File No. 811-04347

As filed with the Securities and Exchange Commission on
June 25, 2010

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940

Amendment No. 178    þ
(Check appropriate box or boxes)

GMO T rust

(Exact name of registrant as specified in charter)

c/o GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110
(Address of principal executive offices)

(617) 330-7500
(Registrant’s Telephone Number, including Area Code)

J.B. Kittredge, Esq.
GMO Trust
40 Rowes Wharf
Boston, Massachusetts 02110
(Name and address of agent for service)

Copy to:
Thomas R. Hiller, Esq.
Ropes & Gray LLP
One International Place
Boston, Massachusetts 02110

It is intended that this filing become effective immediately upon filing in accordance with Section 8 of the Investment Company Act of 1940.

 

 

THIS FILING RELATES SOLELY TO GMO ALTERNATIVE ASSET OPPORTUNITY FUND, GMO DEBT OPPORTUNITIES FUND, GMO HIGH QUALITY SHORT-DURATION BOND FUND, GMO SPECIAL PURPOSE HOLDING FUND, GMO SPECIAL SITUATIONS FUND, AND GMO WORLD OPPORTUNITY OVERLAY FUND; IT IS INTENDED THAT NO INFORMATION RELATING TO ANY OTHER SERIES OF GMO TRUST IS AMENDED OR SUPERSEDED HEREBY.

PRIVATE PLACEMENT MEMORANDUM

June 25, 2010

GMO Alternative Asset Opportunity Fund
40 Rowes Wharf, Boston, Massachusetts 02110

      GMO Alternative Asset Opportunity Fund (the “Fund”) is a separate investment portfolio of GMO Trust (the “Trust”). The Trust is an open-end management investment company and operates as a “series investment company” that consists of separate series of investment portfolios, including the Fund. Other portfolios are described in separate prospectuses or private placement memoranda. At this time, the Fund does not intend to offer its shares publicly or to make them available other than to other funds of the Trust (“GMO Funds”) and certain other accredited investors.

Investment Manager
Grantham, Mayo, Van Otterloo & Co. LLC

     This Private Placement Memorandum concisely describes the information which you ought to know about the Fund before investing. Please read this memorandum carefully and keep it for further reference. A Statement of Additional Information dated June 25, 2010, as revised from time to time (“SAI”), is available free of charge by writing to GMO Shareholder Services, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling 1-617-346-7646. The SAI, which contains more detailed information about the Fund, has been filed with the Securities and Exchange Commission (“SEC”) and is incorporated by reference into this Private Placement Memorandum.

     THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE TRANSFERRED OR RESOLD UNLESS SO REGISTERED OR IN TRANSACTIONS EXEMPT THEREFROM. HOWEVER, THE SECURITIES ARE REDEEMABLE AS DESCRIBED IN THIS PRIVATE PLACEMENT MEMORANDUM. IN CERTAIN CASES INVESTORS MAY BE REDEEMED “IN-KIND” AND RECEIVE PORTFOLIO SECURITIES HELD BY THE FUND IN LIEU OF CASH UPON REDEMPTION.

     THIS PRIVATE PLACEMENT MEMORANDUM AND THE INFORMATION CONTAINED HEREIN ARE FOR THE EXCLUSIVE USE OF THE RECIPIENT FOR THE SOLE PURPOSE OF EVALUATING THE PRIVATE PLACEMENT OF SHARES OF THE FUND DESCRIBED HEREIN. IT MAY NOT BE REPRODUCED, PROVIDED, OR DISCLOSED TO OTHERS, OR USED FOR ANY OTHER PURPOSE, WITHOUT WRITTEN AUTHORIZATION, AND DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SHARES OF THE FUND TO ANY ENTITY OR INDIVIDUAL NOT POSSESSING THE QUALIFICATIONS DESCRIBED IN THIS MEMORANDUM.

     NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR PROVIDE ANY INFORMATION WITH RESPECT TO THE SHARES EXCEPT SUCH INFORMATION AS IS CONTAINED IN THIS MEMORANDUM AND IN THE SAI OR IN OTHER MATERIALS APPROVED BY THE TRUST. NO SALES MADE IN RELIANCE ON THIS DOCUMENT SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN MATTERS DISCUSSED HEREIN SINCE THE DATE HEREOF.

FUND SUMMARY

Purchase and Sale of Fund Shares

     Currently, shares of the Fund are principally available for purchase by other GMO Funds and certain other accredited investors. All investors must be “accredited investors” as defined in Regulation D under the Securities Act of 1933.

     There is no minimum initial or subsequent investment required for this Fund.

     Fund shares are redeemable, and under ordinary circumstances, you may redeem the Fund’s shares when both the NYSE and the U.S. bond markets are open for business. Redemption requests should be submitted directly to the Trust. For instructions on redeeming shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com.

Tax Information

     The Fund has elected to be treated as a partnership for U.S. federal income tax purposes and thus is not itself subject to U.S. federal income tax. Instead, in computing its income tax liability, each shareholder is required to take into account its distributive share of the Fund’s income, gain, loss, deduction, credit, and other tax items for each taxable year substantially as though such items had been realized directly by the shareholder and without regard to whether the Fund has distributed or will distribute any amount to its shareholders. The Fund does not intend to make any distributions (other than in redemption of Fund shares) to its shareholders but may do so in the sole the discretion of the Trustees (or their delegates). Therefore, it is possible that a shareholder will incur income tax liabilities in a taxable year in respect of its investment in the Fund in excess of non-redeeming cash distributions (if any) made by the Fund for that year.

Principal Investment Strategies

     The Fund’s investment program has two primary components. One component is intended to gain exposure to the investment returns of commodities and, from time to time, other alternative asset classes (e.g., currencies). “Commodities” include a range of assets with tangible properties, including oil, natural gas, agricultural products (e.g., wheat, corn, and livestock), precious metals (e.g., gold and silver), industrial metals (e.g., copper), and softs (e.g., cocoa, coffee, and sugar). The Fund typically gains exposure to commodities indirectly, by investing in a wholly owned subsidiary company (discussed below), which, in turn, invests in various commodity-related exchange-traded and over-the-counter (“OTC”) derivatives. The Fund also may use, directly or indirectly through its wholly owned subsidiary, a wide variety of other exchange-traded and OTC derivatives that are not linked to the value of a commodity or other commodity-related instruments (including financial futures, options, and swap contracts). The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, and, as a result, it may be leveraged in relation to its assets.

     The second component of the Fund’s investment program consists of investments in U.S. and foreign fixed income securities, primarily asset-backed securities. The Fund has historically gained its investment exposure to fixed income securities through investment in GMO Short-Duration Collateral Fund (“SDCF”). SDCF has primarily invested in asset-backed securities issued by a wide range of private and government issuers (see “Investment in Other GMO Funds” below for a more detailed description of SDCF’s investment objective and strategies.

     The Manager uses proprietary models to identify trends in commodity prices. The factors considered and models used by the Manager may change over time.

     A substantial portion of the Fund’s investments (through SDCF) in fixed income securities consist of asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest (including through SDCF) in government securities, corporate debt securities, money market instruments, and commercial paper, and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund’s fixed income securities may include securities issued by a wide range of private issuers and, to a lesser extent, securities issued by federal, state, local, and foreign governments (including securities neither guaranteed nor insured by the U.S. government). The Fund may hold directly or indirectly (through SDCF) fixed income securities whose ratings, after the securities were acquired, were reduced below investment grade. Because of the deterioration in credit markets that became acute in 2008, the Fund, in particular through its investment in SDCF, currently has and may continue to have material exposure to below investment grade securities.

     In addition to its commodity-related investments, from time to time, the Fund may invest in a range of currency-related investments, including currency futures, forwards, and options.

     The Fund does not invest directly in commodities and commodity-related derivatives. Instead, to gain exposure to commodities and certain other assets, the Fund invests in a wholly owned subsidiary company. GMO serves as the investment manager to this company but does not receive any additional management or other fees for such services. The company invests primarily in commodity-related derivatives and fixed income securities.

     The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund (“U.S. Treasury Fund”), another series of GMO Trust

described in a separate prospectus (see “Investment in Other GMO Funds” below for a more detailed description of U.S. Treasury Fund’s investment objectives and strategies).

     If deemed prudent by the Manager, the Fund will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. The Fund may not achieve its investment objective while it is taking temporary defensive measures. Because of the above- referenced deterioration in credit markets, the Fund has previously taken temporary defensive positions and has availed itself of the right to honor redemption requests in-kind.

     The Fund does not seek to maintain a specified interest rate duration for its portfolio.

      When used in this Private Placement Memorandum, the term “invest” includes both direct investing and indirect investing and the term “investments” includes both direct investments and indirect investments. For example, the Fund may invest indirectly by investing in the Fund’s wholly owned subsidiary, by investing in another fund, or by investing in derivatives and synthetic instruments. In addition, the term “fixed income securities” includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option). For purposes of this Private Placement Memorandum, the term “bond” refers to any fixed income security, including instruments with variable interest payments, and the term “duration” is defined as the weighted measure of interest rate sensitivity of a fixed income security.

     For purposes of this Private Placement Memorandum, the term “investment grade” refers to a rating of Baa3/P-2 or better given by Moody’s Investors Service, Inc. (“Moody’s”) or BBB-/A-2 or better given by Standard & Poor’s Ratings Services (“S&P”) to a particular fixed income security/commercial paper, and the term “below investment grade” refers to any rating below Baa3/P-2 given by Moody’s or below BBB-/A-2 given by S&P to a particular fixed income security/commercial paper. Fixed income securities rated below investment grade are also known as high yield or “junk” bonds. Securities referred to as investment grade or below investment grade include not only securities rated by Moody’s and/or S&P, but also securities unrated by Moody’s or S&P that are determined by the Manager to have credit qualities comparable to securities rated by Moody’s or S&P as investment grade or below investment grade, as applicable.

     The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. Unless otherwise specified in this Private Placement Memorandum or in the SAI, the Manager is not obligated to and generally will not consider tax consequences when seeking to achieve the Fund’s investment objective (e.g., the Fund may engage in transactions that are not tax efficient for U.S. federal income or other federal, state, local, or non-U.S. tax purposes). Income from certain types of investments made by the Fund may be treated as “unrelated business taxable income” (“UBTI”) and subject to tax when allocated to U.S. tax-exempt shareholders.

     Portfolio turnover is not a principal consideration when the Manager makes investment decisions for the Fund. Based on its assessment of market conditions, the Manager may cause the Fund to trade more frequently at some times than at others. High turnover rates may adversely affect the Fund’s performance by generating higher transaction costs. Additionally, portfolio turnover may give rise to additional taxable income for shareholders, including through the realization of capital gains or other types of income that are taxable to shareholders of the Fund when allocated to them unless the shareholders themselves are exempt from taxation or otherwise investing in the Fund through a tax-advantaged account. If portfolio turnover results in the recognition of short-term capital gains, those gains typically are taxed to shareholders, when allocated to them, at ordinary income tax rates. See

“Distributions and Taxes” below for more information about the tax consequences of these types of income.

      Benchmark. The Fund’s benchmark is a composite of the Dow Jones-UBS Commodity Index, which is composed of futures contracts on nineteen physical commodities, and the J.P. Morgan U.S. 3 Month Cash Index, which measures the total return performance of three-month U.S. dollar Euro-deposits. The Dow Jones-UBS Commodity Index and J.P. Morgan U.S. 3 Month Cash Index each represent 50% of the composite benchmark. In constructing the Fund’s portfolio, the Manager does not seek to match the Fund’s portfolio composition to that of its benchmark, and the Fund’s portfolio composition may differ significantly from that of its benchmark.

      Annual Fund Operating Expenses — Other Expenses and Acquired Fund Fees and Expenses. The amount listed under “Other expenses” in the “Annual Fund Operating Expenses” table included in the Fund’s summary generally reflects direct expenses associated with an investment in the Fund for the fiscal year ended February 28, 2010. The Fund may invest in its wholly owned subsidiary, other GMO Funds, including SDCF, and certain other pooled investment vehicles (“underlying funds”), and the indirect net expenses associated with the Fund’s investment in underlying funds for the fiscal year ended February 28, 2010 are reflected in the “Annual Fund Operating Expenses” table under “Acquired fund fees and expenses.” Acquired Fund fees and expenses include interest expense incurred by SDCF. Acquired fund fees and expenses do not include expenses associated with investments in the securities of unaffiliated issuers unless those issuers hold themselves out to be investment companies, and actual indirect expenses will vary depending on the particular underlying funds in which the Fund invests.

Description of Principal Risks

     Investing in the Fund involves many risks, and factors that may affect the Fund’s portfolio as a whole, called “principal risks,” are summarized in this section. The risks of investing in the Fund depend on the types of investments in its portfolio and the investment strategies the Manager employs on its behalf. This section describes the nature of these principal risks and some related risks, but is not intended to include every potential risk. The Fund could be subject to additional risks because the types of investments it makes and market conditions may change over time. The SAI includes more information about the Fund and its investments.

     Because the Fund invests in its wholly owned subsidiary, other GMO Funds, including SDCF, and unaffiliated money market funds (as indicated under “Principal Investment Strategies” in “Additional Information About The Fund’s Investment Strategies, Risks, And Expenses”), it is exposed to all the risks to which its wholly owned subsidiary and the other underlying funds in which it invests are exposed. Therefore, unless otherwise noted herein, the principal risks summarized below include both direct and indirect principal risks of the Fund, and as indicated above, references in this section to investments made by the Fund include those made both directly by the Fund and indirectly by the Fund through its wholly-owned subsidiary, another GMO Fund, or an unaffiliated money market fund.

     The Fund, by itself, is not intended to provide a complete investment program. Investment in the Fund is intended to serve as part of a diversified portfolio of investments. An investment in the Fund is not a bank deposit and, therefore, is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

     The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified.

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COMMODITIES RISK

     Because of the Fund’s indirect exposure to the global commodity markets, the value of its shares is affected by factors particular to the commodity markets and may fluctuate more than the value of shares of a fund with a broader range of investments. Commodity prices can be extremely volatile and are affected by many factors, including changes in overall market movements, real or perceived inflationary trends, commodity index volatility, changes in interest rates or currency exchange rates, population growth and changing demographics, nationalization, expropriation, or other confiscation, international regulatory, political, and economic developments (e.g. regime changes and changes in economic activity levels), and developments affecting a particular industry or commodity, such as drought, floods, or other weather conditions, livestock disease, trade embargoes, competition from substitute products, transportation bottlenecks or shortages, fluctuations in supply and demand, and tariffs.

     The value of the Fund’s investments in commodity-related derivatives may fluctuate more than the commodity or commodities or commodity index to which these derivatives relate. See “Derivatives Risk” below for a discussion of certain specific risks of the Fund’s derivatives investments, including commodity-related derivatives.

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LIQUIDITY RISK

     The effect of liquidity risk is particularly pronounced when low trading volume, lack of a market maker, a large position, or legal restrictions limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. In addition, holding less liquid securities increases the likelihood that the Fund will honor redemption requests in-kind. Because the Fund’s principal investment strategies involve the use of derivatives (in particular OTC derivatives) and investing in fixed income securities, in particular asset-backed securities, it has increased exposure to liquidity risk and the Fund’s investments may be less liquid than other types of securities. These types of investments also are more likely to be fair valued (see “Determination of Net Asset Value”). Less liquid securities are more susceptible to loss of value and their prices may decline more than other securities when markets decline generally.

     The Fund is also exposed to liquidity risk when it has an obligation to purchase particular securities (e.g., as a result of entering into reverse repurchase agreements, writing a put, or closing out a short position). Some of the markets, exchanges, or securities in which the Fund invests may prove to be less liquid and this would affect the price at which, and the time period in which, the Fund may liquidate positions to meet redemption requests or other funding requirements. Although U.S. Treasury securities have historically been among the most liquid fixed income investments, there can be no assurance that these securities will not become less liquid in the future.

     As noted under “Market Risk — Fixed Income Securities” below, because of the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, liquidity risk has been pronounced for funds that invest in fixed income securities, particularly asset-backed securities. The Fund may find it necessary to sell these securities at distressed prices or meet redemption requests in-kind. For example, during periods in 2008 and 2009, the Fund had a policy to effect nearly all redemptions of its shares in-kind.

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CREDIT AND COUNTERPARTY RISK

     This is the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase agreement or reverse repurchase agreement or other OTC derivatives contract, or a borrower

of the Fund’s securities (including a borrower of the Fund’s portfolio securities pursuant to the GMO Funds’ securities lending program) will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise to honor its obligations. This risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.

     Credit risk for fixed income securities is the risk that the issuer will be unable to make scheduled contractual payments of principal and interest. The value of a fixed income security normally will decline as a result of the issuer’s defaulting on its payment obligations or the market’s expectation of a default, which may be triggered by the downgrading of the issuer’s credit rating.

     All fixed income securities are subject to credit risk. The risk varies depending upon whether the issuer is a corporation or domestic or foreign government (or sub-division or instrumentality) and whether the particular security has a priority in payment of principal and interest. U.S. government securities are subject to varying degrees of credit risk depending upon whether the securities are supported by the full faith and credit of the United States, supported by the ability to borrow from the U.S. Treasury, supported only by the credit of the issuing U.S. government agency, instrumentality, or corporation, or otherwise supported by the United States. For example, issuers of many types of U.S. government securities (e.g., the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and Federal Home Loan Banks), although chartered or sponsored by Congress, are not funded by Congressional appropriations and their fixed income securities, including mortgage-backed and other asset-backed securities, are neither guaranteed nor insured by the U.S. government. These securities are subject to more credit risk than U.S. government securities that are supported by the full faith and credit of the United States (e.g., U.S. Treasury bonds).

     As noted under “Market Risk — Fixed Income Securities” below, asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, and credit-card receivables. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations”). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal and other risks if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support.

     The obligations of issuers also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. The Fund also will be exposed to credit risk on the reference security to the extent it writes protection under credit default swaps. See “Derivatives Risk” above for more information regarding risks associated with the use of credit default swaps.

     Credit risk is particularly pronounced for below investment grade securities (also known as “junk bonds”). During periods of economic uncertainty and change, the market price of the Fund’s investments in below investment grade securities may be particularly volatile. Although offering the potential for higher investment returns, junk bonds often are less liquid than higher quality securities, present a greater risk of default and are more susceptible to real or perceived adverse economic and competitive industry conditions. Often junk bonds also are subject to greater sensitivity to interest rate and economic changes and present valuation difficulties. The market price of these securities can change suddenly and

unexpectedly. The Fund is subject to this risk to the extent that it directly or indirectly acquires or holds below investment grade securities. Credit risk also is particularly pronounced for the Fund, as a substantial number of securities held by SDCF have suffered credit downgrades and are now rated below investment grade.

     The Fund is exposed to counterparty risk to the extent it uses OTC derivatives (such as swap contracts and reverse repurchase agreements), enters into repurchase agreements, or lends its portfolio securities. See “Derivatives Risk” below for more information. If a counterparty’s obligation to the Fund is not collateralized, then the Fund is essentially an unsecured creditor of the counterparty. If the counterparty defaults, the Fund will have contractual remedies, but the Fund may be unable to enforce them. The Fund is subject in particular to the creditworthiness of the contracts’ counterparties because some types of swap contracts used by the Fund may have durations longer than six months (and, in some cases, a number of decades). In addition, the creditworthiness of a counterparty may be adversely affected by larger than average volatility in the markets, even if the counterparty’s net market exposure is small relative to its capital. Counterparty risk is still present even if a counterparty’s obligations are secured by collateral because the Fund’s interest in collateral may not be perfected or additional collateral may not be promptly posted as required. OTC derivatives generally involve greater credit and counterparty risk than exchange-traded derivatives. The Fund may have significant exposure to a single counterparty as a result of its use of swaps and other OTC derivatives.

     The Fund is also subject to counterparty risk to the extent it executes a significant portion of its securities transactions through a single broker or dealer. If the broker or dealer fails to meet its contractual obligations, goes bankrupt, or otherwise experiences a business interruption, the Fund could miss investment opportunities or be unable to dispose of investments it would prefer to sell, resulting in losses for the Fund.

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LEVERAGING RISK

     The Fund’s use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged (i.e., the Fund’s exposure to underlying securities or assets exceeds its net asset value). Leverage increases the Fund’s portfolio losses when the value of its investments declines. Because many derivatives have a leverage component (i.e., a notional value in excess of the assets needed to establish and/or maintain the derivative position), adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the amount invested in the derivative itself. In the case of swaps, the risk of loss generally is related to a notional principal amount, even if the parties have not made any initial investment. Some derivatives have the potential for unlimited loss, regardless of the size of the initial investment. The Fund’s portfolio will be leveraged if it borrows money to meet redemption requests or settle investment transactions or if it avails itself of the right to delay payment on a redemption.

     The Fund is not limited in the extent to which it may directly or indirectly use derivatives or in the absolute face value of its derivatives positions. As a result, the Fund’s net long exposure may exceed 100% of its net assets.

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DERIVATIVES RISK

     The Fund invests in derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets (e.g., commodities), reference rates, or indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other OTC contracts. Derivatives may relate to securities, interest rates, currencies or currency exchange rates, inflation rates, commodities, and related indices. The SAI contains a description of the various types and uses of derivatives in the Fund’s investment strategies.

     The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of

OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.

     Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund. Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.

     Derivatives also present risks described elsewhere in this “Description of Principal Risks” section, including market risk, liquidity risk, and credit and counterparty risk. Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.

     There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.

     Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.

     Derivatives risk is particularly pronounced for the Fund. A basic component of the Fund’s principal investment strategies involves using derivatives, in particular commodity swap contracts, commodity futures, and other exchange-traded and OTC commodity-related derivatives, to gain indirect exposure to the investment returns of commodities that trade in the commodity markets. In addition, when, as an alternative to purchasing bonds directly, the Fund uses credit default swaps to obtain synthetic long exposure to a fixed income security such as a debt instrument or index of debt instruments, the Fund is exposed to the risk that it will be required to pay the notional value of the swap contract in the event of a default.

     Swap contracts and other OTC derivatives, in particular, are highly susceptible to liquidity risk (see “Liquidity Risk” above) and credit and counterparty risk (see “Credit and Counterparty Risk” above), and are subject to documentation risks. In addition, see “Commodities Risk” above for a discussion of certain risks specific to commodity-related derivatives. See also “Leveraging Risk” above.

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MARKET RISK — FIXED INCOME SECURITIES

     The Fund’s investments in fixed income securities (including bonds, notes, bills, synthetic debt instruments, and asset-backed securities) are subject to various market risks. These risks include, but are not limited to, loss on investments in asset-backed and other fixed income securities, lack of liquidity of these investments, and impact of fluctuating interest rates.

     The most significant market risk for the Fund’s investments in fixed income securities is that the securities in which it invests experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund’s investments in asset-backed securities, including through the Fund’s investments in SDCF. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Private Placement Memorandum. See “Credit and Counterparty Risk” above for more information about credit risk.

     With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income

securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.

     The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and the Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.

     The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. See “Focused Investment Risk” below for more information about risks of investing in correlated sectors. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments. The risks associated with asset-backed securities are particularly pronounced for the Fund.

     Besides the market risks associated with investing in asset-backed securities, the Fund’s investments are exposed to liquidity risk and interest rate risk. Liquidity risk has become more pronounced for other types of fixed income securities because of the deterioration in worldwide economic and liquidity conditions discussed above and under “Liquidity Risk” above. Even in the absence of a credit downgrade or default, the price of fixed income securities held by the Fund may decline significantly due to a reduction in market demand.

     In addition, a principal risk run by the Fund is that an increase in prevailing interest rates will cause the value of its investments to decline. The risk associated with increases in interest rates (also called “interest rate risk”) is generally greater for funds investing in fixed income securities with longer durations, although it is present, but to a lesser extent, in the Fund’s investment in SDCF. In some cases, duration can increase.

     The extent to which a security’s value moves with interest rates is referred to as interest rate duration, which can be measured mathematically or empirically. Longer-maturity investments generally have longer interest rate durations because the investment’s fixed rate is locked in for longer periods of time. Floating-rate or adjustable-rate securities, however, generally have shorter interest rate durations because their interest rates are not fixed but rather float up and down with the level of prevailing interest rates. To the extent the Fund invests in fixed income securities paying no interest, such as zero coupon and principal-only securities, the Fund will be exposed to additional interest rate risk.

•

MANAGEMENT AND OPERATIONAL RISK

     The Fund is subject to management risk because it relies on the Manager’s ability to achieve its investment objective. The Manager uses proprietary investment techniques and risk analyses in making investment decisions for the Fund, but there is no assurance that the Manager will achieve the desired

results and the Fund may incur significant losses. The Manager, for example, may fail to use derivatives effectively, taking long or short positions in a particular type of derivative at disadvantageous times. Management risk may be particularly pronounced for the Fund because the Manager does not seek to match the Fund’s portfolio composition to that of its benchmark, and the Fund’s portfolio composition may differ significantly from that of its benchmark. To the extent the Fund invests in securities and other assets not included in its benchmark and/or engages in strategies that cause the Fund’s performance to differ from that of its benchmark, its performance will depend on the ability of the Manager to choose securities and other assets that perform better than securities that are included in the benchmark and/or to utilize those other strategies in a way that adds value relative to the benchmark.

     The Fund also is subject to operational risk associated with the Manager’s provision of investment management, administrative, and shareholder services to the Fund. Operational risk is the risk that deficiencies in the Manager’s internal systems or controls, or in those of a service provider to whom the Manager has contractually delegated responsibilities, will cause losses for the Fund or hinder Fund operations. Operational risk results from inadequate procedures and controls, human error, and system failures by the Manager or a service provider. For example, trading delays or errors (both human and systematic) caused by the Manager could prevent the Fund from purchasing a security that the Manager expects will appreciate in value, thus reducing the Fund’s opportunity to benefit from the security’s appreciation. The Manager is not contractually liable to the Fund for losses associated with operational risk absent the Manager’s willful misfeasance, bad faith, gross negligence, or reckless disregard of its contractual obligations to provide services to the Fund.

