LIABILITIES> 1,600,954
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71,241,819
<SHARES-COMMON-STOCK> 5,478,886
<SHARES-COMMON-PRIOR> 6,227,835
<ACCUMULATED-NII-CURRENT> 1,229
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,499,280)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 238,849
<NET-ASSETS> 69,982,617
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,520,751
<OTHER-INCOME> 0
<EXPENSES-NET> 705,226
<NET-INVESTMENT-INCOME> 3,815,525
<REALIZED-GAINS-CURRENT> (1,353,239)
<APPREC-INCREASE-CURRENT> 2,903,704
<NET-CHANGE-FROM-OPS> 5,365,990
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,825,971
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 781,164
<NUMBER-OF-SHARES-REDEEMED> 1,784,364
<SHARES-REINVESTED> 254,251
<NET-CHANGE-IN-ASSETS> (7,654,823)
<ACCUMULATED-NII-PRIOR> 11,675
<ACCUMULATED-GAINS-PRIOR> (146,041)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (146,041)
<GROSS-ADVISORY-FEES> 362,864
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 705,226
<AVERAGE-NET-ASSETS> 72,572,867
<PER-SHARE-NAV-BEGIN> 12.466
<PER-SHARE-NII> 0.661
<PER-SHARE-GAIN-APPREC> 0.308
<PER-SHARE-DIVIDEND> 0.662
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 12,773
<EXPENSE-RATIO> 0.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>