•

MARKET DISRUPTION AND GEOPOLITICAL RISK

     The Fund is subject to the risk that geopolitical events will disrupt securities markets and adversely affect global economies and markets. The wars in Iraq and Afghanistan have had a substantial effect on economies and securities markets in the U.S. and worldwide. Terrorism in the U.S. and around the world has had a similar global impact and has increased geopolitical risk. The terrorist attacks of September 11, 2001 resulted in the closure of some U.S. securities markets for four days, and similar future events are possible. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, systemic market dislocations of the kind surrounding the insolvency of Lehman Brothers in 2008 may be highly disruptive to economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Fund’s investments. At such times, the Fund’s exposure to the risks described elsewhere in this section, including market risk, liquidity risk, and credit and counterparty risk, will likely increase.

     Market disruptions can also prevent the Fund from implementing its investment program for a period of time and achieving its investment objective. For example, a disruption may cause the Fund’s derivatives counterparties to discontinue offering derivatives on some underlying commodities, securities, reference rates, or indices or to offer such products on a more limited basis or the current global economic crisis may strain the U.S. Treasury’s ability to satisfy its obligations.

•

FOCUSED INVESTMENT RISK

     Funds whose investments are focused in particular sectors, companies, or industries with high positive correlations to one another (e.g., different industries within broad sectors, such as technology or financial services) are subject to greater overall risk than funds whose investments are more diversified. A fund that focuses its investments in a particular type of security or sector, or in securities of companies in a particular industry, is vulnerable to events affecting those securities, sectors, or companies.

Securities, sectors, or companies that share common characteristics are often subject to similar business risks and regulatory burdens, and often react similarly to specific economic, market, political, or other developments. As noted under “Market Risk — Fixed Income Securities” above, sectors of the securitized credit markets have become more highly correlated because of the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008. The Fund also is subject to this risk because it seeks indirect exposure to various types of commodities, which may include oil, natural gas, agriculture, precious metals, industrial metals, and softs, as an integral part of its investment program. See “Commodities Risk” above for a discussion of the risks of commodities and related investments.

•

LARGE SHAREHOLDER RISK

     To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that these shareholders will purchase or redeem Fund shares in large amounts and/or on a frequent basis. These transactions could adversely affect the Fund if it is forced to sell portfolio securities to raise the cash that is necessary to satisfy shareholder redemption requests or purchase portfolio securities to invest cash. This risk is particularly pronounced when one shareholder owns a substantial portion of the Fund. See “Beneficial Owners of 5% or More of the Funds’ Shares” in the SAI for more information. A substantial percentage of the Fund is held by other GMO Funds and/or separate accounts managed by the Manager for its clients. Asset allocation decisions by the Manager may result in substantial redemptions from (or investments into) the Fund. These transactions may adversely affect the Fund’s performance to the extent that the Fund is required to sell investments (or invest cash) at times when it would not otherwise do so. These transactions also may accelerate the realization of taxable income to shareholders if such sales of investments resulted in gains, and also may increase transaction costs. To the extent the Fund invests in other GMO Funds having large shareholders, the Fund is indirectly subject to this risk.

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FUND OF FUNDS RISK AND RELATED CONSIDERATIONS

     The Fund may invest in shares of other investment companies, including other GMO Funds and money market funds (“underlying funds”), and is exposed to the risk that the underlying funds do not perform as expected. The Fund also is indirectly exposed to all of the risks applicable to an investment in the underlying funds. Because the Fund bears the fees and expenses of the underlying funds in which it invests (absent reimbursement of those expenses), the Fund will incur additional expenses when investing in underlying funds. The Fund also is indirectly exposed to all of the risks applicable to an investment in the underlying funds. In addition, funds that invest in shares of other GMO Funds also are likely to be subject to Large Shareholder Risk because underlying GMO Funds are more likely to have large shareholders (e.g., other GMO Funds).

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NON-DIVERSIFIED FUND

     The Fund is not a “diversified” investment company within the meaning of the 1940 Act. This means the Fund is allowed to invest in the securities of a relatively small number of issuers and/or foreign currencies. As a result, the Fund may be subject to greater credit, market, and other risks, and poor performance by a single issuer may have a greater impact on its performance than if the Fund were “diversified.” In addition, the Fund may invest a substantial portion of its assets in shares of SDCF, which also is a not a diversified investment company under the 1940 Act. Please refer to “Investment in Other GMO Funds” below for information regarding certain risks and other information relating to SDCF.

MANAGEMENT OF THE FUND

     GMO, 40 Rowes Wharf, Boston, Massachusetts 02110, provides investment management and shareholder services to the Fund and other GMO Funds. GMO is a private company, founded in 1977. As of May 31, 2010, GMO managed on a worldwide basis more than $95 billion of assets for the GMO Funds and institutional investors, such as pension plans, endowments, and foundations.

     Subject to the approval of the Trustees, the Manager establishes and modifies when it deems appropriate the investment strategies of the Fund. In addition to its management of the Fund’s investment portfolio and the shareholder services it provides to the Fund, the Manager administers the Fund’s business affairs.

     The Fund pays the Manager shareholder service fees for providing client service and reporting, such as performance information reporting, client account information, personal and electronic access to Fund information, access to analysis and explanations of Fund reports, and assistance in maintaining and correcting client-related information.

     For the fiscal year ended February 28, 2010, the Manager received an investment management fee (after any applicable waivers or reimbursements) equal to 0.00% of the Fund’s average daily net assets.

     A discussion of the basis for the Trustees’ approval of the Fund’s investment management contract is included in the Fund’s shareholder report for the period during which the Trustees approved that contract.

     GMO’s Fixed Income Division is responsible for day-to-day investment management of the Fund. The Division’s investment professionals work collaboratively to manage the Fund’s portfolio, and no one person is primarily responsible for day-to-day investment management of the Fund.

     William Nemerever and Thomas Cooper are the senior members and co-directors of the Fixed Income Division. Each has been a senior member of the Division since 1993. As senior members and co-directors, Mr. Nemerever and Mr. Cooper jointly allocate responsibility for portions of the Fund’s portfolio to members of the Division, oversee the implementation of trades, review the overall composition of the portfolio, including compliance with its stated investment objective and strategies, and monitor cash.

     Mr. Nemerever and Mr. Cooper have been jointly responsible for overseeing the portfolio management of GMO’s global fixed income portfolios since 1993. In general, Mr. Nemerever focuses on investment strategy, while Mr. Cooper focuses on instrument selection.

     The SAI contains other information about how GMO determines the compensation of the senior members, other accounts they manage and related conflicts, and their ownership of the Fund.

Custodian, Fund Accounting Agent, and Transfer Agent

     State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02111, serves as the Fund’s custodian, fund accounting agent, and transfer agent. State Street Bank provides similar services with respect to the Fund’s wholly owned subsidiary.

Expense Reimbursement

     As more fully described in the Fund’s “Annual Fund Operating Expenses” table under the caption “Fees and Expenses” in the Fund’s summary, the Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s total annual operating expenses that exceed 0.70% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” As used in this Private Placement Memorandum, “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

     The Manager also has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount.

     The Fund’s contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

     In addition to the contractual expense reimbursements described above, the Manager has voluntarily agreed to waive the Fund’s management fee to 0.45% of the Fund’s average daily net assets and to reimburse the Fund to the extent the Fund’s total annual operating expenses exceed 0.45% of the Fund’s average daily net assets (excluding Excluded Fund Fees and Expenses described above). The Manager may change or terminate these voluntary waivers and reimbursements at any time, at which point the Fund will incur management fees equal to 0.70% of the Fund’s average daily net assets. During any period for which these voluntary waivers and reimbursements are in effect, the Fund will incur management fees at an annual rate lower than 0.70% of the Fund’s average daily net assets, and, as a result, total annual operating expenses after expense reimbursement for the Fund will be lower than the amount listed in the Fund’s “Annual Fund Operating Expenses” table in the Fund’s summary.

	•		Official closing price or
	•		Most recent bid price (if no reported sale or official closing price) or
	•		Broker bid (if the private market is more relevant in determining market value than the exchange)

Exchange-listed options

	•		Most recent bid price for long positions
	•		Most recent ask price for short positions

Unlisted securities (if market quotations are readily available)

•

Most recent quoted bid price

Note: There can be no assurance that brokers will be able to provide bid prices. If quotes are not used, the Fund would seek alternative valuation methodologies (e.g., valuing the relevant assets at “fair value” as described below).

Certain debt obligations (previously acquired and having sixty days or less to final maturity)

•

Amortized cost (unless circumstances dictate otherwise; for example, if the issuer’s creditworthiness has become impaired)

All other fixed income securities (includes bonds, asset-backed securities, loans, structured notes)

•

Most recent bid supplied by a single pricing source chosen by the Manager

Shares of other GMO Funds and other open-end registered investment companies

•

Most recent NAV

“Fair Value” Pricing

     For all other assets and securities, including derivatives, and in cases where market prices are not readily available or circumstances make an existing methodology or procedure unreliable, the Fund’s investments are valued at “fair value,” as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees.

     With respect to the Fund’s use of “fair value” pricing, you should note the following:

•

In some cases, a significant percentage of the Fund’s assets may be “fair valued.” The value of assets that are “fair valued” is determined by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Factors that may be considered in determining “fair value” include, among others, the value of other financial instruments traded on other markets, trading volumes, changes in interest rates, observations from financial institutions, significant events (which may be considered to include changes in the value of U.S. securities or securities indices) that occur after the close of the relevant market

and before the Fund’s net asset value is calculated, other news events, and significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments). Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the fair value determined for a particular security may be materially different from the value realized upon its sale.

•

The Fund’s use of fair value pricing may cause the Fund’s returns to differ from those of its benchmark or other comparative index more than would otherwise be the case.

     The values of foreign securities quoted in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 p.m. Boston time at then current exchange rates or at such other rates as the Trustees or persons acting at their direction may determine in computing net asset value.

     The Manager evaluates pricing sources on an ongoing basis and may change a pricing source at any time. The Manager normally does not evaluate the prices supplied by pricing sources on a day-to-day basis. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices often are available for many securities held by the Fund, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. In addition, because the Fund may hold portfolio securities listed on foreign exchanges that trade on days on which the NYSE or the U.S. bond markets are closed, the net asset value of the Fund’s shares may change significantly on days when shares cannot be redeemed.

DISCLOSURE OF PORTFOLIO HOLDINGS

     The Fund has established a policy with respect to disclosure of its portfolio holdings. That policy is described in the SAI. Information regarding the Fund’s portfolio holdings as of each month’s end is made available to shareholders of the Trust, qualified potential shareholders as determined by GMO (“potential shareholders”), and their consultants or agents through a secured link on GMO’s website approximately five days after month end. Shareholders, potential shareholders, and their consultants or agents also will be able to access the portfolio holdings of SDCF when that information is posted each month on GMO’s website. Periodically, in response to heightened market interest in specific issuers, a Fund’s holdings in one or more issuers may be made available on a more frequent basis to shareholders of the Trust, potential shareholders, and their consultants or agents through a secured link on GMO’s website. This information may be posted as soon as the business day following the date to which the information relates.

     To access this information on GMO’s website (http://www.gmo.com/america/strategies), shareholders, potential shareholders, and their consultants and agents must contact GMO to obtain a password and user name (to the extent they do not already have them) and enter into a confidentiality agreement with GMO and the Trust that permits the information to be used only for purposes determined by GMO to be in the best interest of the shareholders of the Fund. GMO may make portfolio holdings information available in alternate formats under the conditions described in the SAI.

     The Fund or GMO may suspend the posting of portfolio holdings, and the Fund may modify the disclosure policy, without notice to shareholders. Once posted, the Fund’s portfolio holdings will remain available on the website at least until the Fund files a Form N-CSR (annual/semiannual report) or Form N-Q (quarterly schedule of portfolio holdings) for the period that includes the date of those holdings.

HOW TO PURCHASE SHARES

     Currently, shares of the Fund are principally available for purchase by other GMO Funds and certain other accredited investors. All investors must be “accredited investors” as defined in Regulation D under the Securities Act of 1933.

     Under ordinary circumstances, you may purchase the Fund’s shares directly from the Trust on days when both the NYSE and the U.S. bond markets are open for business. For instructions on purchasing shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com. The Trust will not accept a purchase request until it has received a GMO Trust Application deemed to be in good order by the Trust or its designated agent. In addition, the Trust will not accept a purchase request unless an IRS Form W-9 (for U.S. shareholders) or the appropriate IRS Form W-8 (for foreign shareholders) with a correct taxpayer identification number (if required) is on file with GMO and that W-9 or W-8 is deemed to be in good order by the Trust’s withholding agent, State Street Bank and Trust Company. Subject to future guidance from the Internal Revenue Service, the Trust may require additional tax-related certifications, representations or information from you in order to comply with the “Foreign Account Tax Compliance” provisions of the recently enacted Hiring Incentives to Restore Employment Act. Please consult your tax adviser to ensure all tax forms provided to the Trust are completed properly and maintained, as required, in good order. GMO has the right to make final good order assessments.

      Purchase Policies . You must submit a purchase request in good order to avoid having it rejected by the Trust or its designated agent. In general, a purchase request is in good order if it includes:

	•		The name and/or CUSIP number of the Fund being purchased;
	•		The U.S. dollar amount of the shares to be purchased;
	•		The date on which the purchase is to be made (subject to receipt prior to the close of regular trading on that date);
	•		The name and/or the account number (if any) set forth with sufficient clarity to avoid ambiguity; and
	•		The signature of an authorized signatory as identified in the GMO Trust Application or subsequent authorized signers list.

     If payment in full (by check, wire, or, when approved, securities) is not received by the Trust or its designated agent prior to the earlier of the close of the NYSE or 4:00 p.m. Boston time on the intended purchase date, the request may be rejected or deferred until payment is received unless prior arrangements for later payment have been approved by GMO.

     If the purchase request is received in good order by the Trust prior to the close of regular trading on the NYSE (generally 4:00 p.m. Boston time), the purchase price for the Fund shares to be purchased is the net asset value per share determined on that day (plus any applicable purchase premium). If that request is received after the close of regular trading on the NYSE, the purchase price for the Fund shares to be purchased is the net asset value per share determined on the next business day that the NYSE is open (plus any applicable purchase premium). Purchase requests that are received on days when the U.S. bond markets are closed will not be accepted until the next day on which the U.S. bond markets are open, and the purchase price for the Fund’s shares to be purchased is the net asset value per share determined on that day (plus any applicable purchase premium). Purchase premiums (if any) are not charged on reinvestments of distributions.

     To help the U.S. government fight the funding of terrorism and money laundering activities, federal law requires the Trust to verify identifying information provided by each investor in its GMO Trust Application. Additional identifying documentation also may be required. If the Trust is unable to verify the information shortly after your account is opened, the account may be closed and your shares redeemed at their net asset value at the time of the redemption.

     The Trust reserves the right to reject any purchase order. In addition, without notice, the Fund in its sole discretion may temporarily or permanently suspend sales of its shares to new investors and, in some circumstances, existing shareholders.

     There is no minimum initial or subsequent investment required for this Fund.

     Funds advised or sub-advised by GMO (“Top Funds”) may purchase shares of the Fund after the close of regular trading on the NYSE (the “Cut-off Time”) and receive the current day’s price if the following conditions are met: (i) the Top Fund received a good order purchase request prior to the Cut-off Time on that day; and (ii) the purchase(s) by the Top Fund of shares of the Fund are executed pursuant to an allocation predetermined by GMO prior to that day’s Cut-off Time.

      Submitting Your Purchase Order Form . Completed purchase order forms can be submitted by mail or by facsimile or other form of communication pre-approved by Shareholder Services to the Trust at:

GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: 1-617-439-4192
Attention: Shareholder Services

     Call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com to confirm that GMO received, made a good order determination regarding, and accepted your purchase order form. Do not send cash, checks, or securities directly to the Trust. A purchase request submitted by mail is “received” by the Trust when it is actually delivered to the Trust or its designated agent. A purchase request delivered by facsimile is “received” by the Trust when it is actually received by the Trust or its designated agent.

      Funding Your Investment . You may purchase shares:

•

with cash (via wire transfer or check)

•

By wire . Instruct your bank to wire the amount of your investment to:

State Street Bank and Trust Company, Boston, Massachusetts
ABA#: 011000028
Attn: Transfer Agent
Credit: GMO Deposit Account 00330902
Further credit: GMO Alternative Asset Opportunity Fund/Account name and number

•

By check . All checks must be made payable to the Fund or to GMO Trust. The Trust will not accept checks payable to a third party that have been endorsed by the payee to the Trust. Mail checks to:

•

in exchange for securities acceptable to the Manager

	•		securities must be approved by the Manager prior to transfer to the Fund
	•		securities will be valued as set forth under “Determination of Net Asset Value”

•

by a combination of cash and securities

      Frequent Trading Activity. As a matter of policy, the Trust will not honor requests for purchases or exchanges by shareholders identified as engaging in frequent trading strategies, including market timing, that GMO determines could be harmful to the Fund and its shareholders. Frequent trading strategies are generally strategies that involve repeated exchanges and/or purchases and redemptions (or redemptions and purchases) within a short period of time. Frequent trading strategies may be disruptive to the efficient management of the Fund, materially increase portfolio transaction costs and taxes, dilute the value of shares held by long-term investors, or otherwise be harmful to the Fund and its shareholders. Notwithstanding the foregoing, SDCF (another GMO Fund in which the Fund may invest, which is described in a separate private placement memorandum) does not limit frequent trading.

     The Trustees have adopted procedures designed to detect and prevent frequent trading activity that is harmful to the Fund and its shareholders (the “Procedures”). The Procedures include the fair valuation of foreign securities, periodic surveillance of trading in shareholder accounts, and inquiry as to the nature of trading activity. If GMO determined that an account is engaging in frequent trading that has the potential to be harmful to the Fund or its shareholders, the Procedures include prevention measures, including suspension of the account’s exchange and purchase privileges. There is no assurance that the Procedures will be effective in all instances. The Fund will not automatically redeem shares that are the subject of a rejected exchange request. The Fund reserves the right to reject any order or terminate the sale of Fund shares at any time.

HOW TO REDEEM SHARES

     Under ordinary circumstances, you may redeem the Fund’s shares on days when both the NYSE and the U.S. bond markets are open for business. Redemption requests should be submitted directly to the Trust. For instructions on redeeming shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com. The Trust may take up to seven days to remit proceeds.

      Redemption Policies . You must submit a redemption request in good order to avoid having it rejected by the Trust. In general, a redemption request is in good order if it includes:

•

The name and/or CUSIP number of the Fund being redeemed;

	•		The number of shares or the dollar amount of the shares to be redeemed or that the client wants to receive;
	•		The date on which the redemption is to be made (subject to receipt prior to the close of regular trading on the NYSE on that date);
	•		The name and/or the account number set forth with sufficient clarity to avoid ambiguity;
	•		The signature of an authorized signatory as identified in the GMO Trust Application or subsequent authorized signers list; and
	•		Wire instructions or registration address that match the wire instructions or registration address (as applicable) on file at GMO or confirmation from an authorized signatory that the wire instructions are valid.

     If a redemption request in good order is received by the Trust prior to the close of regular trading on the NYSE (generally 4:00 p.m. Boston time), the redemption price for the Fund shares to be redeemed is the net asset value per share determined on that day (less any applicable redemption fee). Redemption requests in good order that are received on days when the U.S. bond markets are closed will not be accepted until the next day on which the U.S. bond markets are open, and the redemption price will be the net asset value per share determined that day (less any applicable redemption fee). If that redemption request is received after the close of regular trading on the NYSE, the redemption price for the Fund shares to be redeemed is the net asset value per share determined on the next business day that the U.S. bond markets are open (less any applicable redemption fee), unless you or another authorized person on your account have instructed GMO Shareholder Services in writing to defer the redemption to another day. If you or another authorized person on your account have instructed GMO Shareholder Services to defer the redemption to another day, you or another authorized person on your account may revoke your redemption request in writing at any time prior to 4:00 p.m. Boston time or before the close of regular trading on the NYSE (whichever is earlier) on the redemption date. Redemption fees, if any, apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). In the event of a disaster affecting Boston, Massachusetts, please contact GMO to confirm that your redemption request was received and is in good order.

     Failure to provide the Trust with a properly authorized redemption request or otherwise satisfy the Trust as to the validity of any change to the wire instructions or registration address may result in a delay in processing a redemption request, delay in remittance of redemption proceeds, or a rejection of the redemption request.

     As with all GMO Funds, if GMO determines, in its sole discretion, that paying redemption proceeds wholly or partly in cash would be detrimental to the best interests of the Fund’s remaining shareholders, the Fund may pay the redemption proceeds in whole or in part with securities instead of cash. As previously noted, the Fund had a policy to effect nearly all redemptions of its shares in-kind during periods of 2008 and 2009. In particular, if market conditions deteriorate and GMO believes a Fund’s redemption fee (if any) is not fair compensation for transaction costs, the Fund may limit cash redemptions (honoring redemptions with portfolio securities) to protect the interests of all Fund shareholders. Redemptions in-kind may require shareholders to enter into new custodial arrangements if they do not have accounts available for holding securities directly.

     If a redemption is paid in cash:

•

payment generally will be made by means of a federal funds transfer to the bank account designated in a recordable format by an authorized signatory in the GMO Trust Application to purchase the Fund shares being redeemed

•

designation of one or more additional bank accounts or any change in the bank accounts originally designated in the GMO Trust Application must be made in a recordable format by an authorized signatory according to the procedures in the GMO Trust Redemption Order Form

•

upon request, payment will be made by check mailed to the registration address (unless another address is specified according to the procedures in the GMO Trust Redemption Order Form).

     The Trust will not pay redemption proceeds to third-parties and does not offer check-writing privileges.

     If a redemption is paid with securities, you should note that:

	•		the securities will be valued as set forth under “Determination of Net Asset Value”
	•		the securities will be selected by the Manager in light of the Fund’s objective and may not represent a pro rata distribution of each security held in the Fund’s portfolio
	•		you may incur brokerage charges on the sale of the securities
	•		the securities will be transferred and delivered by the Trust as directed in writing by an authorized person on your account.

     The Fund may suspend the right of redemption and may postpone payment for more than seven days:

	•		if the NYSE, the U.S. bond markets, and/or the Federal Reserve Bank are closed on days other than weekends or holidays
	•		during periods when trading on the NYSE is restricted
	•		during an emergency that makes it impracticable for the Fund to dispose of its securities or to fairly determine the net asset value of the Fund
	•		during any other period permitted by the SEC for your protection.

     Pursuant to the Trust’s Amended and Restated Agreement and Declaration of Trust, the Trust has the unilateral right to redeem Fund shares held by a shareholder at any time if at that time: (i) the shares of the Fund held by the shareholder have an aggregate net asset value of less than an amount determined from time to time by the Trustees; or (ii) the shares of the Fund held by the shareholder exceed a percentage of the outstanding shares of the Fund determined from time to time by the Trustees. The Trustees have authorized GMO in its sole discretion to redeem shares to prevent a shareholder from becoming an affiliated person of the Fund.

     Top Funds may redeem shares of the Fund after the Cut-off Time and receive the current day’s price if the following conditions are met: (i) the Top Fund received a redemption request prior to the Cut-off Time on that day; and (ii) the redemption of the shares of the Fund is executed pursuant to an allocation predetermined by GMO prior to that day’s Cut-off Time.

      Submitting Your Redemption Request . Redemption requests can be submitted by mail or by facsimile to the Trust at the address/facsimile number set forth under “How to Purchase Shares — Submitting Your Purchase Order Form.” Redemption requests submitted by mail are “received” by the Trust when actually delivered to the Trust. Call the Trust at 1-617-346-7646 or send an e-mail to

SHS@GMO.com to confirm that GMO received, made a good order determination regarding, and accepted your redemption request.

PURCHASE PREMIUMS AND REDEMPTION FEES

     Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non de minimis estimated portfolio transaction costs and other related costs (e.g., bid to ask spreads, stamp duties, and transfer fees) incurred by the Fund (directly or indirectly through investments in underlying funds) as a result of the purchase or redemption by allocating estimated transaction costs to the purchasing or redeeming shareholder. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). At present, the Fund does not charge any purchase premium or redemption fee. However, the Fund may impose a new purchase premium and/or redemption fee at any time.

satisfy its annual RIC distribution requirements and to otherwise avoid incurring RIC-level taxes.

	•		In general, distributions of money by the Fund (including in satisfaction of redemption requests) to a shareholder will represent a nontaxable return of capital to that shareholder up to the amount of the shareholder’s adjusted tax basis in its Fund shares, with any amounts exceeding such basis treated as capital gain. Any loss may be recognized by a shareholder only if it redeems all of its Fund shares for money. A shareholder generally will not recognize gain or loss on an in-kind distribution of property from the Fund, including on an in-kind redemption of Fund shares. In some cases, exceptions to these general rules may apply, which, for instance, can result in the recognition of ordinary income instead of capital gain on certain distributions of money. See “Taxes” in the SAI for more information.
	•		In general, in order to qualify as a RIC, a shareholder must, among other things, derive 90% of its gross income from certain specified sources (“good income”). Because shareholders will be required to take into account their distributive share of items of Fund income for each taxable year as though such items had been realized directly by the shareholder, special tax considerations apply to shareholders that are RICs. The Fund’s investment in a wholly owned subsidiary company is expected to generate good income for shareholders that are RICs. However, there is a risk that the Internal Revenue Service could recharacterize this investment in such a manner that it could generate “bad income” (i.e., non-qualifying income) for shareholders that are RICs. The Fund believes that the risk of such a recharacterization is remote.
	•		The subsidiary may be subject to U.S. withholding tax on certain categories of its U.S.-source income. All of the subsidiary’s net income is expected to be includible in the Fund’s income at the end of its tax year, whether or not distributed by the subsidiary to the Fund, and all such net income is expected to be treated as ordinary income. Net losses incurred by the subsidiary during a tax year will not flow through to the Fund and thus will not be available to shareholders to offset income or capital gain generated from the Fund’s other investments.
	•		Certain of the Fund’s investment practices, including derivative transactions and hedging activities generally, and securities lending activities (if any), as well as the Fund’s investments in certain types of securities, including its interests in the subsidiary, debt obligations issued or purchased at a discount, asset-backed securities, assets “marked to the market” for U.S. federal income tax purposes, and, potentially, so-called “indexed securities” (such as inflation-indexed bonds), will be subject to special and complex U.S. federal income tax provisions. These special rules may increase or accelerate Fund shareholders’ recognition of ordinary income and can otherwise affect the timing, character, and/or amount of income recognized by shareholders. See “Taxes” in the SAI for more information about the tax consequences of the Fund’s specific investment practices and investments.
	•		Any investment by the Fund in foreign securities may subject the Fund and/or its shareholders, directly or indirectly, to taxation, including withholding or other taxes on dividends, interest, or capital gains, and/or tax-filing obligations in foreign jurisdictions. The Fund and/or its shareholders may otherwise be subject to foreign taxation on repatriation proceeds generated from those securities or to other transaction-based foreign taxes on those securities. Subject to certain limitations, shareholders may be entitled to claim a credit or deduction (but not both) for their allocable share of certain foreign taxes incurred by the Fund. In addition, the Fund’s investment in foreign securities (other than equity securities),

foreign currencies, or foreign currency derivatives may increase or accelerate Fund shareholders’ recognition of ordinary income. See “Taxes” in the SAI for more information.

	•		Under the GMO Funds’ securities lending arrangements, when a dividend is paid to a Fund security out on loan, the borrower is required to pay to that Fund a substitute payment at least equal, on an after-tax basis, to the dividend that the Fund would have received if it had received the dividend directly. Because some borrowers of foreign securities may be subject to levels of taxation that are lower than the rates applicable to the Fund, some borrowers are likely to be motivated by the ability to earn a profit on those differential tax rates and to pay that Fund for the opportunity to earn that profit. In the United States, certain swap and securities lending transactions designed to enable non-U.S. persons to reduce otherwise applicable U.S. withholding taxes on U.S. stock dividends have received the attention of U.S. lawmakers. In response, Congress enacted legislation in March 2010 to limit these practices. There can be no assurance that similar legislation will not be adopted in other jurisdictions with respect to foreign securities or that foreign taxing authorities will not otherwise challenge beneficial tax results arising from swap or securities lending arrangements.
	•		An allocable share of a tax-exempt shareholder’s income will likely be UBTI to the extent that the Fund borrows money (including through the use of reverse repurchase agreements) to acquire investments or invests in assets that produce UBTI.
	•		The Fund’s investment in SDCF, U.S. Treasury Fund, or other investment companies treated as partnerships or RICs for U.S. federal income tax purposes could cause the recognition of income by Fund shareholders to vary in terms of its timing, character, and/or amount from that which would have been recognized had the Fund invested directly in the portfolio securities and other assets held by the underlying investment companies. See “Taxes” in the SAI for more information.

     The above is a general summary of the principal U.S. federal income tax consequences of investing in the Fund for shareholders who are U.S. citizens, residents, or domestic corporations. You should consult your own tax advisors about the precise tax consequences of an investment in the Fund in light of your particular tax situation, including possible foreign, state, local, or other applicable taxes (including the federal alternative minimum tax). See “Taxes” in the SAI for more information, including a summary of certain tax consequences of investing in the Fund for non-U.S. shareholders.

CONSOLIDATED FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)

     The consolidated financial highlights table is intended to help you understand the Fund’s financial performance for the period of the Fund’s operations. Some information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). Information presented in the table includes the accounts of the Fund and its wholly owned subsidiary GMO Alternative Asset SPC Ltd. The consolidated financial highlights include 100% of the assets and liabilities of GMO Alternative Asset SPC Ltd. All significant interfund accounts and transactions have been eliminated in consolidation.

     This information has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report, along with the Fund’s financial statements, is included in the Fund’s Annual Report, which is incorporated by reference in the SAI and available upon request.

GMO Alternative Asset Opportunity Fund

INVESTMENT IN OTHER GMO FUNDS

      GMO Short-Duration Collateral Fund. GMO Short-Duration Collateral Fund (“SDCF”), a series of the Trust, is described in a separate prospectus. SDCF is managed by GMO, and other GMO Funds seeking exposure to asset-backed securities have invested a substantial portion of their assets in SDCF.

     SDCF does not pay any investment management or shareholder service fees to the Manager. Subject to Excluded Expenses, the Manager has contractually agreed to reimburse SDCF to the extent SDCF’s total annual operating expenses exceed 0.00% of SDCF’s average daily net assets. This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by SDCF’s Board of Trustees. For these purposes, “Excluded Expenses” means fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

     SDCF’s investment objective is total return comparable to that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index, which is independently maintained and published by J.P. Morgan. The Index measures the total return performance of three-month U.S. dollar Euro-deposits, and the duration of the Index is generally 90 days.

     SDCF is not currently pursuing an active investment program.

     Historically, SDCF primarily has invested in and primarily holds asset-backed securities of any credit quality, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, SDCF has invested in government securities, corporate debt securities, money market instruments and commercial paper and has entered into credit default swaps, reverse repurchase agreements, and repurchase agreements. SDCF has also used other exchange-traded and over-the-counter (“OTC”) derivatives.

     Because of the deterioration in credit markets that became acute in 2008, SDCF currently has and may continue to have material exposure to below investment grade securities. In addition, because of the above-referenced deterioration in credit markets, SDCF has availed itself of the right to honor redemption requests in-kind.

     The Manager does not seek to maintain a specified interest rate duration for SDCF.

     Since October 2008, SDCF has declared and paid distributions when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. SDCF currently intends to continue this practice. A substantial portion of any such distributions could constitute a return of capital to shareholders for tax purposes.

     To the extent the Fund invests in SDCF, it is subject to the risks associated with an investment in fixed income securities and all of the other risks to which SDCF is exposed. The principal risks of an investment in SDCF include Market Risk—Fixed Income Securities, Liquidity Risk, Focused Investment Risk, Credit and Counterparty Risk, Derivatives Risk, Market Disruption and Geopolitical Risk, Large Shareholder Risk, and Management and Operational Risk. SDCF is a non-diversified investment company under the 1940 Act, and therefore a decline in the market value of a particular security held by SDCF may affect SDCF’s performance more than if SDCF were diversified. Shareholders of the Fund are indirectly exposed to these risks, in addition to all risks associated with their investment in the Fund.

      GMO U.S. Treasury Fund. GMO U.S. Treasury Fund (“U.S. Treasury Fund”), a series of the Trust, is offered through a separate prospectus. U.S. Treasury Fund is managed by GMO.

     U.S. Treasury Fund pays an investment management fee to the Manager at the annual rate of 0.08% of U.S. Treasury Fund’s average daily net assets. Subject to Excluded Expenses, the Manager has contractually agreed to reimburse U.S. Treasury Fund to the extent U.S. Treasury Fund’s total annual operating expenses exceed 0.08% of U.S. Treasury Fund’s average daily net assets. This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by U.S. Treasury Fund’s Board of Trustees. In addition to this contractual expense limitation, the Manager has voluntarily agreed to waive U.S. Treasury Fund’s management fee and to reimburse U.S. Treasury Fund to the extent U.S. Treasury Fund’s total annual operating expenses exceed 0.00% of U.S. Treasury Fund’s average daily net assets (excluding Excluded Expenses). The Manager may change or terminate these voluntary waivers and reimbursements at any time. During any period for which these voluntary waivers and reimbursements are in effect, U.S. Treasury Fund will incur management fees at an annual rate lower than 0.08% of U.S. Treasury Fund’s average daily net assets, and, as a result net annual operating expenses for U.S. Treasury Fund will be lower. For these purposes, “Excluded Expenses” are expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

     U.S. Treasury Fund’s investment objective is liquidity and safety of principal with current income as a secondary objective.

     U.S. Treasury Fund primarily invests in U.S. Treasury securities. Under normal circumstances, U.S. Treasury Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Direct U.S. Treasury Obligations and repurchase agreements collateralized by these Obligations. “Direct U.S. Treasury Obligations” include U.S. Treasury bills, bonds, and notes and other securities issued by the U.S. Treasury, such as Separately Traded Registered Interest and Principal Securities (STRIPS) and other zero-coupon securities, that are backed by the full faith and credit of the U.S. government as well as repurchase agreements relating to the foregoing.

     U.S. Treasury Fund may enter into repurchase agreements, under which U.S. Treasury Fund purchases a security backed by the full faith and credit of the U.S. government from a seller who

simultaneously commits to repurchase, on an agreed upon date in the future, the security from U.S. Treasury Fund at the original purchase price plus an agreed upon amount representing the original purchase price plus interest. The counterparties in repurchase agreements are typically broker-dealers and banks, and the safety of the arrangement is dependent on, among other things, U.S. Treasury Fund’s having an interest in the security that can be realized in the event of the insolvency of the counterparty.

     In addition to Direct U.S. Treasury Obligations, U.S. Treasury Fund also may invest in other fixed-income securities that are backed by the full faith and credit of the U.S. government, such as guaranteed securities issued by the Government National Mortgage Association (GNMA) and the Federal Deposit Insurance Corporation (FDIC). U.S. Treasury Fund also may invest in unaffiliated money market funds.

     U.S. Treasury Fund normally invests in Direct U.S. Treasury Obligations and other fixed-income securities backed by the full faith and credit of the U.S. government with a stated or remaining maturity of one year or less. This may not be true of Direct U.S. Treasury Obligations purchased pursuant to repurchase agreements, and, therefore, if the counterparty to the repurchase agreement defaults, U.S. Treasury Fund may own a security with a stated or remaining maturity of greater than one year.

     Although U.S. Treasury Fund primarily invests in short-term obligations, it is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds. In addition, the Manager normally seeks to maintain an interest rate duration of one year or less for U.S. Treasury Fund’s portfolio.

     In selecting U.S. Treasury securities for U.S. Treasury Fund’s portfolio, the Manager focuses primarily on the relative attractiveness of different obligations (such as bonds, notes, or bills), which can vary depending on the general level of interest rates as well as supply/demand imbalances and other market conditions.

     Other GMO Funds may invest in U.S. Treasury Fund to achieve exposure to U.S. Treasury securities, to invest cash, and/or to seek to generate a return similar to yields on U.S. Treasury securities.

     U.S. Treasury Fund’s benchmark is the Citigroup 3 Month Treasury Bill Index, an independently maintained and published short-term Treasury bill index.

     To the extent the Fund invests in U.S. Treasury Fund, it is subject to all of the risks to which U.S. Treasury Fund is exposed. The principal risks of an investment in U.S. Treasury Fund include Market Risk — Fixed Income Securities, Credit and Counterparty Risk, Focused Investment Risk, Large Shareholder Risk, Liquidity Risk, Management and Operational Risk, Market Disruption and Geopolitical Risk, and Fund of Funds Risk. Shareholders of the Fund are indirectly exposed to these risks, in addition to all risks associated with their investment in the Fund.

GMO TRUST

PRIVATE PLACEMENT MEMORANDUM

June 25, 2010

GMO Debt Opportunities Fund
40 Rowes Wharf, Boston, Massachusetts 02110

Class III, Class VI

           GMO Debt Opportunities Fund (the “Fund”) is a separate investment portfolio of GMO Trust (the “Trust”). The Trust is an open-end management investment company and operates as a “series investment company” that consists of separate series of investment portfolios, including the Fund. Other portfolios are described in separate prospectuses or private placement memoranda. At this time, the Fund does not intend to offer its shares publicly or to make them available other than to other funds of the Trust (“GMO Funds”) and certain other accredited investors.

Investment Manager
Grantham, Mayo, Van Otterloo & Co. LLC

          This Private Placement Memorandum concisely describes the information which you ought to know about the Fund before investing. Please read this memorandum carefully and keep it for further reference. A Statement of Additional Information dated June 25, 2010, as revised from time to time (“SAI”), is available free of charge by writing to GMO Shareholder Services, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling 1-617-346-7646. The SAI, which contains more detailed information about the Fund, has been filed with the Securities and Exchange Commission (“SEC”) and is incorporated by reference into this Private Placement Memorandum.

          THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE TRANSFERRED OR RESOLD UNLESS SO REGISTERED OR IN TRANSACTIONS EXEMPT THEREFROM. HOWEVER, THE SECURITIES ARE REDEEMABLE AS DESCRIBED IN THIS PRIVATE PLACEMENT MEMORANDUM. IN CERTAIN CASES INVESTORS MAY BE REDEEMED “IN-KIND” AND RECEIVE PORTFOLIO SECURITIES HELD BY THE FUND IN LIEU OF CASH UPON REDEMPTION.

          THIS PRIVATE PLACEMENT MEMORANDUM AND THE INFORMATION CONTAINED HEREIN ARE FOR THE EXCLUSIVE USE OF THE RECIPIENT FOR THE SOLE PURPOSE OF EVALUATING THE PRIVATE PLACEMENT OF SHARES OF THE FUND DESCRIBED HEREIN. IT MAY NOT BE REPRODUCED, PROVIDED, OR DISCLOSED TO OTHERS, OR USED FOR ANY OTHER PURPOSE, WITHOUT WRITTEN AUTHORIZATION, AND DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SHARES OF THE FUND TO ANY ENTITY OR INDIVIDUAL NOT POSSESSING THE QUALIFICATIONS DESCRIBED IN THIS MEMORANDUM.

          NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR PROVIDE ANY INFORMATION WITH RESPECT TO THE SHARES EXCEPT SUCH INFORMATION AS IS CONTAINED IN THIS MEMORANDUM AND IN THE SAI OR IN OTHER MATERIALS APPROVED BY THE TRUST. NO SALES MADE IN RELIANCE ON THIS DOCUMENT SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN MATTERS DISCUSSED HEREIN SINCE THE DATE HEREOF.

FUND SUMMARY

Purchase and Sale of Fund Shares

          Currently, shares of the Fund are principally available for purchase by other GMO Funds and certain other accredited investors. All investors must be “accredited investors” as defined in Regulation D under the Securities Act of 1933.

          Eligibility to purchase Fund shares or different classes of Fund shares depends on the client’s meeting either (i) the minimum “Total Fund Investment,” which includes only a client’s total investment in the Fund, or (ii) the minimum “Total GMO Investment,” both set forth in the table below. No minimum additional investment is required to purchase additional shares of the Fund.

Minimum Investment Criteria for Class Eligibility

          Fund shares are redeemable, and under ordinary circumstances you may redeem the Fund’s shares on days when both the NYSE and the U.S. bond markets are open for business. Redemption requests should be submitted directly to the Trust. For instructions on redeeming shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com.

Tax Information

          The Fund normally distributes net investment income and net realized capital gains, if any, to shareholders. These distributions are generally taxable to you as ordinary income or capital gains, unless you are an entity that is exempt from income tax or are investing through a tax-advantaged account. If you are investing through a tax-advantaged account, you may be taxed upon withdrawal of monies from that account.

Principal Investment Strategies

          The Fund seeks to achieve its investment objective by investing primarily in debt investments. Under normal circumstances, the Fund invests directly and indirectly (e.g., through other GMO Funds or derivatives) at least 80% of its assets in debt investments (the “Name Policy”) (see “Name Policy” below for more information).

          The Fund is permitted to make investments in all types of U.S. and foreign debt investments, without regard to the credit rating of the obligor. The Fund may invest in debt investments issued by a wide range of private issuers and by federal, state, local, and foreign governments (including securities neither guaranteed nor insured by the U.S. government). The Fund may invest in asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest in corporate debt securities, money market instruments, and commercial paper, and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund also may use other exchange-traded and over-the-counter (“OTC”) derivatives. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, and, as a result, it may be leveraged in relation to its assets.

          The Fund is not restricted in its exposure to any type of debt investment, and at times may be substantially exposed to a single type of debt investment (e.g., asset-backed securities). The Fund’s debt investments may include all types of interest rate, payment, and reset terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred, payment-in-kind, and auction rate features. The Fund may invest in securities of any credit quality. There is no limit on the amount of the Fund’s total assets that may be invested in below investment grade securities, and the Fund may invest in material positions of below investment grade securities. Debt investments rated below investment grade are also known as high yield or “junk” bonds.

          Upon the commencement of its operations, the Fund initially expects to invest substantially all of its assets in asset-backed securities, a substantial portion of which will be junk bonds.

          The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund (“U.S. Treasury Fund”), another series of GMO Trust described in a separate prospectus (see “Investment in Other GMO Funds” below for a more detailed description of U.S. Treasury Fund’s investment objectives and strategies).

          In selecting debt investments for the Fund’s portfolio, the Manager emphasizes a “bottom-up” approach to examining and selecting investments and uses analytical techniques to identify inefficiencies in the pricing of investments and to identify those the Manager believes are undervalued.

          If deemed prudent by the Manager, the Fund will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. The Fund may not achieve its investment objective while it is taking temporary defensive measures. The Fund does not seek to maintain a specified interest rate duration for its portfolio.

          Unless otherwise specified in this Private Placement Memorandum or in the SAI, the Manager is not obligated to and generally will not consider tax consequences when seeking to achieve the Fund’s investment objective (e.g., the Fund may engage in transactions that are not tax efficient for U.S. federal income or other federal, state, local, or non-U.S. tax purposes). Portfolio turnover is not a principal

consideration when the Manager makes investment decisions for the Fund. Based on its assessment of market conditions, the Manager may cause the Fund to trade more frequently at some times than at others. High turnover rates may adversely affect the Fund’s performance by generating higher transaction costs. Additionally, portfolio turnover may give rise to additional taxable income for shareholders, including through the realization of capital gains or other types of income that are taxable to Fund shareholders when distributed to them unless the shareholders themselves are exempt from taxation or otherwise investing in the Fund through a tax-advantaged account. If portfolio turnover results in the recognition of short-term capital gains, those gains typically are taxed to shareholders, when distributed to them, at ordinary income tax rates. See “Distributions and Taxes” below for more information about the tax consequences of these types of income.

           When used in this Private Placement Memorandum, the term “invest” includes both direct investing and indirect investing and the term “investments” includes both direct investments and indirect investments. For example, the Fund may invest indirectly by investing in another fund or by investing in derivatives and synthetic instruments. In addition, the term “debt investments” includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option). For purposes of this Private Placement Memorandum, (a) the term “duration” is defined as the weighted measure of interest rate sensitivity of a debt investment, and (b) the term “total return” includes both capital appreciation and income.

          For purposes of this Private Placement Memorandum, the term “investment grade” refers to a rating of Baa3/P-2 or better given by Moody’s Investors Service, Inc. (“Moody’s”) or BBB-/A-2 or better given by Standard & Poor’s Ratings Services (“S&P”) to a particular debt investment/commercial paper, and the term “below investment grade” refers to any rating below Baa3/P-2 given by Moody’s or below BBB-/A-2 given by S&P to a particular debt investment/commercial paper. Debt investments rated below investment grade are also known as high yield or “junk” bonds. Securities referred to as investment grade or below investment grade include not only securities rated by Moody’s and/or S&P, but also securities unrated by Moody’s or S&P that are determined by the Manager to have credit qualities comparable to securities rated by Moody’s or S&P as investment grade or below investment grade, as applicable.

           Annual Fund Operating Expenses — Other Expenses. The amounts listed under “Other expenses” in the “Annual Fund Operating Expenses” table included in the Fund’s summary reflect an annualized estimate of direct expenses associated with an investment in the Fund for the Fund’s initial fiscal year. The Fund may invest in other GMO Funds and certain other pooled investment vehicles (“underlying funds”), and the indirect net expenses associated with the Fund’s investment (if any) in underlying funds are reflected in “Other expenses” if those expenses are less than 0.01% of the average net assets of the Fund. Indirect net expenses associated with the Fund’s investment in underlying funds are estimated to be less than 0.01% of the Fund’s average net assets for the Fund’s initial fiscal year. These amounts do not include expenses associated with investments in the securities of unaffiliated issuers unless those issuers hold themselves out to be investment companies. Actual indirect expenses will vary depending on the particular underlying funds in which the Fund invests.

Description of Principal Risks

          Investing in the Fund involves many risks, and factors that may affect the Fund’s portfolio as a whole, called “principal risks,” are summarized in this section. The risks of investing in the Fund depend on the types of investments in its portfolio and the investment strategies the Manager employs on its behalf. This section describes the nature of these principal risks and some related risks, but is not intended to include every potential risk. The Fund could be subject to additional risks because the types of investments it makes and market conditions may change over time. The SAI includes more

information about the Fund and its investments.

          Because the Fund invests in other GMO Funds and unaffiliated money market funds (as indicated under “Principal Investment Strategies” in “Additional Information About The Fund’s Investment Strategies, Risks, And Expenses”), it is exposed to all the risks to which the underlying funds in which it invests are exposed. Therefore, unless otherwise noted herein, the principal risks summarized below include both direct and indirect principal risks of the Fund, and as indicated above, references in this section to investments made by the Fund include those made both directly by the Fund and indirectly by the Fund through another GMO Fund or an unaffiliated money market fund.

          The Fund, by itself, generally is not intended to provide a complete investment program. Investment in the Fund is intended to serve as part of a diversified portfolio of investments. An investment in the Fund is not a bank deposit and, therefore, is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

          The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified.

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MARKET RISK—FIXED INCOME SECURITIES

          The Fund is subject to market risk, which is the risk of unfavorable changes in the value of Fund holdings. The following summarizes certain general market risks associated with investments in or exposure to fixed income securities.

          Because the Fund invests a significant portion of its assets in fixed income securities (including bonds, notes, bills, synthetic debt instruments, and asset-backed securities), it is subject to various market risks. These risks include, but are not limited to, loss on investments in asset-backed and other fixed income securities, lack of liquidity of these investments and impact of fluctuating interest rates. The most significant market risk for the Fund is that the securities in which it invests experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. See “Credit and Counterparty Risk” below for more information about credit risk.

          With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically.

Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.

          The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and the Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.

          The risks associated with asset-backed securities are particularly pronounced for the Fund. The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. See “Focused Investment Risk” below for more information about risks of investing in correlated sectors. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.

          Besides the market risks associated with investing in asset-backed securities, the Fund is exposed to liquidity risk and interest rate risk. Liquidity risk has become more pronounced for other types of fixed income securities because of the deterioration in worldwide economic and liquidity conditions discussed above and under “Liquidity Risk” below. Even in the absence of a credit downgrade or default, the price of fixed income securities held by the Fund may decline significantly due to a reduction in market demand.

          In addition, a principal risk of the Fund is that an increase in prevailing interest rates will cause the value of its investments to decline. The risk associated with increases in interest rates (also called “interest rate risk”) is generally greater when the Fund invests in fixed income securities with longer durations and in some cases duration can increase.

          The extent to which a security’s value moves with interest rates is referred to as interest rate duration, which can be measured mathematically or empirically. Longer-maturity investments generally have longer interest rate durations because the investment’s fixed rate is locked in for longer periods of time. Floating-rate or adjustable-rate securities, however, generally have shorter interest rate durations because their interest rates are not fixed but rather float up and down with the level of prevailing interest rates. The Fund also is permitted to invest, from time to time, in fixed income securities paying no interest, such as zero coupon and principal-only securities. To the extent the Fund makes investments in fixed income securities paying no interest, it will be exposed to additional interest rate risk.

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LIQUIDITY RISK

          The effect of liquidity risk is particularly pronounced when low trading volume, lack of a market maker, a large position, or legal restrictions limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. In addition, holding less liquid securities increases the likelihood that the Fund will honor redemption requests in-kind. Because the Fund’s principal investment strategies involve the use of derivatives (in particular OTC derivatives) and investing in fixed income securities, in particular asset-backed securities, it has increased exposure to liquidity risk and the Fund’s investments may be less liquid than other types of securities. These types of investments are more likely to be fair valued (see “Determination of Net Asset Value”). Less liquid securities are more susceptible to loss of value and their prices may decline more than other securities when markets decline generally.

          The Fund is also exposed to liquidity risk when it has an obligation to purchase particular securities (e.g., as a result of entering into reverse repurchase agreements, writing a put, or closing out a short position). Some of the markets, exchanges, or securities in which the Fund invests may prove to be less liquid and this would affect the price at which, and the time period in which, the Fund may liquidate positions to meet redemption requests or other funding requirements. Although U.S. Treasury securities have historically been among the most liquid fixed income investments, there can be no assurance that these securities will not become less liquid in the future.

          As noted under “Market Risk — Fixed Income Securities” above, because of the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, liquidity risk has been pronounced for funds that invest in fixed income securities, particularly asset-backed securities. The Fund may find it necessary to sell these securities at distressed prices or meet redemption requests in-kind.

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FOCUSED INVESTMENT RISK

          Funds whose investments are focused in particular countries, regions, sectors, or companies or in industries with high positive correlations to one another (e.g., different industries within broad sectors, such as technology or financial services) are subject to greater overall risk than funds whose investments are more diversified. A fund that focuses its investments in a particular type of security or sector, or in securities of companies in a particular industry, is vulnerable to events affecting those securities, sectors, or companies. Securities, sectors, or companies that share common characteristics are often subject to similar business risks and regulatory burdens, and often react similarly to specific economic, market, political, or other developments. This risk is particularly pronounced for the Fund because of its significant exposure to asset-backed securities. As noted under “Market Risk—Fixed Income Securities” above, sectors of the securitized credit markets have become more highly correlated since the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008.

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CREDIT AND COUNTERPARTY RISK

          This is the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase agreement or reverse repurchase agreement or other OTC derivatives contract, or a borrower of the Fund’s securities (including a borrower of the Fund’s portfolio securities pursuant to the GMO Funds’ securities lending program) will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise to honor its obligations. This risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.

          Credit risk for fixed income securities is the risk that the issuer will be unable to make scheduled contractual payments of principal and interest. The value of a fixed income security normally will decline

as a result of the issuer’s defaulting on its payment obligations or the market’s expectation of a default, which may be triggered by the downgrading of the issuer’s credit rating.

          All fixed income securities are subject to credit risk. The risk varies depending upon whether the issuer is a corporation or domestic or foreign government (or sub-division or instrumentality) and whether the particular security has a priority in payment of principal and interest. U.S. government securities are subject to varying degrees of credit risk depending upon whether the securities are supported by the full faith and credit of the United States, supported by the ability to borrow from the U.S. Treasury, supported only by the credit of the issuing U.S. government agency, instrumentality, or corporation, or otherwise supported by the United States. For example, issuers of many types of U.S. government securities (e.g., the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and Federal Home Loan Banks), although chartered or sponsored by Congress, are not funded by Congressional appropriations and their fixed income securities, including mortgage-backed and other asset-backed securities, are neither guaranteed nor insured by the U.S. government. These securities are subject to more credit risk than U.S. government securities that are supported by the full faith and credit of the United States (e.g., U.S. Treasury bonds).

          As noted under “Market Risk — Fixed Income Securities” above, asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans and credit-card receivables. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations”). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal and other risks if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors.

          The Fund also will be exposed to credit risk on the reference security to the extent it writes protection under credit default swaps. See “Derivatives Risk” below for more information regarding risks associated with the use of credit default swaps.

          Credit risk is particularly pronounced for below investment grade securities (also known as “junk bonds”). During periods of economic uncertainty and change, the market price of the Fund’s investments in below investment grade securities may be particularly volatile. Although offering the potential for higher investment returns, junk bonds often are less liquid than higher quality securities, present a greater risk of default and are more susceptible to real or perceived adverse economic and competitive industry conditions. Often junk bonds also are subject to greater sensitivity to interest rate and economic changes and present valuation difficulties. The market price of these securities can change suddenly and unexpectedly. Credit risk is particularly pronounced for the Fund because there is no limit on the Fund’s investments in below investment grade securities.

          In addition, the Fund is exposed to counterparty risk to the extent it uses OTC derivatives (such as swap contracts and reverse repurchase agreements), enters into repurchase agreements, or lends its portfolio securities. See “Derivatives Risk” above for more information. If a counterparty’s obligation to the Fund is not collateralized, then the Fund is essentially an unsecured creditor of the counterparty. If the

counterparty defaults, the Fund will have contractual remedies, but the Fund may be unable to enforce them. The Fund is subject in particular to the creditworthiness of the contracts’ counterparties because some types of swap contracts used by the Fund may have durations longer than six months (and, in some cases, a number of decades). In addition, the creditworthiness of a counterparty may be adversely affected by larger than average volatility in the markets, even if the counterparty’s net market exposure is small relative to its capital. Counterparty risk is still present even if a counterparty’s obligations are secured by collateral because the Fund’s interest in the collateral may not be perfected or additional collateral may not be promptly posted as required. OTC derivatives generally involve greater credit and counterparty risk than exchange-traded derivatives. The Fund may have significant exposure to a single counterparty as a result of its use of swaps and other OTC derivatives.

          The Fund is also subject to counterparty risk to the extent it executes a significant portion of its securities transactions through a single broker or dealer. If the broker or dealer fails to meet its contractual obligations, goes bankrupt, or otherwise experiences a business interruption, the Fund could miss investment opportunities or be unable to dispose of investments it would prefer to sell, resulting in losses for the Fund.

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DERIVATIVES RISK

          The Fund may invest in derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other OTC contracts. Derivatives may relate to securities, interest rates, currencies or currency exchange rates, inflation rates, commodities, and related indices. The SAI contains a description of the various types and uses of derivatives in the Fund’s investment strategies.

          The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.

          Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund. Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a

greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.

          Derivatives also present risks described elsewhere in this “Description of Principal Risks” section, including market risk, liquidity risk, currency risk, and credit and counterparty risk. Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.

          There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.

          Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by a shareholder.

          The risks of derivatives are particularly pronounced for Fund because it uses a variety of exchange-traded and OTC derivatives to implement its investment programs. In addition, when, as an alternative to purchasing bonds directly, the Fund uses credit default swaps to obtain synthetic long exposure to a fixed income security such as a debt instrument or index of debt instruments, the Fund is exposed to the risk that it will be required to pay the notional value of the swap contract in the event of a default.

          Swap contracts and other OTC derivatives are highly susceptible to liquidity risk (see “Liquidity Risk” above) and credit and counterparty risk (see “Credit and Counterparty Risk” below), and are subject to documentation risks. See also “Leveraging Risk” below.

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LEVERAGING RISK

          The Fund’s use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged (i.e., the Fund’s exposure to underlying securities, assets, or currencies exceeds its net asset value). Leverage increases the Fund’s portfolio losses when the value of its investments declines. Because many derivatives have a leverage component (i.e., a notional value in excess of the assets needed to establish and/or maintain the derivative position), adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the amount invested in the derivative itself. In the case of swaps, the risk of loss generally is related to a notional principal amount, even if the parties have not made any initial investment. Some derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A Fund’s portfolio

will be leveraged if it borrows money to meet redemption requests or settle investment transactions or if it avails itself of the right to delay payment on a redemption.

          The Fund is not limited in the extent to which it uses derivatives. As a result, its net long exposure may exceed 100% of its net assets.

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MARKET DISRUPTION AND GEOPOLITICAL RISK

          The Fund is subject to the risk that geopolitical events will disrupt securities markets and adversely affect global economies and markets. The wars in Iraq and Afghanistan have had a substantial effect on economies and securities markets in the U.S. and worldwide. Terrorism in the U.S. and around the world has had a similar global impact and has increased geopolitical risk. The terrorist attacks of September 11, 2001 resulted in the closure of some U.S. securities markets for four days, and similar future events are possible. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, systemic market dislocations of the kind surrounding the insolvency of Lehman Brothers in 2008 may be highly disruptive to economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Fund’s investments. At such times, the Fund’s exposure to the risks described elsewhere in this section, including market risk, liquidity risk, and credit and counterparty risk, will likely increase. Market disruptions can also prevent the Fund from implementing its investment program for a period of time and achieving its investment objective. For example, a disruption may cause the Fund’s derivatives counterparties to discontinue offering derivatives on some underlying commodities, securities, reference rates, or indices or to offer such products on a more limited basis.

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LARGE SHAREHOLDER RISK

          To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that these shareholders will purchase or redeem Fund shares in large amounts and/or on a frequent basis. These transactions could adversely affect the Fund if it is forced to sell portfolio securities to raise the cash that is necessary to satisfy shareholder redemption requests or purchase portfolio securities to invest cash. This risk is particularly pronounced when one shareholder owns a substantial portion of the Fund. A substantial percentage of the Fund may be held by other GMO Funds and/or separate accounts managed by the Manager for its clients. Asset allocation decisions by the Manager may result in substantial redemptions from (or investments into) the Fund. These transactions may adversely affect the Fund’s performance to the extent that the Fund is required to sell investments (or invest cash) at times when it would not otherwise do so. These transactions also may accelerate the realization of taxable income to shareholders if such sales of investments resulted in gains, and also may increase transaction costs. These transactions potentially limit the use of any capital loss carryforwards and certain other losses to offset future realized capital gains (if any) and may limit or prevent the Fund’s ability to use tax equalization. To the extent the Fund invests in other GMO Funds having large shareholders, the Fund is indirectly subject to this risk.

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MANAGEMENT AND OPERATIONAL RISK

          The Fund is subject to management risk because it relies on the Manager’s ability to achieve its investment objective. The Manager uses proprietary investment techniques and risk analyses in making investment decisions for the Fund, but there is no assurance that the Manager will achieve the desired results and the Fund may incur significant losses. The Manager, for example, may fail to use derivatives effectively, choosing to hedge or not to hedge positions at disadvantageous times. The Fund generally

does not take temporary defensive positions and instead generally stays fully invested in fixed income securities and related derivative instruments.

          The Fund also is subject to operational risk associated with the Manager’s provision of investment management, administrative, and shareholder services to the Fund. Operational risk is the risk that deficiencies in the Manager’s internal systems or controls, or in those of a service provider to whom the Manager has contractually delegated responsibilities, will cause losses for the Fund or hinder Fund operations. Operational risk results from inadequate procedures and controls, human error, and system failures by the Manager or a service provider. For example, trading delays or errors (both human and systematic) caused by the Manager could prevent the Fund from purchasing a security that the Manager expects will appreciate in value, thus reducing the Fund’s opportunity to benefit from the security’s appreciation. The Manager is not contractually liable to the Fund for losses associated with operational risk absent the Manager’s willful misfeasance, bad faith, gross negligence, or reckless disregard of its contractual obligations to provide services to the Fund.

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FUND OF FUNDS RISK AND RELATED CONSIDERATIONS

          The Fund may invest in shares of other investment companies, including certain other GMO Funds and money market funds (“underlying funds”), and is exposed to the risk that the underlying funds do not perform as expected. The Fund also is indirectly exposed to all of the risks applicable to an investment in the underlying funds. Because the Fund bears the fees and expenses of the underlying funds in which it invests (absent reimbursement of those expenses), the Fund will incur additional expenses when investing in underlying funds. The Fund also is indirectly exposed to all of the risks applicable to an investment in the underlying funds. In addition, funds that invest in shares of other GMO Funds also are likely to be subject to Large Shareholder Risk because underlying GMO Funds are more likely to have large shareholders (e.g., other GMO Funds).

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NON-DIVERSIFIED FUND

          The Fund is not a “diversified” investment company within the meaning of the 1940 Act. This means the Fund is allowed to invest in the securities of a relatively small number of issuers and/or foreign currencies. As a result, the Fund may be subject to greater credit, market, and other risks, and poor performance by a single issuer may have a greater impact on the Fund’s performance than if the Fund were “diversified.”

MANAGEMENT OF THE FUND

          GMO, 40 Rowes Wharf, Boston, Massachusetts 02110, provides investment management and shareholder services to the Fund and other GMO Funds. GMO is a private company, founded in 1977. As of May 31, 2010, GMO managed on a worldwide basis more than $95 billion of assets for the GMO Funds and institutional investors, such as pension plans, endowments, and foundations.

          Subject to the approval of the Trustees, the Manager establishes and modifies when it deems appropriate the investment strategies of the Fund. In addition to its management of the Fund’s investment portfolio and the shareholder services it provides to the Fund, the Manager administers the Fund’s business affairs.

          The Fund pays the Manager shareholder service fees for providing client service and reporting, such as performance information reporting, client account information, personal and electronic access to Fund information, access to analysis and explanations of Fund reports, and assistance in maintaining and correcting client-related information.

          The Manager’s annual compensation for investment management services rendered is 0.25% of the Fund’s average daily net assets for each class of shares.

          A discussion of the basis for the Trustees’ approval of the Fund’s initial investment management contract will be included in the Fund’s annual or semiannual shareholder report for the period during which the Trustees approved that contract.

          GMO’s Fixed Income Division is responsible for day-to-day investment management of the Fund. The Division’s investment professionals work collaboratively to manage the Fund’s portfolio, and no one person is primarily responsible for day-to-day investment management of the Fund.

          William Nemerever and Thomas Cooper are the senior members and co-directors of the Fixed Income Division. Each has been a senior member of the Division since 1993. As senior members and co-directors, Mr. Nemerever and Mr. Cooper jointly allocate responsibility for portions of the Fund’s portfolio to members of the Division, oversee the implementation of trades, review the overall composition of the portfolio, including compliance with its stated investment objective and strategies, and monitor cash.

          Mr. Nemerever and Mr. Cooper have been jointly responsible for overseeing the portfolio management of GMO’s global fixed income portfolios since 1993. In general, Mr. Nemerever focuses on investment strategy, while Mr. Cooper focuses on instrument selection.

          The SAI contains other information about how GMO determines the compensation of the senior members, other accounts they manage and related conflicts, and their ownership of the Fund.

Custodian, Fund Accounting Agent, and Transfer Agent

          State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02111, serves as the Fund’s custodian, fund accounting agent, and transfer agent.

Expense Reimbursement

          As more fully described in the Fund’s “Annual Fund Operating Expenses” table under the caption “Fees and Expenses” in the Fund’s summary, the Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s total annual operating expenses that exceed 0.25% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” As used in this Private Placement Memorandum, “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

          In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s

Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount.

          The Fund’s contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

•

Most recent bid supplied by a single pricing source chosen by the Manager

Shares of other GMO Funds and other open-end registered investment companies

•

Most recent NAV

“Fair Value” Pricing

          For all other assets and securities, including derivatives, and in cases where market prices are not readily available or circumstances make an existing methodology or procedure unreliable, the Fund’s investments are valued at “fair value,” as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees.

          With respect to the Fund’s use of “fair value” pricing, you should that, in some cases, a significant percentage of the Fund’s assets may be “fair valued.” The value of assets that are “fair valued” is determined by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Factors that may be considered in determining “fair value” include, among others, the value of other financial instruments traded on other markets, trading volumes, changes in interest rates, observations from financial institutions, significant events (which may be considered to include changes in the value of U.S. securities or securities indices) that occur after the close of the relevant market and before the Fund’s net asset value is calculated, other news events, and significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments). Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the fair value determined for a particular security may be materially different from the value realized upon its sale.

          The values of foreign securities quoted in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 p.m. Boston time, at then current exchange rates or at such other rates as the Trustees or persons acting at their direction may determine in computing net asset value.

          The Manager evaluates pricing sources on an ongoing basis and may change a pricing source at any time. The Manager normally does not evaluate the prices supplied by pricing sources on a day-to-day basis. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices often are available for many securities held by the Fund, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. In addition, because the Fund may hold portfolio securities listed on foreign exchanges that trade on days on which the NYSE or the U.S. bond markets are closed, the net asset value of the Fund’s shares may change significantly on days when shares cannot be redeemed.

NAME POLICY

          The Fund will not change its Name Policy without providing its shareholders at least 60 days’ prior written notice. When used in connection with the Fund’s Name Policy, “assets” include the Fund’s net assets plus any borrowings made for investment purposes.

DISCLOSURE OF PORTFOLIO HOLDINGS

          The Fund has established a policy with respect to disclosure of its portfolio holdings. That policy is described in the SAI. Information regarding the Fund’s portfolio holdings as of each month’s end is made available to shareholders of the Trust, qualified potential shareholders as determined by GMO (“potential shareholders”), and their consultants or agents through a secured link on GMO’s website approximately five days after month end. Periodically, in response to heightened market interest in specific issuers, a Fund’s holdings in one or more issuers may be made available on a more frequent basis to shareholders of the Trust, potential shareholders, and their consultants or agents through a secured link on GMO’s website. This information may be posted as soon as the business day following the date to which the information relates.

          To access this information on GMO’s website (http://www.gmo.com/america/strategies), shareholders, potential shareholders, and their consultants and agents must contact GMO to obtain a password and user name (to the extent they do not already have them) and enter into a confidentiality agreement with GMO and the Trust that permits the information to be used only for purposes determined by GMO to be in the best interest of the shareholders of the Fund. GMO may make portfolio holdings information available in alternate formats under the conditions described in the SAI.

          The Fund or GMO may suspend the posting of portfolio holdings, and the Fund may modify the disclosure policy, without notice to shareholders. Once posted, the Fund’s portfolio holdings will remain available on the website at least until the Fund files a Form N-CSR (annual/semiannual report) or Form N-Q (quarterly schedule of portfolio holdings) for the period that includes the date of those holdings.

HOW TO PURCHASE SHARES

          Currently, shares of the Fund are principally available for purchase by other GMO Funds and certain other accredited investors. All investors must be “accredited investors” as defined in Regulation D under the Securities Act of 1933.

          Under ordinary circumstances, you may purchase the Fund’s shares directly from the Trust on days when both the NYSE and the U.S. bond markets are open for business. For instructions on purchasing shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com. The Trust will not accept a purchase request until it has received a GMO Trust Application deemed to be in good order by the Trust or its designated agent. In addition, the Trust will not accept a purchase request unless an IRS Form W-9 (for U.S. shareholders) or the appropriate IRS Form W-8 (for foreign shareholders) with a correct taxpayer identification number (if required) is on file with GMO and that W-9 or W-8 is deemed to be in good order by the Trust’s withholding agent, State Street Bank and Trust Company. Subject to future guidance from the Internal Revenue Service, the Trust may require additional tax-related certifications, representations, or information from you in order to comply with the “Foreign Account Tax Compliance” provisions of the recently enacted Hiring Incentives to Restore Employment Act. Please consult your tax adviser to ensure all tax forms provided to the Trust are completed properly and maintained, as required, in good order. GMO has the right to make final good order assessments.

           Purchase Policies. You must submit a purchase request in good order to avoid having it rejected by the Trust or its designated agent. In general, a purchase request is in good order if it includes:

	•		The name and/or CUSIP number of the Fund being purchased;
	•		The U.S. dollar amount of the shares to be purchased;
	•		The date on which the purchase is to be made (subject to receipt prior to the close of regular trading on that date);
	•		The name and/or the account number (if any) set forth with sufficient clarity to avoid ambiguity; and
	•		The signature of an authorized signatory as identified in the GMO Trust Application or subsequent authorized signers list.

          If payment in full (by check, wire, or, when approved, securities) is not received by the Trust or its designated agent prior to the earlier of the close of the NYSE or 4:00 p.m. Boston time on the intended purchase date, the request may be rejected or deferred until payment is received unless prior arrangements for later payment have been approved by GMO.

          If the purchase request is received in good order by the Trust prior to the close of regular trading on the NYSE (generally 4:00 p.m. Boston time), the purchase price for the Fund shares to be purchased is the net asset value per share determined on that day (plus any applicable purchase premium). If that request is received after the close of regular trading on the NYSE, the purchase price for the Fund shares to be purchased is the net asset value per share determined on the next business day that the NYSE is open (plus any applicable purchase premium). Purchase requests that are received on days when the U.S. bond markets are closed will not be accepted until the next day on which the U.S. bond markets are open, and the purchase price for the Fund’s shares to be purchased is the net asset value per share determined on that day (plus any applicable purchase premium). Purchase premiums (if any) are not charged on reinvestments of distributions.

          To help the U.S. government fight the funding of terrorism and money laundering activities, federal law requires the Trust to verify identifying information provided by each investor in its GMO Trust Application. Additional identifying documentation also may be required. If the Trust is unable to verify the information shortly after your account is opened, the account may be closed and your shares redeemed at their net asset value at the time of the redemption.

          The Trust reserves the right to reject any purchase order. In addition, without notice, the Fund in its sole discretion may temporarily or permanently suspend sales of its shares to new investors and, in some circumstances, existing shareholders.

          Minimum investment amounts (by class) are set forth in the table on page 21 of this Private Placement Memorandum. No minimum additional investment is required to purchase additional shares of a class of the Fund. The Trust may waive initial minimums for some investors.

          Funds advised or sub-advised by GMO (“Top Funds”) may purchase shares of the Fund after the close of regular trading on the NYSE (the “Cut-off Time”) and receive the current day’s price if the following conditions are met: (i) the Top Fund received a good order purchase request prior to the Cut-off Time on that day; and (ii) the purchase(s) by the Top Fund of shares of the Fund are executed pursuant to an allocation predetermined by GMO prior to that day’s Cut-off Time.

           Submitting Your Purchase Order Form . Completed purchase order forms can be submitted by mail or by facsimile or other form of communication pre-approved by Shareholder Services to the Trust at:

GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: 1-617-439-4192
Attention: Shareholder Services

          Call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com to confirm that GMO received, made a good order determination regarding, and accepted your purchase order form. Do not send cash, checks, or securities directly to the Trust. A purchase request submitted by mail is “received” by the Trust when it is actually delivered to the Trust or its designated agent. A purchase request delivered by facsimile is “received” by the Trust when it is actually received by the Trust or its designated agent.

           Funding Your Investment . You may purchase shares:

•

with cash (via wire transfer or check)

•

By wire . Instruct your bank to wire the amount of your investment to:

State Street Bank and Trust Company, Boston, Massachusetts
ABA#: 011000028
Attn: Transfer Agent
Credit: GMO Deposit Account 00330902
Further credit: GMO Debt Opportunities Fund/Account name and number

•

By check . All checks must be made payable to the Fund or to GMO Trust. The Trust will not accept checks payable to a third party that have been endorsed by the payee to the Trust. Mail checks to:

•

in exchange for securities acceptable to the Manager

	•		securities must be approved by the Manager prior to transfer to the Fund.
	•		securities will be valued as set forth under “Determination of Net Asset Value”

•

by a combination of cash and securities

           Frequent Trading Activity. As a matter of policy, the Trust will not honor requests for purchases or exchanges by shareholders identified as engaging in frequent trading strategies, including market timing, that GMO determines could be harmful to certain other GMO Funds and their shareholders. Frequent trading strategies are generally strategies that involve repeated exchanges and/or purchases and redemptions (or redemptions and purchases) within a short period of time. Frequent trading strategies may be disruptive to the efficient management of such Funds, materially increase portfolio transaction costs and taxes, dilute the value of shares held by long-term investors, or otherwise be harmful to such

Funds and their shareholders. Notwithstanding the foregoing, these policies and procedures do not limit frequent trading of the Fund.

HOW TO REDEEM SHARES

          Under ordinary circumstances, you may redeem the Fund’s shares on days when both the NYSE and the U.S. bond markets are open for business. Redemption requests should be submitted directly to the Trust. For instructions on redeeming shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com. The Trust may take up to seven days to remit proceeds.

           Redemption Policies. You must submit a redemption request in good order to avoid having it rejected by the Trust. In general, a redemption request is in good order if it includes:

	•		The name and/or CUSIP number of the Fund being redeemed;
	•		The number of shares or the dollar amount of the shares to be redeemed or that the client wants to receive;
	•		The date on which the redemption is to be made (subject to receipt prior to the close of regular trading on the NYSE on that date);
	•		The name and/or the account number set forth with sufficient clarity to avoid ambiguity;
	•		The signature of an authorized signatory as identified in the GMO Trust Application or subsequent authorized signers list; and
	•		Wire instructions or registration address that match the wire instructions or registration address (as applicable) on file at GMO or confirmation from an authorized signatory that the wire instructions are valid.

          If a redemption request in good order is received by the Trust prior to the close of regular trading on the NYSE (generally 4:00 p.m. Boston time), the redemption price for the Fund shares to be redeemed is the net asset value per share determined on that day (less any applicable redemption fee). Redemption requests in good order that are received on days when the U.S. bond markets are closed will not be accepted until the next day on which the U.S. bond markets are open, and the redemption price will be the net asset value per share determined that day (less any applicable redemption fee). If that redemption request is received after the close of regular trading on the NYSE, the redemption price for the Fund shares to be redeemed is the net asset value per share determined on the next business day that the U.S. bond markets are open (less any applicable redemption fee) unless you or another authorized person on your account have instructed GMO Shareholder Services in writing to defer the redemption to another day. If you or another authorized person on your account have instructed GMO Shareholder Services to defer the redemption to another day, you or another authorized person on your account may revoke your redemption request in writing at any time prior to 4:00 p.m. Boston time or before the close of regular trading on the NYSE (whichever is earlier) on the redemption date. Redemption fees, if any, apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). In the event of a disaster affecting Boston, Massachusetts, please contact GMO to confirm that your redemption request was received and is in good order.

          Failure to provide the Trust with a properly authorized redemption request or otherwise satisfy the Trust as to the validity of any change to the wire instructions or registration address may result in a delay in processing a redemption request, delay in remittance of redemption proceeds, or a rejection of the redemption request.

          As with all GMO Funds, if the Manager determines, in its sole discretion, that paying redemption proceeds wholly or partly in cash would be detrimental to the best interests of the Fund’s remaining shareholders, the Fund may pay the redemption proceeds in whole or in part with securities instead of cash. In particular, if market conditions deteriorate and the Manager believes a Fund’s redemption fee (if any) is not fair compensation for transaction costs, the Fund may limit cash redemptions (honoring redemptions with portfolio securities) to protect the interests of all Fund shareholders. Redemptions in-kind may require shareholders to enter into new custodial arrangements if they do not have accounts available for holding securities directly.

          If a redemption is paid in cash:

•

payment will generally be made by means of a federal funds transfer to the bank account designated in a recordable format by an authorized signatory in the GMO Trust Application to purchase the Fund shares being redeemed

•

designation of one or more additional bank accounts or any change in the bank accounts originally designated in the GMO Trust Application must be made in a recordable format by an authorized signatory according to the procedures in the GMO Trust Redemption Order Form

•

upon request, payment will be made by check mailed to the registration address (unless another address is specified according to the procedures in the GMO Trust Redemption Order Form).

          The Trust will not pay redemption proceeds to third-parties and does not offer check-writing privileges.

          If a redemption is paid with securities, you should note that:

	•		the securities will be valued as set forth under “Determination of Net Asset Value”
	•		the securities will be selected by the Manager in light of the Fund’s objective and may not represent a pro rata distribution of each security held in the Fund’s portfolio
	•		you may incur brokerage charges on the sale of the securities
	•		redemptions paid in securities are generally treated by shareholders for tax purposes the same as redemptions paid in cash
	•		the securities will be transferred and delivered by the Trust as directed in writing by an authorized person on your account.

          The Fund may suspend the right of redemption and may postpone payment for more than seven days:

	•		if the NYSE, the U.S. bond markets, and/or the Federal Reserve Bank are closed on days other than weekends or holidays
	•		during periods when trading on the NYSE is restricted
	•		during an emergency that makes it impracticable for the Fund to dispose of its securities or to fairly determine the net asset value of the Fund

•

during any other period permitted by the SEC for your protection.

          Pursuant to the Trust’s Amended and Restated Agreement and Declaration of Trust, the Trust has the unilateral right to redeem Fund shares held by a shareholder at any time if at that time: (i) the shares of the Fund or a class held by the shareholder have an aggregate net asset value of less than an amount determined from time to time by the Trustees; or (ii) the shares of the Fund or the class held by the shareholder exceed a percentage of the outstanding shares of the Fund or class determined from time to time by the Trustees. The Trustees have authorized GMO in its sole discretion to redeem shares to prevent a shareholder from becoming an affiliated person of the Fund.

          Top Funds may redeem shares of the Fund after the Cut-off Time and receive the current day’s price if the following conditions are met: (i) the Top Fund received a redemption request prior to the Cut-off Time on that day; and (ii) the redemption of the shares of the Fund is executed pursuant to an allocation predetermined by GMO prior to that day’s Cut-off Time.

           Submitting Your Redemption Request . Redemption requests can be submitted by mail or by facsimile to the Trust at the address/facsimile number set forth under “How to Purchase Shares — Submitting Your Purchase Order Form.” Redemption requests submitted by mail are “received” by the Trust when actually delivered to the Trust. Call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com to confirm that GMO received, made a good order determination regarding, and accepted your redemption request.

PURCHASE PREMIUMS AND REDEMPTION FEES

          Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non de minimis estimated portfolio transaction costs and other related costs (e.g., bid to ask spreads, stamp duties, and transfer fees) incurred by the Fund (directly or indirectly through investments in underlying funds) as a result of the purchase or redemption by allocating estimated transaction costs to the purchasing or redeeming shareholder. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). At present, the Fund does not charge any purchase premium or redemption fee. However, the Fund may impose a new purchase premium and/or redemption fee at any time.

MULTIPLE CLASSES AND ELIGIBILITY

          The Fund currently offers multiple classes of shares. The sole economic difference among the classes of shares described in this Private Placement Memorandum is in their shareholder service fee. Differences in the fee reflect the fact that, as the size of a client relationship increases, the cost to service that client decreases as a percentage of the client’s assets. Thus, the shareholder service fee generally is lower for classes requiring greater minimum investments.

          Eligibility to purchase Fund shares or different classes of Fund shares depends on the client’s meeting either (i) the minimum “Total Fund Investment,” which includes only a client’s total investment in the Fund, or (ii) the minimum “Total GMO Investment,” both set forth in the table below. No minimum additional investment is required to purchase additional shares of the Fund.

Minimum Investment Criteria for Class Eligibility

          A client’s Total GMO Investment equals the Manager’s estimate of the market value of all the client’s assets managed by GMO and its affiliates (i) at the time of the client’s initial investment, (ii) at the close of business on the last business day of each calendar quarter, or (iii) at other times as determined by the Manager (including those described below under “Conversions between Classes”) (each, a “Determination Date”). When purchasing shares of the Fund, investors should consult with the Manager to determine the applicable Determination Date and the share class for which they are eligible.

          Upon request GMO may permit a client to undertake in writing to meet the applicable Total Fund Investment or Total GMO Investment minimums over a specified period (a “Commitment Letter”).

          You should note:

	•		No minimum additional investment is required to purchase additional shares of the Fund for any class of shares.
	•		The Manager makes all determinations as to the aggregation of client accounts for purposes of determining eligibility. See the SAI for a discussion of factors the Manager considers relevant when making those determinations.
	•		Eligibility requirements for each class of shares are subject to change upon notice to shareholders.
	•		The Trust may waive eligibility requirements for certain persons, accounts or special situations. As of the date of this Private Placement Memorandum, these waivers include the waiver of eligibility requirements for (i) GMO Funds and other accounts over which the Manager has investment discretion that invest in other GMO Funds, (ii) GMO employees and their family members, and (iii) the Trustees of the Trust, each of which may invest in the least expensive class of those GMO Funds offered at the time of investment without regard to the amount invested.
	•		Investments through an intermediary generally are invested in Class III Shares.

Conversions between Classes

          As described in the Fund’s summary, in determining whether a client is eligible to purchase Fund shares, GMO considers each client’s Total Fund Investment and Total GMO Investment on each Determination Date. Based on this determination, and subject to the following, each client’s shares of the Fund eligible for conversion will be converted to the class of shares of the Fund with the lowest shareholder service fee for which the client satisfies all minimum investment requirements (or, to the extent the client already holds shares of that class, the client will remain in that class). Except as noted below, with respect to the Fund:

•

To the extent a client satisfies all minimum investment requirements for a class of shares then being offered that bears a lower shareholder service fee than the class held by the client on the Determination Date (generally at the close of business on the last business day of each calendar quarter), the client’s shares eligible for conversion generally will be automatically

			converted to that class within 45 calendar days following the Determination Date on a date selected by the Manager.
	•		If a client no longer satisfies all minimum investment requirements for the class of shares of the Fund held by the client on the last Determination Date of a calendar year (generally at the close of business on the last business day of the calendar year), the Fund generally will convert the client’s shares to the class it is then offering bearing the lowest shareholder service fee for which the client satisfies all minimum investment requirements (and which class will typically bear a higher shareholder service fee than the class then held by the client). If a client no longer satisfies all minimum investment requirements for any class of the Fund as of the last Determination Date of a calendar year, the Fund will convert the client’s shares to the class of the Fund then being offered bearing the highest shareholder service fee. Notwithstanding the foregoing, a client’s shares will not be converted to a class of shares bearing a higher shareholder service fee without at least 15 calendar days’ prior notice, and if the client makes an additional investment and/or the value of the client’s shares otherwise increases prior to the end of the notice period so as to satisfy all minimum investment requirements for the client’s current class of shares, the client will remain in the class of shares then held by the client. Solely for the purpose of determining whether a client has satisfied the minimum investment requirements for the client’s current class of shares, the value of the client’s shares is considered to be the greater of (i) the value of the client’s shares on the relevant Determination Date or (ii) the value of the client’s shares on the date that GMO reassesses the value of the client’s account for the purpose of sending notice of a proposed conversion. If the client is not able to make an additional investment in the Fund solely because the Fund is closed to new investment or is capacity constrained, the class of shares then held by the client will not be converted unless the Manager approves reopening the Fund to permit the client to make an additional investment. The conversion of a client’s shares to a class of shares bearing a higher shareholder service fee generally will occur within 60 calendar days following the last Determination Date of a calendar year or, in the case of conversion due to an abusive pattern of investments and/or redemptions, on any other date the Manager determines.

          The Fund may at any time without notice convert a client’s shares to the class it is then offering bearing the lowest shareholder service fee for which the client satisfied all minimum investment requirements (or, if the Fund has no such class, the class of that Fund bearing the highest shareholder service fee) if the client no longer satisfies all minimum investment requirements for the class of shares held by the client and: (i) the Manager believes the client has engaged in an abusive pattern of investments and/or redemptions (e.g., a large investment just before a Determination Date and a redemption right after the Determination Date), (ii) the client fails to meet the applicable Total Fund Investment or Total GMO Investment minimum by the time specified in the client’s Commitment Letter, or (iii) the total expense ratio borne by the client immediately following the conversion is equal to or less than the total expense ratio borne by the client immediately prior to such conversion (after giving effect to any applicable fee and expense waivers or reimbursements).

          The Fund has been advised by counsel that, for tax purposes, the conversion of a client’s investment from one class of shares of the Fund to another class of shares of the Fund should not result in the recognition of gain or loss in the shares that are converted. The client’s tax basis in the new class of shares immediately after the conversion should equal the client’s basis in the converted shares immediately before conversion, and the holding period of the new class of shares should include the holding period of the converted shares.

DISTRIBUTIONS AND TAXES

          The Fund’s policy is to declare and pay distributions of its net investment income, if any, semi-annually, although it is permitted to, and will from time to time, declare and pay distributions of net investment income, if any, more frequently (e.g., monthly). The Fund also intends to distribute net realized capital gains, whether from the sale of securities held by the Fund for not more than one year (net short-term capital gains) or from the sale of securities held by the Fund for more than one year (net long-term capital gains), if any, at least annually. In addition, the Fund may, from time to time and at its discretion, make unscheduled distributions in advance of large redemptions by shareholders or as otherwise deemed appropriate by the Fund. From time to time, distributions by the Fund could constitute, for U.S. federal income tax purposes, a return of capital to shareholders. Shareholders should read the description below for information regarding the tax character of distributions from the Fund to shareholders.

          All dividends and/or distributions are reinvested in additional shares of the Fund, at net asset value, unless a shareholder elects to receive cash. Shareholders may elect to receive cash by marking the appropriate boxes on the GMO Trust Application or by writing to the Trust. No purchase premium is charged on reinvested dividends or distributions.

          The following is a general summary of the principal U.S. federal income tax consequences to shareholders investing in the Fund. The Fund’s shareholders may include certain other GMO Funds. The summary below does not address tax consequences to shareholders of those other GMO Funds. Shareholders of those other GMO Funds should refer to the prospectuses or private placement memoranda (as applicable) and statements of additional information for those GMO Funds for a summary of the tax consequences applicable to them. It is important for you to note:

	•		The Fund is treated as a separate taxable entity for U.S. federal income tax purposes and intends to qualify each year as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended.
	•		For U.S. federal income tax purposes, distributions of net investment income are generally taxable as ordinary income.
	•		For U.S. federal income tax purposes, taxes on distributions of net realized capital gains generally are determined by how long the Fund owned the investments that generated them, rather than by how long a shareholder has owned shares in the Fund. Distributions of net realized capital gains from the sale of investments that the Fund owned for more than one year and that are properly designated by the Fund as capital gain dividends generally are taxable to shareholders as long-term capital gains. Distributions of net realized capital gains from the sale of investments that the Fund owned for one year or less generally are taxable to shareholders as ordinary income.
	•		The Fund may make total distributions during a taxable year in an amount that exceeds the Fund’s net investment income and net realized capital gains for that year, in which case the excess generally would be treated as a return of capital, which would reduce a shareholder’s tax basis in its applicable shares, with any amounts exceeding such basis treated as capital gain. A return of capital is not taxable to shareholders to the extent such amount does not exceed a shareholder’s tax basis, but it reduces a shareholder’s tax basis in its shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the shareholder of its shares.

	•		If the Fund realizes capital losses in excess of capital gains for any taxable year, these excess losses will carry over and can be used to offset capital gains realized in succeeding taxable years until either (a) the end of the eighth succeeding taxable year or (b) such losses have been fully utilized to offset net realized capital gains, whichever comes first. The Fund’s ability to utilize these and certain other losses to reduce distributable net realized capital gains in succeeding taxable years may be limited by reason of direct or indirect changes in the actual or constructive ownership of the Fund.
	•		For taxable years beginning before January 1, 2011, distributions of net investment income properly designated by the Fund as derived from “qualified dividend income” will be taxable to shareholders taxed as individuals at the rates applicable to long-term capital gain, provided holding period and other requirements are met at both the shareholder and Fund levels. The Fund does not expect a significant portion of its distributions to be derived from qualified dividend income. Long-term capital gain rates applicable to most individuals have been reduced to 15% (with a 0% rate applying to taxpayers in the 10% and 15% rate brackets) for taxable years beginning before January 1, 2011. It is currently unclear whether Congress will extend, eliminate or change the “qualified dividend income” provision or the reduction of long-term capital gain rates for individuals to or for tax years beginning on or after January 1, 2011.
	•		Distributions by the Fund generally are taxable to a shareholder even if they are paid from income or gains earned by the Fund before that shareholder invested in the Fund (and accordingly the income or gains were included in the price the shareholder paid for the Fund’s shares). Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares.
	•		Distributions by the Fund to retirement plans that qualify for tax-exempt treatment under U.S. federal income tax laws generally will not be taxable. Special tax rules apply to investments through such plans. You should consult your tax advisor to determine the suitability of the Fund as an investment through such a plan and the tax treatment of distributions from such a plan.
	•		Any gain resulting from a shareholder’s sale, exchange, or redemption of Fund shares generally will be taxable to the shareholder as short-term or long-term capital gain, depending on how long the Fund shares were held by the shareholder.
	•		Certain of the Fund’s investment practices, including derivative transactions, hedging activities generally, and securities lending activities (if any), as well as the Fund’s investments in certain types of securities, including debt obligations issued or purchased at a discount, asset-backed securities, assets “marked to the market” for U.S. federal income tax purposes, and, potentially, so-called “indexed securities” (such as inflation-indexed bonds), will be subject to special and complex U.S. federal income tax provisions. These special rules may affect the timing, character, and/or amount of the Fund’s distributions and, in some cases, may cause the Fund to liquidate investments at a time when it is not advantageous to do so. See “Taxes” in the SAI for more information about the tax consequences of the Fund’s specific investment practices and investments.
	•		Any investment by the Fund in foreign securities may be subject to foreign withholding or other taxes on dividends, interest, or capital gains. The Fund may otherwise be subject to

			foreign taxation on repatriation proceeds generated from those securities or to other transaction-based foreign taxes on those securities. Those withholding and other taxes will reduce the Fund’s yield on foreign securities. The foreign withholding and other tax rates applicable to the Fund’s investments in certain foreign jurisdictions may be higher if the Fund has a significant number of non-U.S. shareholders than if it has fewer non-U.S. shareholders. It is not expected that shareholders will be entitled to claim a credit or deduction for foreign taxes paid by the Fund. In addition, the Fund’s investments (if any) in foreign securities (other than equity securities), foreign currencies or foreign currency derivatives may accelerate Fund distributions to shareholders and increase the distributions taxed to shareholders as ordinary income. See “Taxes” in the SAI for more information.
	•		Under the GMO Funds’ securities lending arrangements, when a dividend is paid to a Fund security out on loan, the borrower is required to pay to that Fund a substitute payment at least equal, on an after-tax basis, to the dividend that the Fund would have received if it had received the dividend directly. Because some borrowers of foreign securities may be subject to levels of taxation that are lower than the rates applicable to the Fund, some borrowers are likely to be motivated by the ability to earn a profit on those differential tax rates and to pay that Fund for the opportunity to earn that profit. In the United States, certain swap and securities lending transactions designed to enable non-U.S. persons to reduce otherwise applicable U.S. withholding taxes on U.S. stock dividends have received the attention of U.S. lawmakers. In response, Congress enacted legislation in March 2010 to limit these practices. There can be no assurance that similar legislation will not be adopted in other jurisdictions with respect to foreign securities or that foreign taxing authorities will not otherwise challenge beneficial tax results arising from swap or securities lending arrangements.
	•		To the extent the Fund invests in other GMO Funds or other investment companies treated as partnerships or RICs for U.S. federal income tax purposes, the Fund’s distributions could vary in terms of their timing, character, and/or amount from what the Fund’s distributions would have been had the Fund invested directly in the portfolio securities and other assets held by the underlying investment companies. See “Taxes” in the SAI for more information.

          The above is a general summary of the principal U.S. federal income tax consequences of investing in the Fund for shareholders who are U.S. citizens, residents, or domestic corporations. You should consult your own tax advisors about the precise tax consequences of an investment in the Fund in light of your particular tax situation, including possible foreign, state, local, or other applicable taxes (including the federal alternative minimum tax).

          Most states permit mutual funds, such as the Fund, to “pass through” to their shareholders the state tax exemption on income earned from investments in certain direct U.S. Treasury obligations, as well as some limited types of U.S. government agency securities, so long as a fund meets all applicable state requirements. Therefore, you may be allowed to exclude from your state taxable income distributions made to you by the Fund, to the extent attributable to interest the Fund earned on such investments. The availability of these exemptions varies by state. You should consult your tax advisors regarding the applicability of any such exemption to your situation.

          See “Taxes” in the SAI for more information, including a summary of certain tax consequences of investing in the Fund for non-U.S. shareholders.

INVESTMENT IN OTHER GMO FUNDS

           GMO U.S. Treasury Fund. GMO U.S. Treasury Fund (“U.S. Treasury Fund”), a series of the Trust, is offered through a separate prospectus. U.S. Treasury Fund is managed by GMO.

          U.S. Treasury Fund pays an investment management fee to the Manager at the annual rate of 0.08% of U.S. Treasury Fund’s average daily net assets. Subject to Excluded Expenses, the Manager has contractually agreed to reimburse U.S. Treasury Fund to the extent U.S. Treasury Fund’s total annual operating expenses exceed 0.08% of U.S. Treasury Fund’s average daily net assets. This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by U.S. Treasury Fund’s Board of Trustees. In addition to this contractual expense limitation, the Manager has voluntarily agreed to waive U.S. Treasury Fund’s management fee and to reimburse U.S. Treasury Fund to the extent U.S. Treasury Fund’s total annual operating expenses exceed 0.00% of U.S. Treasury Fund’s average daily net assets (excluding Excluded Expenses). The Manager may change or terminate these voluntary waivers and reimbursements at any time. During any period for which these voluntary waivers and reimbursements are in effect, U.S. Treasury Fund will incur management fees at an annual rate lower than 0.08% of U.S. Treasury Fund’s average daily net assets, and, as a result net annual operating expenses for U.S. Treasury Fund will be lower. For these purposes, “Excluded Expenses” are expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

          U.S. Treasury Fund’s investment objective is liquidity and safety of principal with current income as a secondary objective.

          U.S. Treasury Fund primarily invests in U.S. Treasury securities. Under normal circumstances, U.S. Treasury Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Direct U.S. Treasury Obligations and repurchase agreements collateralized by these Obligations. “Direct U.S. Treasury Obligations” include U.S. Treasury bills, bonds, and notes and other securities issued by the U.S. Treasury, such as Separately Traded Registered Interest and Principal Securities (STRIPS) and other zero-coupon securities, that are backed by the full faith and credit of the U.S. government as well as repurchase agreements relating to the foregoing.

          U.S. Treasury Fund may enter into repurchase agreements, under which U.S. Treasury Fund purchases a security backed by the full faith and credit of the U.S. government from a seller who simultaneously commits to repurchase, on an agreed upon date in the future, the security from U.S. Treasury Fund at the original purchase price plus an agreed upon amount representing the original purchase price plus interest. The counterparties in repurchase agreements are typically broker-dealers and banks, and the safety of the arrangement is dependent on, among other things, U.S. Treasury Fund’s having an interest in the security that can be realized in the event of the insolvency of the counterparty.

          In addition to Direct U.S. Treasury Obligations, U.S. Treasury Fund also may invest in other fixed-income securities that are backed by the full faith and credit of the U.S. government, such as guaranteed securities issued by the Government National Mortgage Association (GNMA) and the Federal Deposit Insurance Corporation (FDIC). U.S. Treasury Fund also may invest in unaffiliated money market funds.

          U.S. Treasury Fund normally invests in Direct U.S. Treasury Obligations and other fixed-income securities backed by the full faith and credit of the U.S. government with a stated or remaining maturity of one year or less. This may not be true of Direct U.S. Treasury Obligations purchased pursuant to repurchase agreements, and, therefore, if the counterparty to the repurchase agreement defaults, U.S. Treasury Fund may own a security with a stated or remaining maturity of greater than one year.

          Although U.S. Treasury Fund primarily invests in short-term obligations, it is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds. In addition, the Manager normally seeks to maintain an interest rate duration of one year or less for U.S. Treasury Fund’s portfolio.

          In selecting U.S. Treasury securities for U.S. Treasury Fund’s portfolio, the Manager focuses primarily on the relative attractiveness of different obligations (such as bonds, notes, or bills), which can vary depending on the general level of interest rates as well as supply/demand imbalances and other market conditions.

          Other GMO Funds may invest in U.S. Treasury Fund to achieve exposure to U.S. Treasury securities, to invest cash, and/or to seek to generate a return similar to yields on U.S. Treasury securities.

          U.S. Treasury Fund’s benchmark is the Citigroup 3 Month Treasury Bill Index, an independently maintained and published short-term Treasury bill index.

          To the extent the Fund invests in U.S. Treasury Fund, it is subject to all of the risks to which U.S. Treasury Fund is exposed. The principal risks of an investment in U.S. Treasury Fund include Market Risk — Fixed Income Securities, Credit and Counterparty Risk, Focused Investment Risk, Large Shareholder Risk, Liquidity Risk, Management and Operational Risk, Market Disruption and Geopolitical Risk, and Fund of Funds Risk. Shareholders of the Fund are indirectly exposed to these risks, in addition to all risks associated with their investment in the Fund.

GMO TRUST

PRIVATE PLACEMENT MEMORANDUM

June 25, 2010

GMO High Quality Short-Duration Bond Fund

40 Rowes Wharf, Boston, Massachusetts 02110

Class III, Class VI

           GMO High Quality Short-Duration Bond Fund (the “Fund”) is a separate investment portfolio of GMO Trust (the “Trust”). The Trust is an open-end management investment company and operates as a “series investment company” that consists of separate series of investment portfolios, including the Fund. Other portfolios are described in separate prospectuses or private placement memoranda. At this time, the Fund does not intend to offer its shares publicly or to make them available other than to other funds of the Trust (“GMO Funds”) and certain other accredited investors.

Investment Manager
Grantham, Mayo, Van Otterloo & Co. LLC

          This Private Placement Memorandum concisely describes the information which you ought to know about the Fund before investing. Please read this memorandum carefully and keep it for further reference. A Statement of Additional Information dated June 25, 2010, as revised from time to time (“SAI”), is available free of charge by writing to GMO Shareholder Services, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling 1-617-346-7646. The SAI, which contains more detailed information about the Fund, has been filed with the Securities and Exchange Commission (“SEC”) and is incorporated by reference into this Private Placement Memorandum.

          THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE TRANSFERRED OR RESOLD UNLESS SO REGISTERED OR IN TRANSACTIONS EXEMPT THEREFROM. HOWEVER, THE SECURITIES ARE REDEEMABLE AS DESCRIBED IN THIS PRIVATE PLACEMENT MEMORANDUM. IN CERTAIN CASES INVESTORS MAY BE REDEEMED “IN-KIND” AND RECEIVE PORTFOLIO SECURITIES HELD BY THE FUND IN LIEU OF CASH UPON REDEMPTION.

          THIS PRIVATE PLACEMENT MEMORANDUM AND THE INFORMATION CONTAINED HEREIN ARE FOR THE EXCLUSIVE USE OF THE RECIPIENT FOR THE SOLE PURPOSE OF EVALUATING THE PRIVATE PLACEMENT OF SHARES OF THE FUND DESCRIBED HEREIN. IT MAY NOT BE REPRODUCED, PROVIDED, OR DISCLOSED TO OTHERS, OR USED FOR ANY OTHER PURPOSE, WITHOUT WRITTEN AUTHORIZATION, AND DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SHARES OF THE FUND TO ANY ENTITY OR INDIVIDUAL NOT POSSESSING THE QUALIFICATIONS DESCRIBED IN THIS MEMORANDUM.

          NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR PROVIDE ANY INFORMATION WITH RESPECT TO THE SHARES EXCEPT SUCH INFORMATION AS IS CONTAINED IN THIS MEMORANDUM AND IN THE SAI OR IN OTHER MATERIALS APPROVED BY THE TRUST. NO SALES MADE IN RELIANCE ON THIS DOCUMENT SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN MATTERS DISCUSSED HEREIN SINCE THE DATE HEREOF.

FUND SUMMARY

Purchase and Sale of Fund Shares

          Currently, shares of the Fund are principally available for purchase by other GMO Funds and certain other accredited investors. All investors must be “accredited investors” as defined in Regulation D under the Securities Act of 1933.

          Eligibility to purchase Fund shares or different classes of Fund shares depends on the client’s meeting either (i) the minimum “Total Fund Investment,” which includes only a client’s total investment in the Fund, or (ii) the minimum “Total GMO Investment,” both set forth in the table below. No minimum additional investment is required to purchase additional shares of the Fund.

Minimum Investment Criteria for Class Eligibility

          Fund shares are redeemable, and under ordinary circumstances you may redeem the Fund’s shares when both the NYSE and the U.S. bond markets are open for business. Redemption requests should be submitted directly to the Trust. For instructions on redeeming shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com.

Tax Information

          The Fund normally distributes net investment income and net realized capital gains, if any, to shareholders. These distributions are generally taxable to you as ordinary income or capital gains, unless you are an entity that is exempt from income tax or are investing through a tax-advantaged account. If you are investing through a tax-advantaged account, you may be taxed upon withdrawal of monies from that account.

Principal Investment Strategies

          The Fund seeks to add value relative to its benchmark to the extent consistent with the preservation of capital and liquidity. Under normal circumstances, the Fund invests directly and indirectly (e.g., through other GMO Funds or derivatives) at least 80% of its assets in high quality bonds (the “Name Policy”) (see “Name Policy” below for more information).

          To implement its investment strategies, the Fund primarily invests in high quality U.S. and foreign fixed income securities. The Fund may invest in fixed income securities issued by a wide range of private issuers and, to a lesser extent, securities issued by federal, state, local, and foreign governments (including securities neither guaranteed nor insured by the U.S. government). The Fund may invest in asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest in corporate debt securities, money market instruments, and commercial paper, and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund also may use other exchange-traded and over-the-counter (“OTC”) derivatives. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, and, as a result, it may be leveraged in relation to its assets.

          The Fund’s fixed income securities may include all types of interest rate, payment, and reset terms, including adjustable rate, fixed rate, zero coupon, contingent, deferred, payment-in-kind, and auction rate features. While the Fund primarily invests in high quality bonds, the Fund may invest in securities that are not high quality and may hold bonds and other fixed income securities whose ratings after they were acquired were reduced below high quality.

          The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund (“U.S. Treasury Fund”), another series of GMO Trust described in a separate prospectus (see “Investment in Other GMO Funds” below for a more detailed description of U.S. Treasury Fund’s investment objectives and strategies).

          In selecting fixed income securities for the Fund’s portfolio, the Manager focuses primarily on the securities’ credit quality. The Manager uses fundamental investment techniques to identify the credit risk associated with investments in fixed income securities and bases its investment decisions on that assessment.

          If deemed prudent by the Manager, the Fund will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. The Fund may not achieve its investment objective while it is taking temporary defensive measures.

          The Manager normally seeks to maintain an estimated interest rate duration of 365 days or less for the Fund’s portfolio. The Fund’s dollar-weighted average portfolio maturity may be substantially longer than its dollar-weighted average interest rate duration. The Manager estimates the Fund’s dollar-weighted average interest rate duration by aggregating the durations of the Fund’s direct and indirect individual holdings and weighting each holding based on its market value. Duration needs to be estimated when the obligor to a fixed income security is required to prepay principal and/or interest on the security and the payments are not denominated in U.S. dollars. The Manager may estimate duration by traditional means or through empirical analysis, which may produce results that differ from those produced by traditional methods of calculating duration.

          Unless otherwise specified in this Private Placement Memorandum or in the SAI, the Manager is not obligated to and generally will not consider tax consequences when seeking to achieve the Fund’s investment objective (e.g., the Fund may engage in transactions that are not tax efficient for U.S. federal income or other federal, state, local, or non-U.S. tax purposes). Portfolio turnover is not a principal consideration when the Manager makes investment decisions for the Fund. Based on its assessment of market conditions, the Manager may cause the Fund to trade more frequently at some times than at others. High turnover rates may adversely affect the Fund’s performance by generating higher transaction costs. Additionally, portfolio turnover may give rise to additional taxable income for shareholders, including through the realization of capital gains or other types of income that are taxable to Fund shareholders when distributed to them unless the shareholders themselves are exempt from taxation or otherwise investing in the Fund through a tax-advantaged account. If portfolio turnover results in the recognition of short-term capital gains, those gains typically are taxed to shareholders, when distributed to them, at ordinary income tax rates. See “Distributions and Taxes” below for more information about the tax consequences of these types of income.

           When used in this Private Placement Memorandum, the term “invest” includes both direct investing and indirect investing and the term “investments” includes both direct investments and indirect investments. For example, the Fund may invest indirectly by investing in another fund or by investing in derivatives and synthetic instruments. In addition, the term “fixed income securities” includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option). For purposes of this Private Placement Memorandum (a) the term “bond” refers to any fixed income security, including instruments with variable interest payments, (b) the term “duration” is defined as the weighted measure of interest rate sensitivity of a fixed income security, and (c) the term “total return” includes both capital appreciation and income.

          For purposes of this Private Placement Memorandum, investment-grade securities/commercial paper that are given a rating of Aa/P-1 or better by Moody’s Investors Service, Inc. (“Moody’s”) or AA/A-1 or better by Standard & Poor’s Ratings Services (“S&P”) are referred to as “high quality.” In addition, in this Private Placement Memorandum, the term “investment grade” refers to a rating of Baa3/P-2 or better given by Moody’s or BBB-/A-2 or better given by S&P to a particular fixed income security/commercial paper, and the term “below investment grade” refers to any rating below Baa3/P-2 given by Moody’s or below BBB-/A-2 given by S&P to a particular fixed income security/commercial paper. Fixed income securities rated below investment grade are also known as high yield or “junk” bonds. Securities referred to as investment grade, below investment grade, or high quality include not only securities rated by Moody’s and/or S&P, but also securities unrated by Moody’s or S&P that are determined by the Manager to have credit qualities comparable to securities rated by Moody’s or S&P as investment grade, below investment grade, or high quality, as applicable.

           Annual Fund Operating Expenses — Other Expenses. The amounts listed under “Other expenses” in the “Annual Fund Operating Expenses” table included in the Fund’s summary reflect an annualized estimate of direct expenses associated with an investment in the Fund for the Fund’s initial fiscal year. The Fund may invest in other GMO Funds and certain other pooled investment vehicles (“underlying funds”), and the indirect net expenses associated with the Fund’s investment (if any) in underlying funds are reflected in “Other expenses” if those expenses are less than 0.01% of the average net assets of the Fund. Indirect net expenses associated with the Fund’s investment in underlying funds are estimated to be less than 0.01% of the Fund’s average net assets for the Fund’s initial fiscal year. These amounts do not include expenses associated with investments in the securities of unaffiliated issuers unless those issuers hold themselves out to be investment companies. Actual indirect expenses will vary depending on the particular underlying funds in which the Fund invests.

           Benchmark. The Fund’s benchmark is the J.P. Morgan U.S. 3 Month Cash Index, which is independently maintained and published by J.P. Morgan. The Index measures the total return performance of three-month U.S. dollar Euro-deposits.

Description of Principal Risks

          Investing in the Fund involves many risks, and factors that may affect the Fund’s portfolio as a whole, called “principal risks,” are summarized in this section. The risks of investing in the Fund depend on the types of investments in its portfolio and the investment strategies the Manager employs on its behalf. This section describes the nature of these principal risks and some related risks, but is not intended to include every potential risk. The Fund could be subject to additional risks because the types of investments it makes and market conditions may change over time. The SAI includes more information about the Fund and its investments.

          Because the Fund invests in other GMO Funds and unaffiliated money market funds (as indicated under “Principal Investment Strategies” in “Additional Information About The Fund’s Investment Strategies, Risks, And Expenses”), it is exposed to all the risks to which the underlying funds in which it invests are exposed. Therefore, unless otherwise noted herein, the principal risks summarized below include both direct and indirect principal risks of the Fund, and as indicated above, references in this section to investments made by the Fund include those made both directly by the Fund and indirectly by the Fund through another GMO Fund or an unaffiliated money market fund.

          The Fund, by itself, generally is not intended to provide a complete investment program. Investment in the Fund is intended to serve as part of a diversified portfolio of investments. An investment in the Fund is not a bank deposit and, therefore, is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

          The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified.

•

MARKET RISK—FIXED INCOME SECURITIES

          The Fund is subject to market risk, which is the risk of unfavorable changes in the value of Fund holdings. The following summarizes certain general market risks associated with investments in or exposure to fixed income securities.

          Because the Fund invests a significant portion of its assets in fixed income securities (including bonds, notes, bills, synthetic debt instruments, and asset-backed securities), it is subject to various market risks. These risks include, but are not limited to, loss on investments in asset-backed and other fixed income securities, lack of liquidity of these investments and impact of fluctuating interest rates. The most significant market risk for the Fund is that the securities in which it invests experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying

assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. See “Credit and Counterparty Risk” below for more information about credit risk.

          With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.

          The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and the Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.

          The risks associated with asset-backed securities are particularly pronounced for the Fund. The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. See “Focused Investment Risk” below for more information about risks of investing in correlated sectors. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.

          Besides the market risks associated with investing in asset-backed securities, the Fund is exposed to liquidity risk and interest rate risk. Liquidity risk has become more pronounced for other types of fixed income securities because of the deterioration in worldwide economic and liquidity conditions discussed above and under “Liquidity Risk” below. Even in the absence of a credit downgrade or default, the price of fixed income securities held by the Fund may decline significantly due to a reduction in market demand.

          In addition, a principal risk of the Fund is that an increase in prevailing interest rates will cause the value of its investments to decline. The risk associated with increases in interest rates (also called “interest rate risk”) is generally greater when the Fund invests in fixed income securities with longer durations and in some cases duration can increase.

          The extent to which a security’s value moves with interest rates is referred to as interest rate duration, which can be measured mathematically or empirically. Longer-maturity investments generally have longer interest rate durations because the investment’s fixed rate is locked in for longer periods of time. Floating-rate or adjustable-rate securities, however, generally have shorter interest rate durations because their interest rates are not fixed but rather float up and down with the level of prevailing interest rates. The Fund also is permitted to invest, from time to time, in fixed income securities paying no interest, such as zero coupon and principal-only securities. To the extent the Fund makes investments in fixed income securities paying no interest, it will be exposed to additional interest rate risk.

•

CREDIT AND COUNTERPARTY RISK

          This is the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase agreement or reverse repurchase agreement or other OTC derivatives contract, or a borrower of the Fund’s securities (including a borrower of the Fund’s portfolio securities pursuant to the GMO Funds’ securities lending program) will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise to honor its obligations. This risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.

          Credit risk for fixed income securities is the risk that the issuer will be unable to make scheduled contractual payments of principal and interest. The value of a fixed income security normally will decline as a result of the issuer’s defaulting on its payment obligations or the market’s expectation of a default, which may be triggered by the downgrading of the issuer’s credit rating.

          All fixed income securities are subject to credit risk. The risk varies depending upon whether the issuer is a corporation or domestic or foreign government (or sub-division or instrumentality) and whether the particular security has a priority in payment of principal and interest. U.S. government securities are subject to varying degrees of credit risk depending upon whether the securities are supported by the full faith and credit of the United States, supported by the ability to borrow from the U.S. Treasury, supported only by the credit of the issuing U.S. government agency, instrumentality, or corporation, or otherwise supported by the United States. For example, issuers of many types of U.S. government securities (e.g., the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and Federal Home Loan Banks), although chartered or sponsored by Congress, are not funded by Congressional appropriations and their fixed income securities, including mortgage-backed and other asset-backed securities, are neither guaranteed nor insured by the U.S. government. These securities are subject to more credit risk than U.S. government securities that are supported by the full faith and credit of the United States (e.g., U.S. Treasury bonds).

          As noted under “Market Risk — Fixed Income Securities” above, asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans and credit-card receivables. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations”). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal and other risks if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The

obligations of issuers also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors.

          The Fund also will be exposed to credit risk on the reference security to the extent it writes protection under credit default swaps. See “Derivatives Risk” below for more information regarding risks associated with the use of credit default swaps.

          Credit risk is particularly pronounced for below investment grade securities (also known as “junk bonds”). During periods of economic uncertainty and change, the market price of the Fund’s investments in below investment grade securities may be particularly volatile. Although offering the potential for higher investment returns, junk bonds often are less liquid than higher quality securities, present a greater risk of default and are more susceptible to real or perceived adverse economic and competitive industry conditions. Often junk bonds also are subject to greater sensitivity to interest rate and economic changes and present valuation difficulties. The market price of these securities can change suddenly and unexpectedly. The Fund is subject to this risk to the extent that it directly or indirectly acquires or holds below investment grade securities.

          In addition, the Fund is exposed to counterparty risk to the extent it uses OTC derivatives (such as swap contracts and reverse repurchase agreements), enters into repurchase agreements, or lends its portfolio securities. See “Derivatives Risk” below for more information. If a counterparty’s obligation to the Fund is not collateralized, then the Fund is essentially an unsecured creditor of the counterparty. If the counterparty defaults, the Fund will have contractual remedies, but the Fund may be unable to enforce them. The Fund is subject in particular to the creditworthiness of the contracts’ counterparties because some types of swap contracts used by the Fund may have durations longer than six months (and, in some cases, a number of decades). In addition, the creditworthiness of a counterparty may be adversely affected by larger than average volatility in the markets, even if the counterparty’s net market exposure is small relative to its capital. Counterparty risk is still present even if a counterparty’s obligations are secured by collateral because the Fund’s interest in the collateral may not be perfected or additional collateral may not be promptly posted as required. OTC derivatives generally involve greater credit and counterparty risk than exchange-traded derivatives. The Fund may have significant exposure to a single counterparty as a result of its use of swaps and other OTC derivatives.

          The Fund is also subject to counterparty risk to the extent it executes a significant portion of its securities transactions through a single broker or dealer. If the broker or dealer fails to meet its contractual obligations, goes bankrupt, or otherwise experiences a business interruption, the Fund could miss investment opportunities or be unable to dispose of investments it would prefer to sell, resulting in losses for the Fund.

•

LIQUIDITY RISK

          The effect of liquidity risk is particularly pronounced when low trading volume, lack of a market maker, a large position, or legal restrictions limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. In addition, holding less liquid securities increases the likelihood that the Fund will honor redemption requests in-kind. Because the Fund’s principal investment strategies involve the use of derivatives (in particular OTC derivatives) and investing in fixed income securities, in particular asset-backed securities, it has increased exposure to liquidity risk and the Fund’s investments may be less liquid than other types of securities. These types of investments are more likely to be fair valued (see “Determination of Net Asset Value”). Less liquid securities are more susceptible to loss of value and their prices may decline more than other securities when markets decline generally.

          The Fund is also exposed to liquidity risk when it has an obligation to purchase particular securities (e.g., as a result of entering into reverse repurchase agreements, writing a put, or closing out a short position). Some of the markets, exchanges, or securities in which the Fund invests may prove to be less liquid and this would affect the price at which, and the time period in which, the Fund may liquidate

positions to meet redemption requests or other funding requirements. The Fund may buy securities that are less liquid than those in its benchmark. Although U.S. Treasury securities have historically been among the most liquid fixed income investments, there can be no assurance that these securities will not become less liquid in the future.

          As noted under “Market Risk — Fixed Income Securities” above, because of the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, liquidity risk has been pronounced for funds that invest in fixed income securities, particularly asset-backed securities. The Fund may find it necessary to sell these securities at distressed prices or meet redemption requests in-kind.

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FOCUSED INVESTMENT RISK

          Funds whose investments are focused in particular countries, regions, sectors, or companies or in industries with high positive correlations to one another (e.g., different industries within broad sectors, such as technology or financial services) are subject to greater overall risk than funds whose investments are more diversified. A fund that focuses its investments in a particular type of security or sector, or in securities of companies in a particular industry, is vulnerable to events affecting those securities, sectors, or companies. Securities, sectors, or companies that share common characteristics are often subject to similar business risks and regulatory burdens, and often react similarly to specific economic, market, political, or other developments. This risk may be particularly pronounced for the Fund to the extent the Fund has significant exposure to asset-backed securities. As noted under “Market Risk—Fixed Income Securities” above, sectors of the securitized credit markets have become more highly correlated since the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008.

•

MARKET DISRUPTION AND GEOPOLITICAL RISK

          The Fund is subject to the risk that geopolitical events will disrupt securities markets and adversely affect global economies and markets. The wars in Iraq and Afghanistan have had a substantial effect on economies and securities markets in the U.S. and worldwide. Terrorism in the U.S. and around the world has had a similar global impact and has increased geopolitical risk. The terrorist attacks of September 11, 2001 resulted in the closure of some U.S. securities markets for four days, and similar future events are possible. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, systemic market dislocations of the kind surrounding the insolvency of Lehman Brothers in 2008 may be highly disruptive to economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Fund’s investments. At such times, the Fund’s exposure to the risks described elsewhere in this section, including market risk, liquidity risk, and credit and counterparty risk, will likely increase. Market disruptions can also prevent the Fund from implementing its investment program for a period of time and achieving its investment objective. For example, a disruption may cause the Fund’s derivatives counterparties to discontinue offering derivatives on some underlying commodities, securities, reference rates, or indices or to offer such products on a more limited basis.

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LARGE SHAREHOLDER RISK

          To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that these shareholders will purchase or redeem Fund shares in large amounts and/or on a frequent basis. These transactions could adversely affect the Fund if it is forced to sell portfolio securities to raise the cash that is necessary to

satisfy shareholder redemption requests or purchase portfolio securities to invest cash. This risk is particularly pronounced when one shareholder owns a substantial portion of the Fund. A substantial percentage of the Fund may be held by other GMO Funds and/or separate accounts managed by the Manager for its clients. Asset allocation decisions by the Manager may result in substantial redemptions from (or investments into) the Fund. These transactions may adversely affect the Fund’s performance to the extent that the Fund is required to sell investments (or invest cash) at times when it would not otherwise do so. These transactions also may accelerate the realization of taxable income to shareholders if such sales of investments resulted in gains, and also may increase transaction costs. These transactions potentially limit the use of any capital loss carryforwards and certain other losses to offset future realized capital gains (if any) and may limit or prevent the Fund’s ability to use tax equalization. To the extent the Fund invests in other GMO Funds having large shareholders, the Fund is indirectly subject to this risk.

•

MANAGEMENT AND OPERATIONAL RISK

          The Fund is subject to management risk because it relies on the Manager’s ability to achieve its investment objective. The Manager uses proprietary investment techniques and risk analyses in making investment decisions for the Fund, but there is no assurance that the Manager will achieve the desired results and the Fund may incur significant losses. The Fund generally does not take temporary defensive positions and instead generally stays fully invested in fixed income securities and related derivative instruments.

          The Fund also is subject to operational risk associated with the Manager’s provision of investment management, administrative, and shareholder services to the Fund. Operational risk is the risk that deficiencies in the Manager’s internal systems or controls, or in those of a service provider to whom the Manager has contractually delegated responsibilities, will cause losses for the Fund or hinder Fund operations. Operational risk results from inadequate procedures and controls, human error, and system failures by the Manager or a service provider. For example, trading delays or errors (both human and systematic) caused by the Manager could prevent the Fund from purchasing a security that the Manager expects will appreciate in value, thus reducing the Fund’s opportunity to benefit from the security’s appreciation. The Manager is not contractually liable to the Fund for losses associated with operational risk absent the Manager’s willful misfeasance, bad faith, gross negligence, or reckless disregard of its contractual obligations to provide services to the Fund.

•

DERIVATIVES RISK

          The Fund may invest in derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other OTC contracts. Derivatives may relate to securities, interest rates, currencies or currency exchange rates, inflation rates, commodities, and related indices. The SAI contains a description of the various types and uses of derivatives in the Fund’s investment strategies.

          The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it

under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.

          Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund. Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.

          Derivatives also present risks described elsewhere in this “Description of Principal Risks” section, including market risk, liquidity risk, currency risk, and credit and counterparty risk. Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.

          There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of a Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.

          Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by a shareholder.

          The risks of derivatives are particularly pronounced for Fund because it uses a variety of exchange-traded and OTC derivatives to implement its investment programs. In addition, when, as an alternative to purchasing bonds directly, the Fund uses credit default swaps to obtain synthetic long exposure to a fixed income security such as a debt instrument or index of debt instruments, the Fund is exposed to the risk that it will be required to pay the notional value of the swap contract in the event of a default.

          Swap contracts and other OTC derivatives are highly susceptible to liquidity risk (see “Liquidity Risk” above) and credit and counterparty risk (see “Credit and Counterparty Risk” above), and are subject to documentation risks. See also “Leveraging Risk” below.

•

LEVERAGING RISK

          The Fund’s use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged (i.e., the Fund’s exposure to underlying securities, assets, or currencies exceeds its net asset value). Leverage increases the Fund’s portfolio losses when the value of its investments declines. Because many derivatives have a leverage component (i.e., a notional value in excess of the assets needed to establish and/or maintain the derivative position), adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the amount invested in the derivative itself. In the case of swaps, the risk of loss generally is related to a notional principal amount, even if the parties have not made any initial investment. Some derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A Fund’s portfolio will be leveraged if it borrows money to meet redemption requests or settle investment transactions or if it avails itself of the right to delay payment on a redemption.

          The Fund is not limited in the extent to which it uses derivatives. As a result, its net long exposure may exceed 100% of its net assets.

•

FUND OF FUNDS RISK AND RELATED CONSIDERATIONS

          The Fund may invest in shares of other investment companies, including certain other GMO Funds and money market funds (“underlying funds”), and is exposed to the risk that the underlying funds do not perform as expected. The Fund also is indirectly exposed to all of the risks applicable to an investment in the underlying funds. Because the Fund bears the fees and expenses of the underlying funds in which it invests (absent reimbursement of those expenses), the Fund will incur additional expenses when investing in underlying funds. The Fund also is indirectly exposed to all of the risks applicable to an investment in the underlying funds. In addition, funds that invest in shares of other GMO Funds also are likely to be subject to Large Shareholder Risk because underlying GMO Funds are more likely to have large shareholders (e.g., other GMO Funds).

•

NON-DIVERSIFIED FUND

          The Fund is not a “diversified” investment company within the meaning of the 1940 Act. This means the Fund is allowed to invest in the securities of a relatively small number of issuers and/or foreign currencies. As a result, the Fund may be subject to greater credit, market, and other risks, and poor performance by a single issuer may have a greater impact on the Fund’s performance than if the Fund were “diversified.”

MANAGEMENT OF THE FUND

          GMO, 40 Rowes Wharf, Boston, Massachusetts 02110, provides investment management and shareholder services to the Fund and other GMO Funds. GMO is a private company, founded in 1977. As of May 31, 2010, GMO managed on a worldwide basis more than $95 billion of assets for the GMO Funds and institutional investors, such as pension plans, endowments, and foundations.

          Subject to the approval of the Trustees, the Manager establishes and modifies when it deems appropriate the investment strategies of the Fund. In addition to its management of the Fund’s investment portfolio and the shareholder services it provides to the Fund, the Manager administers the Fund’s business affairs.

          The Fund pays the Manager shareholder service fees for providing client service and reporting, such as performance information reporting, client account information, personal and electronic access to Fund information, access to analysis and explanations of Fund reports, and assistance in maintaining and correcting client-related information.

          The Manager’s annual compensation for investment management services rendered is 0.05% of the Fund’s average daily net assets for each class of shares.

          A discussion of the basis for the Trustees’ approval of the Fund’s initial investment management contract will be included in the Fund’s annual or semiannual shareholder report for the period during which the Trustees approved that contract.

          GMO’s Fixed Income Division is responsible for day-to-day investment management of the Fund. The Division’s investment professionals work collaboratively to manage the Fund’s portfolio, and no one person is primarily responsible for day-to-day investment management of the Fund.

          William Nemerever and Thomas Cooper are the senior members and co-directors of the Fixed Income Division. Each has been a senior member of the Division since 1993. As senior members and co-directors, Mr. Nemerever and Mr. Cooper jointly allocate responsibility for portions of the Fund’s portfolio to members of the Division, oversee the implementation of trades, review the overall composition of the portfolio, including compliance with its stated investment objective and strategies, and monitor cash.

          Mr. Nemerever and Mr. Cooper have been jointly responsible for overseeing the portfolio management of GMO’s global fixed income portfolios since 1993. In general, Mr. Nemerever focuses on investment strategy, while Mr. Cooper focuses on instrument selection.

          The SAI contains other information about how GMO determines the compensation of the senior members, other accounts they manage and related conflicts, and their ownership of the Fund.

Custodian, Fund Accounting Agent, and Transfer Agent

          State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02111, serves as the Fund’s custodian, fund accounting agent, and transfer agent.

Expense Reimbursement

          As more fully described in the Fund’s “Annual Fund Operating Expenses” table under the caption “Fees and Expenses” in the Fund’s summary, the Manager has contractually agreed to reimburse the Fund

for the portion of the Fund’s total annual operating expenses that exceed 0.05% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” As used in this Private Placement Memorandum, “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

          In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount.

          The Fund’s contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

Unlisted securities (if market quotations are readily available)

•

Most recent quoted bid price

Note: There can be no assurance that brokers will be able to provide bid prices. If quotes are not used, the Fund would seek alternative valuation methodologies (e.g., valuing the relevant assets at “fair value” as described below).

Certain debt obligations (previously acquired and having sixty days or less to final maturity)

•

Amortized cost (unless circumstances dictate otherwise; for example, if the issuer’s creditworthiness has become impaired)

All other fixed income securities (includes bonds, asset-backed securities, loans, structured notes)

•

Most recent bid supplied by a single pricing source chosen by the Manager

Shares of other GMO Funds and other open-end registered investment companies

•

Most recent NAV

“Fair Value” Pricing

          For all other assets and securities, including derivatives, and in cases where market prices are not readily available or circumstances make an existing methodology or procedure unreliable, the Fund’s investments are valued at “fair value,” as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees.

          With respect to the Fund’s use of “fair value” pricing, you should note the following:

•

In some cases, a significant percentage of the Fund’s assets may be “fair valued.” The value of assets that are “fair valued” is determined by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Factors that may be considered in determining “fair value” include, among others, the value of other financial instruments traded on other markets, trading volumes, changes in interest rates, observations from financial institutions, significant events (which may be considered to include changes in the value of U.S. securities or securities indices) that occur after the close of the relevant market and before the Fund’s net asset value is calculated, other news events, and significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments). Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the fair value determined for a particular security may be materially different from the value realized upon its sale.

•

The Fund’s use of fair value pricing may cause the Fund’s returns to differ from those of its benchmark.

          The values of foreign securities quoted in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 p.m. Boston time, at then current exchange rates or at such other rates as the Trustees or persons acting at their direction may determine in computing net asset value.

          The Manager evaluates pricing sources on an ongoing basis and may change a pricing source at any time. The Manager normally does not evaluate the prices supplied by pricing sources on a day-to-day basis. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices often are available for many securities held by the Fund, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. In addition, because the Fund may hold portfolio securities listed on foreign exchanges that trade on days on which the NYSE or the U.S. bond markets are closed, the net asset value of the Fund’s shares may change significantly on days when shares cannot be redeemed.

NAME POLICY

          The Fund will not change its Name Policy without providing its shareholders at least 60 days’ prior written notice. When used in connection with the Fund’s Name Policy, “assets” include the Fund’s net assets plus any borrowings made for investment purposes.

DISCLOSURE OF PORTFOLIO HOLDINGS

          The Fund has established a policy with respect to disclosure of its portfolio holdings. That policy is described in the SAI. Information regarding the Fund’s portfolio holdings as of each month’s end is made available to shareholders of the Trust, qualified potential shareholders as determined by GMO (“potential shareholders”), and their consultants or agents through a secured link on GMO’s website approximately five days after month end. Periodically, in response to heightened market interest in specific issuers, a Fund’s holdings in one or more issuers may be made available on a more frequent basis to shareholders of the Trust, potential shareholders, and their consultants or agents through a secured link on GMO’s website. This information may be posted as soon as the business day following the date to which the information relates.

          To access this information on GMO’s website (http://www.gmo.com/america/strategies), shareholders, potential shareholders, and their consultants and agents must contact GMO to obtain a password and user name (to the extent they do not already have them) and enter into a confidentiality agreement with GMO and the Trust that permits the information to be used only for purposes determined by GMO to be in the best interest of the shareholders of the Fund. GMO may make portfolio holdings information available in alternate formats under the conditions described in the SAI.

          The Fund or GMO may suspend the posting of portfolio holdings, and the Fund may modify the disclosure policy, without notice to shareholders. Once posted, the Fund’s portfolio holdings will remain available on the website at least until the Fund files a Form N-CSR (annual/semiannual report) or Form N-Q (quarterly schedule of portfolio holdings) for the period that includes the date of those holdings.

HOW TO PURCHASE SHARES

          Currently, shares of the Fund are principally available for purchase by other GMO Funds and certain other accredited investors. All investors must be “accredited investors” as defined in Regulation D under the Securities Act of 1933.

          Under ordinary circumstances, you may purchase the Fund’s shares directly from the Trust on days when both the NYSE and the U.S. bond markets are open for business. For instructions on purchasing shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com. The Trust will not accept a purchase request until it has received a GMO Trust Application deemed to be in good order by the Trust or its designated agent. In addition, the Trust will not accept a purchase request unless an IRS Form W-9 (for U.S. shareholders) or the appropriate IRS Form W-8 (for foreign shareholders) with a correct taxpayer identification number (if required) is on file with GMO and that W-9 or W-8 is deemed to be in good order by the Trust’s withholding agent, State Street Bank and Trust Company. Subject to future guidance from the Internal Revenue Service, the Trust may require additional tax-related certifications, representations or information from you in order to comply with the “Foreign Account Tax Compliance” provisions of the recently enacted Hiring Incentives to Restore Employment Act. Please consult your tax adviser to ensure all tax forms provided to the Trust are completed properly and maintained, as required, in good order. GMO has the right to make final good order assessments.

           Purchase Policies. You must submit a purchase request in good order to avoid having it rejected by the Trust or its designated agent. In general, a purchase request is in good order if it includes:

	•		The name and/or CUSIP number of the Fund being purchased;
	•		The U.S. dollar amount of the shares to be purchased;
	•		The date on which the purchase is to be made (subject to receipt prior to the close of regular trading on that date);
	•		The name and/or the account number (if any) set forth with sufficient clarity to avoid ambiguity; and
	•		The signature of an authorized signatory as identified in the GMO Trust Application or subsequent authorized signers list.

          If payment in full (by check, wire, or, when approved, securities) is not received by the Trust or its designated agent prior to the earlier of the close of the NYSE or 4:00 p.m. Boston time on the intended purchase date, the request may be rejected or deferred until payment is received unless prior arrangements for later payment have been approved by GMO.

          If the purchase request is received in good order by the Trust prior to the close of regular trading on the NYSE (generally 4:00 p.m. Boston time), the purchase price for the Fund shares to be purchased is the net asset value per share determined on that day (plus any applicable purchase premium). If that request is received after the close of regular trading on the NYSE, the purchase price for the Fund shares to be purchased is the net asset value per share determined on the next business day that the NYSE is open (plus any applicable purchase premium). Purchase requests that are received on days when the U.S. bond markets are closed will not be accepted until the next day on which the U.S. bond markets are open, and the purchase price for the Fund’s shares to be purchased is the net asset value per share determined on that day (plus any applicable purchase premium). Purchase premiums (if any) are not charged on reinvestments of distributions.

          To help the U.S. government fight the funding of terrorism and money laundering activities, federal law requires the Trust to verify identifying information provided by each investor in its GMO Trust Application. Additional identifying documentation also may be required. If the Trust is unable to verify the information shortly after your account is opened, the account may be closed and your shares redeemed at their net asset value at the time of the redemption.

          The Trust reserves the right to reject any purchase order. In addition, without notice, the Fund in its sole discretion may temporarily or permanently suspend sales of its shares to new investors and, in some circumstances, existing shareholders.

          Minimum investment amounts (by class) are set forth in the table on page 22 of this Private Placement Memorandum. No minimum additional investment is required to purchase additional shares of a class of the Fund. The Trust may waive initial minimums for some investors.

          Funds advised or sub-advised by GMO (“Top Funds”) may purchase shares of the Fund after the close of regular trading on the NYSE (the “Cut-off Time”) and receive the current day’s price if the following conditions are met: (i) the Top Fund received a good order purchase request prior to the Cut-off Time on that day; and (ii) the purchase(s) by the Top Fund of shares of the Fund are executed pursuant to an allocation predetermined by GMO prior to that day’s Cut-off Time.

           Submitting Your Purchase Order Form . Completed purchase order forms can be submitted by mail or by facsimile or other form of communication pre-approved by Shareholder Services to the Trust at:

GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: 1-617-439-4192
Attention: Shareholder Services

          Call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com to confirm that GMO received, made a good order determination regarding, and accepted your purchase order form. Do not send cash, checks, or securities directly to the Trust. A purchase request submitted by mail is “received” by the Trust when it is actually delivered to the Trust or its designated agent. A purchase request delivered by facsimile is “received” by the Trust when it is actually received by the Trust or its designated agent.

           Funding Your Investment . You may purchase shares:

•

with cash (via wire transfer or check)

•

By wire . Instruct your bank to wire the amount of your investment to:

State Street Bank and Trust Company, Boston, Massachusetts
ABA#: 011000028
Attn: Transfer Agent
Credit: GMO Deposit Account 00330902
Further credit: GMO High Quality Short-Duration Bond Fund/Account name and number

•

By check . All checks must be made payable to the Fund or to GMO Trust. The Trust will not accept checks payable to a third party that have been endorsed by the payee to the Trust. Mail checks to:

•

in exchange for securities acceptable to the Manager

	•		securities must be approved by the Manager prior to transfer to the Fund
	•		securities will be valued as set forth under “Determination of Net Asset Value”

•

by a combination of cash and securities

           Frequent Trading Activity. As a matter of policy, the Trust will not honor requests for purchases or exchanges by shareholders identified as engaging in frequent trading strategies, including market timing, that GMO determines could be harmful to certain other GMO Funds and their shareholders. Frequent trading strategies are generally strategies that involve repeated exchanges and/or purchases and redemptions (or redemptions and purchases) within a short period of time. Frequent trading strategies may be disruptive to the efficient management of such Funds, materially increase portfolio transaction costs and taxes, dilute the value of shares held by long-term investors, or otherwise be harmful to such Funds and their shareholders. Notwithstanding the foregoing, these policies and procedures do not limit frequent trading of the Fund.

HOW TO REDEEM SHARES

          Under ordinary circumstances, you may redeem the Fund’s shares on days when both the NYSE and the U.S. bond markets are open for business. Redemption requests should be submitted directly to the Trust. For instructions on redeeming shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com. The Trust may take up to seven days to remit proceeds.

           Redemption Policies. You must submit a redemption request in good order to avoid having it rejected by the Trust. In general, a redemption request is in good order if it includes:

	•		The name and/or CUSIP number of the Fund being redeemed;
	•		The number of shares or the dollar amount of the shares to be redeemed or that the client wants to receive;
	•		The date on which the redemption is to be made (subject to receipt prior to the close of regular trading on the NYSE on that date);
	•		The name and/or the account number set forth with sufficient clarity to avoid ambiguity;
	•		The signature of an authorized signatory as identified in the GMO Trust Application or subsequent authorized signers list; and

•

Wire instructions or registration address that match the wire instructions or registration address (as applicable) on file at GMO or confirmation from an authorized signatory that the wire instructions are valid.

          If a redemption request in good order is received by the Trust prior to the close of regular trading on the NYSE (generally 4:00 p.m. Boston time), the redemption price for the Fund shares to be redeemed is the net asset value per share determined on that day (less any applicable redemption fee). Redemption requests in good order that are received on days when the U.S. bond markets are closed will not be accepted until the next day on which the U.S. bond markets are open, and the redemption price will be the net asset value per share determined that day (less any applicable redemption fee). If that redemption request is received after the close of regular trading on the NYSE, the redemption price for the Fund shares to be redeemed is the net asset value per share determined on the next business day that the U.S. bond markets are open (less any applicable redemption fee) unless you or another authorized person on your account have instructed GMO Shareholder Services in writing to defer the redemption to another day. If you or another authorized person on your account have instructed GMO Shareholder Services to defer the redemption to another day, you or another authorized person on your account may revoke your redemption request in writing at any time prior to 4:00 p.m. Boston time or before the close of regular trading on the NYSE (whichever is earlier) on the redemption date. Redemption fees, if any, apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). In the event of a disaster affecting Boston, Massachusetts, please contact GMO to confirm that your redemption request was received and is in good order.

          Failure to provide the Trust with a properly authorized redemption request or otherwise satisfy the Trust as to the validity of any change to the wire instructions or registration address may result in a delay in processing a redemption request, delay in remittance of redemption proceeds, or a rejection of the redemption request.

          As with all GMO Funds, if the Manager determines, in its sole discretion, that paying redemption proceeds wholly or partly in cash would be detrimental to the best interests of the Fund’s remaining shareholders, the Fund may pay the redemption proceeds in whole or in part with securities instead of cash. In particular, if market conditions deteriorate and the Manager believes a Fund’s redemption fee (if any) is not fair compensation for transaction costs, the Fund may limit cash redemptions (honoring redemptions with portfolio securities) to protect the interests of all Fund shareholders. Redemptions in-kind may require shareholders to enter into new custodial arrangements if they do not have accounts available for holding securities directly.

          If a redemption is paid in cash:

•

payment will generally be made by means of a federal funds transfer to the bank account designated in a recordable format by an authorized signatory in the GMO Trust Application to purchase the Fund shares being redeemed

•

designation of one or more additional bank accounts or any change in the bank accounts originally designated in the GMO Trust Application must be made in a recordable format by an authorized signatory according to the procedures in the GMO Trust Redemption Order Form

•

upon request, payment will be made by check mailed to the registration address (unless another address is specified according to the procedures in the GMO Trust Redemption Order Form).

          The Trust will not pay redemption proceeds to third-parties and does not offer check-writing privileges.

          If a redemption is paid with securities, you should note that:

	•		the securities will be valued as set forth under “Determination of Net Asset Value”
	•		the securities will be selected by the Manager in light of the Fund’s objective and may not represent a pro rata distribution of each security held in the Fund’s portfolio
	•		you may incur brokerage charges on the sale of the securities
	•		redemptions paid in securities are generally treated by shareholders for tax purposes the same as redemptions paid in cash
	•		the securities will be transferred and delivered by the Trust as directed in writing by an authorized person on your account.

          The Fund may suspend the right of redemption and may postpone payment for more than seven days:

	•		if the NYSE, the U.S. bond markets, and/or the Federal Reserve Bank are closed on days other than weekends or holidays
	•		during periods when trading on the NYSE is restricted
	•		during an emergency that makes it impracticable for the Fund to dispose of its securities or to fairly determine the net asset value of the Fund
	•		during any other period permitted by the SEC for your protection.

          Pursuant to the Trust’s Amended and Restated Agreement and Declaration of Trust, the Trust has the unilateral right to redeem Fund shares held by a shareholder at any time if at that time: (i) the shares of the Fund or a class held by the shareholder have an aggregate net asset value of less than an amount determined from time to time by the Trustees; or (ii) the shares of the Fund or the class held by the shareholder exceed a percentage of the outstanding shares of the Fund or class determined from time to time by the Trustees. The Trustees have authorized GMO in its sole discretion to redeem shares to prevent a shareholder from becoming an affiliated person of the Fund.

          Top Funds may redeem shares of the Fund after the Cut-off Time and receive the current day’s price if the following conditions are met: (i) the Top Fund received a redemption request prior to the Cut-off Time on that day; and (ii) the redemption of the shares of the Fund is executed pursuant to an allocation predetermined by GMO prior to that day’s Cut-off Time.

           Submitting Your Redemption Request . Redemption requests can be submitted by mail or by facsimile to the Trust at the address/facsimile number set forth under “How to Purchase Shares — Submitting Your Purchase Order Form.” Redemption requests submitted by mail are “received” by the Trust when actually delivered to the Trust. Call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com to confirm that GMO received, made a good order determination regarding, and accepted your redemption request.

PURCHASE PREMIUMS AND REDEMPTION FEES

          Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non de minimis estimated portfolio transaction costs and other related costs (e.g., bid to ask spreads, stamp duties, and transfer fees) incurred by the Fund (directly or indirectly through investments in underlying funds) as a result of the purchase or redemption by allocating estimated transaction costs to the purchasing or redeeming shareholder. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). At present, the Fund does not charge any purchase premium or redemption fee. However, the Fund may impose a new purchase premium and/or redemption fee at any time.

MULTIPLE CLASSES AND ELIGIBILITY

          The Fund currently offers multiple classes of shares. The sole economic difference among the classes of shares described in this Private Placement Memorandum is in their shareholder service fee. Differences in the fee reflect the fact that, as the size of a client relationship increases, the cost to service that client decreases as a percentage of the client’s assets. Thus, the shareholder service fee generally is lower for classes requiring greater minimum investments.

          Eligibility to purchase Fund shares or different classes of Fund shares depends on the client’s meeting either (i) the minimum “Total Fund Investment,” which includes only a client’s total investment in the Fund, or (ii) the minimum “Total GMO Investment,” both set forth in the table below. No minimum additional investment is required to purchase additional shares of the Fund.

Minimum Investment Criteria for Class Eligibility

          A client’s Total GMO Investment equals the Manager’s estimate of the market value of all the client’s assets managed by GMO and its affiliates (i) at the time of the client’s initial investment, (ii) at the close of business on the last business day of each calendar quarter, or (iii) at other times as determined by the Manager (including those described below under “Conversions between Classes”) (each, a “Determination Date”). When purchasing shares of the Fund, investors should consult with the Manager to determine the applicable Determination Date and the share class for which they are eligible.

          Upon request GMO may permit a client to undertake in writing to meet the applicable Total Fund Investment or Total GMO Investment minimums over a specified period (a “Commitment Letter”).

          You should note:

•

No minimum additional investment is required to purchase additional shares of the Fund for any class of shares.

	•		The Manager makes all determinations as to the aggregation of client accounts for purposes of determining eligibility. See the SAI for a discussion of factors the Manager considers relevant when making those determinations.
	•		Eligibility requirements for each class of shares are subject to change upon notice to shareholders.
	•		The Trust may waive eligibility requirements for certain persons, accounts or special situations. As of the date of this Private Placement Memorandum, these waivers include the waiver of eligibility requirements for (i) GMO Funds and other accounts over which the Manager has investment discretion that invest in other GMO Funds, (ii) GMO employees and their family members, and (iii) the Trustees of the Trust, each of which may invest in the least expensive class of those GMO Funds offered at the time of investment without regard to the amount invested.
	•		Investments through an intermediary generally are invested in Class III Shares.

Conversions between Classes

          As described in the Fund’s summary, in determining whether a client is eligible to purchase Fund shares, GMO considers each client’s Total Fund Investment and Total GMO Investment on each Determination Date. Based on this determination, and subject to the following, each client’s shares of the Fund eligible for conversion will be converted to the class of shares of the Fund with the lowest shareholder service fee for which the client satisfies all minimum investment requirements (or, to the extent the client already holds shares of that class, the client will remain in that class). Except as noted below, with respect to the Fund:

	•		To the extent a client satisfies all minimum investment requirements for a class of shares then being offered that bears a lower shareholder service fee than the class held by the client on the Determination Date (generally at the close of business on the last business day of each calendar quarter), the client’s shares eligible for conversion generally will be automatically converted to that class within 45 calendar days following the Determination Date on a date selected by the Manager.
	•		If a client no longer satisfies all minimum investment requirements for the class of shares of the Fund held by the client on the last Determination Date of a calendar year (generally at the close of business on the last business day of the calendar year), the Fund generally will convert the client’s shares to the class it is then offering bearing the lowest shareholder service fee for which the client satisfies all minimum investment requirements (and which class will typically bear a higher shareholder service fee than the class then held by the client). If a client no longer satisfies all minimum investment requirements for any class of the Fund as of the last Determination Date of a calendar year, the Fund will convert the client’s shares to the class of the Fund then being offered bearing the highest shareholder service fee. Notwithstanding the foregoing, a client’s shares will not be converted to a class of shares bearing a higher shareholder service fee without at least 15 calendar days’ prior notice, and if the client makes an additional investment and/or the value of the client’s shares otherwise increases prior to the end of the notice period so as to satisfy all minimum investment requirements for the client’s current class of shares, the client will remain in the class of shares then held by the client. Solely for the purpose of determining whether a client has satisfied the minimum investment requirements for the client’s current class of shares, the value of the client’s shares is considered to be the greater of (i) the value of the client’s shares

on the relevant Determination Date or (ii) the value of the client’s shares on the date that GMO reassesses the value of the client’s account for the purpose of sending notice of a proposed conversion. If the client is not able to make an additional investment in the Fund solely because the Fund is closed to new investment or is capacity constrained, the class of shares then held by the client will not be converted unless the Manager approves reopening the Fund to permit the client to make an additional investment. The conversion of a client’s shares to a class of shares bearing a higher shareholder service fee generally will occur within 60 calendar days following the last Determination Date of a calendar year or, in the case of conversion due to an abusive pattern of investments and/or redemptions, on any other date the Manager determines.

          The Fund may at any time without notice convert a client’s shares to the class it is then offering bearing the lowest shareholder service fee for which the client satisfied all minimum investment requirements (or, if the Fund has no such class, the class of that Fund bearing the highest shareholder service fee) if the client no longer satisfies all minimum investment requirements for the class of shares held by the client and: (i) the Manager believes the client has engaged in an abusive pattern of investments and/or redemptions (e.g., a large investment just before a Determination Date and a redemption right after the Determination Date), (ii) the client fails to meet the applicable Total Fund Investment or Total GMO Investment minimum by the time specified in the client’s Commitment Letter, or (iii) the total expense ratio borne by the client immediately following the conversion is equal to or less than the total expense ratio borne by the client immediately prior to such conversion (after giving effect to any applicable fee and expense waivers or reimbursements).

          The Fund has been advised by counsel that, for tax purposes, the conversion of a client’s investment from one class of shares of the Fund to another class of shares of the Fund should not result in the recognition of gain or loss in the shares that are converted. The client’s tax basis in the new class of shares immediately after the conversion should equal the client’s basis in the converted shares immediately before conversion, and the holding period of the new class of shares should include the holding period of the converted shares.

summary below does not address tax consequences to shareholders of those other GMO Funds. Shareholders of those other GMO Funds should refer to the prospectuses or private placement memoranda (as applicable) and statements of additional information for those GMO Funds for a summary of the tax consequences applicable to them. It is important for you to note:

	•		The Fund is treated as a separate taxable entity for U.S. federal income tax purposes and intends to qualify each year as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended.
	•		For U.S. federal income tax purposes, distributions of net investment income are generally taxable as ordinary income.
	•		For U.S. federal income tax purposes, taxes on distributions of net realized capital gains generally are determined by how long the Fund owned the investments that generated them, rather than by how long a shareholder has owned shares in the Fund. Distributions of net realized capital gains from the sale of investments that the Fund owned for more than one year and that are properly designated by the Fund as capital gain dividends generally are taxable to shareholders as long-term capital gains. Distributions of net realized capital gains from the sale of investments that the Fund owned for one year or less generally are taxable to shareholders as ordinary income.
	•		The Fund may make total distributions during a taxable year in an amount that exceeds the Fund’s net investment income and net realized capital gains for that year, in which case the excess generally would be treated as a return of capital, which would reduce a shareholder’s tax basis in its applicable shares, with any amounts exceeding such basis treated as capital gain. A return of capital is not taxable to shareholders to the extent such amount does not exceed a shareholder’s tax basis, but it reduces a shareholder’s tax basis in its shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the shareholder of its shares.
	•		If the Fund realizes capital losses in excess of capital gains for any taxable year, these excess losses will carry over and can be used to offset capital gains realized in succeeding taxable years until either (a) the end of the eighth succeeding taxable year or (b) such losses have been fully utilized to offset net realized capital gains, whichever comes first. The Fund’s ability to utilize these and certain other losses to reduce distributable net realized capital gains in succeeding taxable years may be limited by reason of direct or indirect changes in the actual or constructive ownership of the Fund.
	•		For taxable years beginning before January 1, 2011, distributions of net investment income properly designated by the Fund as derived from “qualified dividend income” will be taxable to shareholders taxed as individuals at the rates applicable to long-term capital gain, provided holding period and other requirements are met at both the shareholder and Fund levels. The Fund does not expect a significant portion of its distributions to be derived from qualified dividend income. Long-term capital gain rates applicable to most individuals have been reduced to 15% (with a 0% rate applying to taxpayers in the 10% and 15% rate brackets) for taxable years beginning before January 1, 2011. It is currently unclear whether Congress will extend, eliminate or change the “qualified dividend income” provision or the reduction of long-term capital gain rates for individuals to or for tax years beginning on or after January 1, 2011.

	•		Distributions by the Fund generally are taxable to a shareholder even if they are paid from income or gains earned by the Fund before that shareholder invested in the Fund (and accordingly the income or gains were included in the price the shareholder paid for the Fund’s shares). Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares.
	•		Distributions by the Fund to retirement plans that qualify for tax-exempt treatment under U.S. federal income tax laws generally will not be taxable. Special tax rules apply to investments through such plans. You should consult your tax advisor to determine the suitability of the Fund as an investment through such a plan and the tax treatment of distributions from such a plan.
	•		Any gain resulting from a shareholder’s sale, exchange, or redemption of Fund shares generally will be taxable to the shareholder as short-term or long-term capital gain, depending on how long the Fund shares were held by the shareholder.
	•		Certain of the Fund’s investment practices, including derivative transactions, hedging activities generally, and securities lending activities (if any), as well as the Fund’s investments in certain types of securities, including debt obligations issued or purchased at a discount, asset-backed securities, assets “marked to the market” for U.S. federal income tax purposes, and, potentially, so-called “indexed securities” (such as inflation-indexed bonds), will be subject to special and complex U.S. federal income tax provisions. These special rules may affect the timing, character, and/or amount of the Fund’s distributions and, in some cases, may cause the Fund to liquidate investments at a time when it is not advantageous to do so. See “Taxes” in the SAI for more information about the tax consequences of the Fund’s specific investment practices and investments.
	•		Any investment by the Fund in foreign securities may be subject to foreign withholding or other taxes on dividends, interest, or capital gains. The Fund may otherwise be subject to foreign taxation on repatriation proceeds generated from those securities or to other transaction-based foreign taxes on those securities. Those withholding and other taxes will reduce the Fund’s yield on foreign securities. The foreign withholding and other tax rates applicable to the Fund’s investments in certain foreign jurisdictions may be higher if the Fund has a significant number of non-U.S. shareholders than if it has fewer non-U.S. shareholders. It is not expected that shareholders will be entitled to claim a credit or deduction for foreign taxes paid by the Fund. In addition, the Fund’s investments (if any) in foreign securities (other than equity securities), foreign currencies or foreign currency derivatives may accelerate Fund distributions to shareholders and increase the distributions taxed to shareholders as ordinary income. See “Taxes” in the SAI for more information.
	•		Under the GMO Funds’ securities lending arrangements, when a dividend is paid to a Fund security out on loan, the borrower is required to pay to that Fund a substitute payment at least equal, on an after-tax basis, to the dividend that the Fund would have received if it had received the dividend directly. Because some borrowers of foreign securities may be subject to levels of taxation that are lower than the rates applicable to the Fund, some borrowers are likely to be motivated by the ability to earn a profit on those differential tax rates and to pay that Fund for the opportunity to earn that profit. In the United States, certain swap and securities lending transactions designed to enable non-U.S. persons to reduce otherwise applicable U.S. withholding taxes on U.S. stock dividends have received the attention of U.S. lawmakers. In response, Congress enacted legislation in March 2010 to limit these practices.

There can be no assurance that similar legislation will not be adopted in other jurisdictions with respect to foreign securities or that foreign taxing authorities will not otherwise challenge beneficial tax results arising from swap or securities lending arrangements.

•

To the extent the Fund invests in other GMO Funds or other investment companies treated as partnerships or RICs for U.S. federal income tax purposes, the Fund’s distributions could vary in terms of their timing, character, and/or amount from what the Fund’s distributions would have been had the Fund invested directly in the portfolio securities and other assets held by the underlying investment companies. See “Taxes” in the SAI for more information.

          The above is a general summary of the principal U.S. federal income tax consequences of investing in the Fund for shareholders who are U.S. citizens, residents, or domestic corporations. You should consult your own tax advisors about the precise tax consequences of an investment in the Fund in light of your particular tax situation, including possible foreign, state, local, or other applicable taxes (including the federal alternative minimum tax).

          Most states permit mutual funds, such as the Fund, to “pass through” to their shareholders the state tax exemption on income earned from investments in certain direct U.S. Treasury obligations, as well as some limited types of U.S. government agency securities, so long as a fund meets all applicable state requirements. Therefore, you may be allowed to exclude from your state taxable income distributions made to you by the Fund, to the extent attributable to interest the Fund earned on such investments. The availability of these exemptions varies by state. You should consult your tax advisors regarding the applicability of any such exemption to your situation.

          See “Taxes” in the SAI for more information, including a summary of certain tax consequences of investing in the Fund for non-U.S. shareholders.

INVESTMENT IN OTHER GMO FUNDS

           GMO U.S. Treasury Fund. GMO U.S. Treasury Fund (“U.S. Treasury Fund”), a series of the Trust, is offered through a separate prospectus. U.S. Treasury Fund is managed by GMO.

          U.S. Treasury Fund pays an investment management fee to the Manager at the annual rate of 0.08% of U.S. Treasury Fund’s average daily net assets. Subject to Excluded Expenses, the Manager has contractually agreed to reimburse U.S. Treasury Fund to the extent U.S. Treasury Fund’s total annual operating expenses exceed 0.08% of U.S. Treasury Fund’s average daily net assets. This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by U.S. Treasury Fund’s Board of Trustees. In addition to this contractual expense limitation, the Manager has voluntarily agreed to waive U.S. Treasury Fund’s management fee and to reimburse U.S. Treasury Fund to the extent U.S. Treasury Fund’s total annual operating expenses exceed 0.00% of U.S. Treasury Fund’s average daily net assets (excluding Excluded Expenses). The Manager may change or terminate these voluntary waivers and reimbursements at any time. During any period for which these voluntary waivers and reimbursements are in effect, U.S. Treasury Fund will incur management fees at an annual rate lower than 0.08% of U.S. Treasury Fund’s average daily net assets, and, as a result net annual operating expenses for U.S. Treasury Fund will be lower. For these purposes, “Excluded Expenses” are expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

          U.S. Treasury Fund’s investment objective is liquidity and safety of principal with current income as a secondary objective.

          U.S. Treasury Fund primarily invests in U.S. Treasury securities. Under normal circumstances, U.S. Treasury Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Direct U.S. Treasury Obligations and repurchase agreements collateralized by these Obligations. “Direct U.S. Treasury Obligations” include U.S. Treasury bills, bonds, and notes and other securities issued by the U.S. Treasury, such as Separately Traded Registered Interest and Principal Securities (STRIPS) and other zero-coupon securities, that are backed by the full faith and credit of the U.S. government as well as repurchase agreements relating to the foregoing.

          U.S. Treasury Fund may enter into repurchase agreements, under which U.S. Treasury Fund purchases a security backed by the full faith and credit of the U.S. government from a seller who simultaneously commits to repurchase, on an agreed upon date in the future, the security from U.S. Treasury Fund at the original purchase price plus an agreed upon amount representing the original purchase price plus interest. The counterparties in repurchase agreements are typically broker-dealers and banks, and the safety of the arrangement is dependent on, among other things, U.S. Treasury Fund’s having an interest in the security that can be realized in the event of the insolvency of the counterparty.

          In addition to Direct U.S. Treasury Obligations, U.S. Treasury Fund also may invest in other fixed-income securities that are backed by the full faith and credit of the U.S. government, such as guaranteed securities issued by the Government National Mortgage Association (GNMA) and the Federal Deposit Insurance Corporation (FDIC). U.S. Treasury Fund also may invest in unaffiliated money market funds.

          U.S. Treasury Fund normally invests in Direct U.S. Treasury Obligations and other fixed-income securities backed by the full faith and credit of the U.S. government with a stated or remaining maturity of one year or less. This may not be true of Direct U.S. Treasury Obligations purchased pursuant to repurchase agreements, and, therefore, if the counterparty to the repurchase agreement defaults, U.S. Treasury Fund may own a security with a stated or remaining maturity of greater than one year.

          Although U.S. Treasury Fund primarily invests in short-term obligations, it is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds. In addition, the Manager normally seeks to maintain an interest rate duration of one year or less for U.S. Treasury Fund’s portfolio.

          In selecting U.S. Treasury securities for U.S. Treasury Fund’s portfolio, the Manager focuses primarily on the relative attractiveness of different obligations (such as bonds, notes, or bills), which can vary depending on the general level of interest rates as well as supply/demand imbalances and other market conditions.

          Other GMO Funds may invest in U.S. Treasury Fund to achieve exposure to U.S. Treasury securities, to invest cash, and/or to seek to generate a return similar to yields on U.S. Treasury securities.

          U.S. Treasury Fund’s benchmark is the Citigroup 3 Month Treasury Bill Index, an independently maintained and published short-term Treasury bill index.

          To the extent the Fund invests in U.S. Treasury Fund, it is subject to all of the risks to which U.S. Treasury Fund is exposed. The principal risks of an investment in U.S. Treasury Fund include Market Risk — Fixed Income Securities, Credit and Counterparty Risk, Focused Investment Risk, Large Shareholder Risk, Liquidity Risk, Management and Operational Risk, Market Disruption and Geopolitical Risk, and Fund of Funds Risk. Shareholders of the Fund are indirectly exposed to these risks, in addition to all risks associated with their investment in the Fund.

GMO TRUST

PRIVATE PLACEMENT MEMORANDUM

June 25, 2010

GMO Special Situations Fund
40 Rowes Wharf, Boston, Massachusetts 02110

Class III, Class VI

           GMO Special Situations Fund (the “Fund”) is a separate investment portfolio of GMO Trust (the “Trust”). The Trust is an open-end management investment company and operates as a “series investment company” that consists of separate series of investment portfolios, including the Fund. Other portfolios are described in separate prospectuses or private placement memoranda. At this time, the Fund does not intend to offer its shares publicly or to make them available other than to other funds of the Trust (“GMO Funds”) and certain other accredited investors whose assets are managed in an asset allocation strategy by Grantham, Mayo, Van Otterloo & Co. LLC’s (the “Manager” or “GMO”) Asset Allocation Division.

Investment Manager
Grantham, Mayo, Van Otterloo & Co. LLC

          This Private Placement Memorandum concisely describes the information which you ought to know about the Fund before investing. Please read this memorandum carefully and keep it for further reference. A Statement of Additional Information dated June 25, 2010, as revised from time to time (“SAI”), is available free of charge by writing to GMO Shareholder Services, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling 1-617-346-7646. The SAI, which contains more detailed information about the Fund, has been filed with the Securities and Exchange Commission (“SEC”) and is incorporated by reference into this Private Placement Memorandum.

          THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE TRANSFERRED OR RESOLD UNLESS SO REGISTERED OR IN TRANSACTIONS EXEMPT THEREFROM. HOWEVER, THE SECURITIES ARE REDEEMABLE AS DESCRIBED IN THIS PRIVATE PLACEMENT MEMORANDUM. IN CERTAIN CASES INVESTORS MAY BE REDEEMED “IN KIND” AND RECEIVE PORTFOLIO SECURITIES HELD BY THE FUND IN LIEU OF CASH UPON REDEMPTION.

          THIS PRIVATE PLACEMENT MEMORANDUM AND THE INFORMATION CONTAINED HEREIN ARE FOR THE EXCLUSIVE USE OF THE RECIPIENT FOR THE SOLE PURPOSE OF EVALUATING THE PRIVATE PLACEMENT OF SHARES OF THE FUND DESCRIBED HEREIN. IT MAY NOT BE REPRODUCED, PROVIDED, OR DISCLOSED TO OTHERS, OR USED FOR ANY OTHER PURPOSE, WITHOUT WRITTEN AUTHORIZATION, AND DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SHARES OF THE FUND TO ANY ENTITY OR INDIVIDUAL NOT POSSESSING THE QUALIFICATIONS DESCRIBED IN THIS MEMORANDUM.

          NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR PROVIDE ANY INFORMATION WITH RESPECT TO THE SHARES EXCEPT SUCH INFORMATION AS IS CONTAINED IN THIS MEMORANDUM AND IN THE SAI OR IN OTHER MATERIALS APPROVED BY THE TRUST. NO SALES MADE IN RELIANCE ON THIS DOCUMENT SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN MATTERS DISCUSSED HEREIN SINCE THE DATE HEREOF.

FUND SUMMARY

Purchase and Sale of Fund Shares

          Currently, shares of the Fund are principally available for purchase by other GMO Funds and certain other accredited investors. All investors must be “accredited investors” as defined in Regulation D under the Securities Act of 1933.

          Eligibility to purchase Fund shares or different classes of Fund shares depends on the client’s meeting either (i) the minimum “Total Fund Investment,” which includes only a client’s total investment in the Fund, or (ii) the minimum “Total GMO Investment,” both set forth in the table below. No minimum additional investment is required to purchase additional shares of the Fund.

Minimum Investment Criteria for Class Eligibility

          Fund shares are redeemable, and under ordinary circumstances you may redeem the Fund’s shares on days when the NYSE is open for business. Redemption requests should be submitted directly to the Trust. For instructions on redeeming shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com.

Tax Information

          The Fund has elected to be treated as a partnership for U.S. federal income tax purposes and thus is not itself subject to U.S. federal income tax. Instead, in computing its income tax liability, each shareholder is required to take into account its distributive share of the Fund’s income, gain, loss, deduction, credit, and other tax items for each taxable year substantially as though such items had been realized directly by the shareholder and without regard to whether the Fund has distributed or will distribute any amount to its shareholders. The Fund does not intend to make any distributions (other than in redemption of Fund shares) to its shareholders but may do so in the sole the discretion of the Trustees (or their delegates). Therefore, it is possible that a shareholder will incur income tax liabilities in a taxable year in respect of its investment in the Fund in excess of non-redeeming cash distributions (if any) made by the Fund for that year.

ADDITIONAL INFORMATION ABOUT THE FUND’S INVESTMENT STRATEGIES, RISKS, AND EXPENSES

          This Private Placement Memorandum is not all-inclusive, and the Fund may make investments, employ strategies, and be exposed to risks that are not described in this Private Placement Memorandum. More information about the Fund’s investments and strategies is contained in the SAI. Except for policies identified in the SAI as “fundamental,” the Fund’s Board of Trustees (“Trustees”) may change the Fund’s investment objectives or policies without shareholder approval. There is no guarantee that the Fund will be able to achieve its investment objective. The Fund, by itself, is not intended to provide a complete investment program, and investment in the Fund should only be considered as part of a diversified portfolio that includes other investments.

Investment Objectives

          The investment objectives of the Fund are capital appreciation and capital preservation.

Principal Investment Strategies

          The Fund is not intended to serve as a standalone investment product and is available only for investment by other GMO Funds and other GMO asset allocation clients.

          The Manager plans to pursue the Fund’s investment objectives by implementing investment strategies that complement long-only investments in global equities and fixed income instruments.

          The Fund may have long or short exposure to foreign and U.S. equity securities (including both growth and value style equities and equities of any market capitalization), foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), currencies, and, from time to time, other alternative asset classes (e.g., instruments that seek exposure to or reduce risks of market volatility). The Fund is not restricted in its exposure to any particular asset class, and at times may be substantially exposed (long or short) to a single asset class (e.g., equity securities or fixed income securities). In addition, the Fund is not restricted in its exposure (long or short) to any particular market. The Fund may have substantial exposure (long or short) to a particular country or type of country (e.g., emerging countries). The Fund could be subject to material losses from a single investment.

          In managing the Fund’s strategy, the Manager employs proprietary quantitative investment models and fundamental judgment for the selection of derivatives and other investments and portfolio construction. The models use one or more independent, though possibly concentrated or focused, strategies for selection of investments. The Manager also may eliminate strategies or add new strategies in response to additional research, changing market conditions, or other factors.

          In pursuing its investment objectives, the Fund is permitted to use a wide variety of exchange-traded and over-the-counter (“OTC”) derivatives, including reverse repurchase agreements, options, futures, swap contracts, swaptions, and foreign currency derivative transactions. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, and, as a result, it may be leveraged in relation to its assets.

          The Fund may elect to make some or all of its investments through one or more wholly-owned, non-U.S. subsidiaries. GMO may serve as the investment manager to these companies but will not receive any additional management or other fees for such services.

          The Fund does not seek to control risk relative to a particular securities market index or benchmark. In addition, the Fund does not seek to outperform a particular securities market index or blend of market indices (i.e., the Fund does not seek “relative” return).

          The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund (“U.S. Treasury Fund”), another series of GMO Trust described in a separate prospectus (see “Investment in Other GMO Funds” below for a more detailed description of U.S. Treasury Fund’s investment objectives and strategies).

          The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.

          The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. Unless otherwise specified in this Private Placement Memorandum or in the SAI, the Manager is not obligated to and generally will not consider tax consequences when seeking to achieve the Fund’s investment objective (e.g., the Fund may engage in transactions that are not tax efficient for U.S. federal income or other federal, state, local, or non-U.S. tax purposes). Income from certain types of investments made by the Fund may be treated as “unrelated business taxable income” (“UBTI”) and subject to tax when allocated to U.S. tax-exempt shareholders.

          Portfolio turnover is not a principal consideration when the Manager makes investment decisions for the Fund. Based on its assessment of market conditions, the Manager may cause the Fund to trade more frequently at some times than at others. High turnover rates may adversely affect the Fund’s performance by generating higher transaction costs. Additionally, portfolio turnover may give rise to additional taxable income for shareholders, including through the realization of capital gains or other types of income that are taxable to shareholders of the Fund when allocated to them unless the shareholders themselves are exempt from taxation or otherwise investing in the Fund through a tax-advantaged account. If portfolio turnover results in the recognition of short-term capital gains, those gains typically are taxed to shareholders, when allocated to them, at ordinary income tax rates. See “Distributions and Taxes” below for more information about the tax consequences of these types of income.

           When used in this Private Placement Memorandum, the term “invest” includes both direct investing and indirect investing and the term “investments” includes both direct investments and indirect investments. For example, the Fund may invest indirectly by investing in another fund or by investing in derivatives and synthetic instruments. In addition, the term “fixed income securities” includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option). For purposes of this Private Placement Memorandum, (a) the term “duration” is defined as the weighted measure of interest rate sensitivity of a debt investment, (b) the term “total return” includes both capital appreciation and income, and (c) the term “bond” refers to any fixed income security.

          For purposes of this Private Placement Memorandum, the term “investment grade” refers to a rating of Baa3/P-2 or better given by Moody’s Investors Service, Inc. (“Moody’s”) or BBB-/A-2 or better given by Standard & Poor’s Ratings Services (“S&P”) to a particular fixed income security/commercial paper, and the term “below investment grade” refers to any rating below Baa3/P-2 given by Moody’s or below BBB-/A-2 given by S&P to a particular fixed income security/commercial paper. Fixed inxome securities rated below investment grade are also known as high yield or “junk” bonds. In addition, in this Private Placement Memorandum, investment grade securities that are given a rating of Aa/P-1 or better by Moody’s or AA/A-1 or better by S&P are referred to as “high quality.” Securities referred to as

investment grade, below investment grade, or high quality include not only securities rated by Moody’s and/or S&P, but also securities unrated by Moody’s or S&P that are determined by the Manager to have credit qualities comparable to securities rated by Moody’s or S&P as investment grade, below investment grade, or high quality, as applicable.

           Annual Fund Operating Expenses — Other Expenses and Acquired Fund Fees and Expenses. The amount listed under “Other expenses” in the “Annual Fund Operating Expenses” table included in the Fund’s summary generally reflects direct expenses associated with an investment in the Fund for the fiscal year ended February 28, 2010. The Fund may invest in other GMO Funds and certain other pooled investment vehicles (“underlying funds”), and the indirect net expenses associated with the Fund’s investment in underlying funds for the fiscal year ended February 28, 2010 are reflected in the “Annual Fund Operating Expenses” table under “Acquired fund fees and expenses.” Acquired fund fees and expenses do not include expenses associated with investments in the securities of unaffiliated issuers unless those issuers hold themselves out to be investment companies, and actual indirect expenses will vary depending on the particular underlying funds in which the Fund invests.

Description of Principal Risks

          Investing in the Fund involves many risks, and factors that may affect the Fund’s portfolio as a whole, called “principal risks,” are summarized in this section. The risks of investing in the Fund depend on the types of investments in its portfolio and the investment strategies the Manager employs on its behalf. This section describes the nature of these principal risks and some related risks, but is not intended to include every potential risk. The Fund could be subject to additional risks because the types of investments it makes and market conditions may change over time. The SAI includes more information about the Fund and its investments.

          To the extent the Fund invests in wholly-owned subsidiaries, other GMO Funds, or unaffiliated money market funds (as indicated under “Principal Investment Strategies” in “Additional Information About The Fund’s Investment Strategies, Risks, And Expenses”), it is exposed to all the risks to which its wholly-owned subsidiaries and the other underlying funds in which it invests are exposed, as well as the risk that investments made through its wholly-owned subsidiaries will not perform as expected. Therefore, unless otherwise noted herein, the principal risks summarized below include both direct and indirect principal risks of the Fund, and as indicated above, references in this section to investments made by the Fund include those made both directly by the Fund and indirectly by the Fund through its wholly-owned subsidiaries, another GMO Fund, or an unaffiliated money market fund.

          The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified.

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CUSTOMIZED INVESTMENT PROGRAM RISK

          The Fund is not intended to provide a complete investment program and is intended generally to complement the long-only investments in global equities and fixed income instruments utilized in the Manager’s asset allocation strategies. As a result, the risks associated with the Fund’s investments often will be far greater (and the Fund’s investment returns may be far more volatile) than if the Fund served as a stand-alone investment vehicle.

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MANAGEMENT AND OPERATIONAL RISK

          The Fund is subject to management risk because it relies on the Manager’s ability to achieve its investment objective. The Manager uses proprietary investment techniques and risk analyses in making

investment decisions for the Fund, but there is no assurance that the Manager will achieve the desired results and the Fund may incur significant losses. The Manager, for example, may fail to use derivatives effectively, choosing to adjust positions at disadvantageous times. The nature of the risks assumed as a result of the Fund’s derivative positions and other investments may cause the Fund to incur significant losses. In addition, management risk may be particularly pronounced for the Fund because the Fund does not seek to control risk relative to a particular securities market index or benchmark.

          The Fund also is subject to operational risk associated with the Manager’s provision of investment management, administrative, and shareholder services to the Fund. Operational risk is the risk that deficiencies in the Manager’s internal systems or controls, or in those of a service provider to whom the Manager has contractually delegated responsibilities, will cause losses for the Fund or hinder Fund operations. Operational risk results from inadequate procedures and controls, human error, and system failures by the Manager or a service provider. For example, trading delays or errors (both human and systematic) caused by the Manager could prevent the Fund from purchasing a security that the Manager expects will appreciate in value, thus reducing the Fund’s opportunity to benefit from the security’s appreciation. The Manager is not contractually liable to the Fund for losses associated with operational risk absent the Manager’s willful misfeasance, bad faith, gross negligence, or reckless disregard of its contractual obligations to provide services to the Fund.

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DERIVATIVES RISK

          The Fund may invest in derivatives, which are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other OTC contracts. Derivatives may relate to securities, interest rates, currencies or currency exchange rates, inflation rates, commodities, and related indices. The SAI contains a description of the various types and uses of derivatives in the Fund’s investment strategies.

          The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.

          Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” below), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events

affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund. Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.

          Derivatives also present risks described elsewhere in this “Description of Principal Risks” section, including market risk, liquidity risk, currency risk, and credit and counterparty risk. Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.

          There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.

          Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by a shareholder.

          The risks of derivatives are particularly pronounced for Fund because it uses a variety of exchange-traded and OTC derivatives to implement its investment programs. In addition, when, as an alternative to purchasing bonds directly, the Fund uses credit default swaps to obtain synthetic long exposure to a fixed income security such as a debt instrument or index of debt instruments, the Fund is exposed to the risk that it will be required to pay the notional value of the swap contract in the event of a default.

          Swap contracts and other OTC derivatives are highly susceptible to liquidity risk (see “Liquidity Risk” below) and credit and counterparty risk (see “Credit and Counterparty Risk” below), and are subject to documentation risks. See also “Leveraging Risk” below.

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CURRENCY RISK

          Currency risk is the risk that fluctuations in exchange rates will adversely affect the value of the Fund’s investments. Currency risk includes the risk that currencies in which the Fund’s investments are traded and/or in which the Fund receives income, or currencies in which the Fund has taken an active investment position, will decline in value relative to other currencies. In the case of hedging positions, currency risk includes the risk that the currency to which the Fund has obtained exposure declines in value relative to the foreign currency being hedged. In such event, the Fund may realize a loss on the hedging instrument at the same time the Fund is realizing a loss on the currency being hedged. Currency exchange rates fluctuate significantly for many

reasons, including changes in supply and demand in the currency exchange markets, actual or perceived changes in interest rates, intervention (or the failure to intervene) by U.S. or foreign governments, central banks, or supranational agencies such as the International Monetary Fund, and currency controls or other political and economic developments in the U.S. or abroad. See “Market Disruption and Geopolitical Risk” below.

          The Fund uses derivatives to acquire positions in currencies whose value the Manager expects to correlate with the value of currencies the Fund owns, currencies the Manager wants the Fund to own, or currencies the Fund is exposed to through its investments. If the exchange rates of the currencies involved do not move as expected, the Fund could lose money on its holdings of a particular currency and also lose money on the derivative. The Fund also takes overweighted or underweighted currency positions and/or alters the currency exposure of the securities in which it has invested. As a result, its currency exposure may differ (in some cases significantly) from the currency exposure of its security investments. See also “Foreign Investment Risk” below.

          Because the Fund has foreign currency holdings and/or invests or trades in securities denominated in foreign currencies or related derivatives, it may be adversely affected by changes in the exchange rates of foreign currencies. Currency risk is particularly pronounced for the Fund. Derivative transactions in foreign currencies (such as futures, forwards, options, and swaps) may involve leveraging risk in addition to currency risk, as described below under “Leveraging Risk.” In addition, the obligations of counterparties in currency derivative transactions may not be secured by collateral, which increases counterparty risk (see “Credit and Counterparty Risk” below).

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LEVERAGING RISK

          The Fund’s use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged (i.e., the Fund’s exposure to underlying securities or assets exceeds its net asset value). Leverage increases the Fund’s portfolio losses when the value of its investments declines. Because many derivatives have a leverage component (i.e., a notional value in excess of the assets needed to establish and/or maintain the derivative position), adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the amount invested in the derivative itself. In the case of swaps, the risk of loss generally is related to a notional principal amount, even if the parties have not made any initial investment. Some derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A Fund’s portfolio will be leveraged if it borrows money to meet redemption requests or settle investment transactions or if it avails itself of the right to delay payment on a redemption.

          The Fund is not limited in the extent to which it uses derivatives. As a result, its net long exposure may exceed 100% of its net assets.

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LIQUIDITY RISK

          The effect of liquidity risk is particularly pronounced when low trading volume, lack of a market maker, a large position, or legal restrictions limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. In addition, holding less liquid securities increases the likelihood that the Fund will honor redemption requests in-kind. Because the Fund’s principal investment strategies involve the use of derivatives (in particular OTC derivatives) and investing in fixed income securities, in particular asset-backed securities, it has increased exposure to liquidity risk and the Fund’s investments may be less liquid than other types of securities. These types of investments are more likely to be fair valued (see “Determination of Net Asset Value” below). Less liquid securities are more susceptible to loss of value and their prices may decline more than other securities when markets decline generally.

          The Fund is also exposed to liquidity risk when it has an obligation to purchase particular securities (e.g., as a result of entering into reverse repurchase agreements, writing a put, or closing out a short position). Some of the markets, exchanges, or securities in which the Fund invests may prove to be less liquid and this would affect the price at which, and the time period in which, the Fund may liquidate positions to meet redemption requests or other funding requirements. Although U.S. Treasury securities have historically been among the most liquid fixed income investments, there can be no assurance that these securities will not become less liquid in the future.

          As noted under “Market Risk — Fixed Income Securities” below, because of the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, liquidity risk has been pronounced for funds that invest in fixed income securities, particularly asset-backed securities. The Fund may find it necessary to sell these securities at distressed prices or meet redemption requests in-kind.

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CREDIT AND COUNTERPARTY RISK

          This is the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase agreement or reverse repurchase agreement or other OTC derivatives contract, or a borrower of the Fund’s securities (including a borrower of the Fund’s portfolio securities pursuant to the GMO Funds’ securities lending program) will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise to honor its obligations. This risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.

          Credit risk for fixed income securities is the risk that the issuer will be unable to make scheduled contractual payments of principal and interest. The value of a fixed income security normally will decline as a result of the issuer’s defaulting on its payment obligations or the market’s expectation of a default, which may be triggered by the downgrading of the issuer’s credit rating.

          All fixed income securities are subject to credit risk. The risk varies depending upon whether the issuer is a corporation or domestic or foreign government (or sub-division or instrumentality) and whether the particular security has a priority in payment of principal and interest. U.S. government securities are subject to varying degrees of credit risk depending upon whether the securities are supported by the full faith and credit of the United States, supported by the ability to borrow from the U.S. Treasury, supported only by the credit of the issuing U.S. government agency, instrumentality, or corporation, or otherwise supported by the United States. For example, issuers of many types of U.S. government securities (e.g., the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and Federal Home Loan Banks), although chartered or sponsored by Congress, are not funded by Congressional appropriations and their fixed income securities, including mortgage-backed and other asset-backed securities, are neither guaranteed nor insured by the U.S. government. These securities are subject to more credit risk than U.S. government securities that are supported by the full faith and credit of the United States (e.g., U.S. Treasury bonds).

          As noted under “Market Risk — Fixed Income Securities” below, asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans and credit-card receivables. Asset-backed securities also may be collateralized by the fees earned by service providers. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations”). Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the

securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal and other risks if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers also are subject to bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors.

          The Fund also will be exposed to credit risk on the reference security to the extent it writes protection under credit default swaps. See “Derivatives Risk” above for more information regarding risks associated with the use of credit default swaps.

          Credit risk is particularly pronounced for below investment grade securities (also known as “junk bonds”). During periods of economic uncertainty and change, the market price of the Fund’s investments in below investment grade securities may be particularly volatile. Although offering the potential for higher investment returns, junk bonds often are less liquid than higher quality securities, present a greater risk of default and are more susceptible to real or perceived adverse economic and competitive industry conditions. Often junk bonds also are subject to greater sensitivity to interest rate and economic changes and present valuation difficulties. The market price of these securities can change suddenly and unexpectedly. From time to time, the Fund may directly acquire or hold below investment grade securities. At such times, the Fund will be subject to these risks.

          In addition, the Fund is exposed to counterparty risk to the extent it uses OTC derivatives (such as swap contracts and reverse repurchase agreements), enters into repurchase agreements, or lends its portfolio securities. See “Derivatives Risk” above for more information. If a counterparty’s obligation to the Fund is not collateralized, then the Fund is essentially an unsecured creditor of the counterparty. If the counterparty defaults, the Fund will have contractual remedies, but the Fund may be unable to enforce them. The Fund is subject in particular to the creditworthiness of the contracts’ counterparties because some types of swap contracts used by the Fund may have durations longer than six months (and, in some cases, a number of decades). In addition, the creditworthiness of a counterparty may be adversely affected by larger than average volatility in the markets, even if the counterparty’s net market exposure is small relative to its capital. Counterparty risk is still present even if a counterparty’s obligations are secured by collateral because the Fund’s interest in the collateral may not be perfected or additional collateral may not be promptly posted as required. OTC derivatives generally involve greater credit and counterparty risk than exchange-traded derivatives. The Fund may have significant exposure to a single counterparty as a result of its use of swaps and other OTC derivatives.

          The Fund is also subject to counterparty risk to the extent it executes a significant portion of its securities transactions through a single broker or dealer. If the broker or dealer fails to meet its contractual obligations, goes bankrupt, or otherwise experiences a business interruption, the Fund could miss investment opportunities or be unable to dispose of investments it would prefer to sell, resulting in losses for the Fund.

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FOCUSED INVESTMENT RISK

          Funds whose investments are focused in particular countries, regions, sectors, or companies or in industries with high positive correlations to one another (e.g., different industries within broad sectors, such as technology or financial services) are subject to greater overall risk than funds whose investments are more diversified. A fund that focuses its investments in a particular type of security or sector, or in securities of companies in a particular industry, is vulnerable to events affecting those securities, sectors, or companies. Securities, sectors, or companies that share common characteristics are often subject to similar business risks and regulatory burdens, and often react similarly to specific economic, market, political, or other developments. As noted under “Market Risk—Fixed Income Securities” below, sectors

of the securitized credit markets have become more highly correlated since the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008. This risk is pronounced for the Fund because it makes significant use of swap contracts and other OTC derivatives. See “Credit and Counterparty Risk” and “Derivatives Risk” above.

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FOREIGN INVESTMENT RISK

          Because the Fund invests in foreign (non-U.S.) securities, it is subject to additional and more varied risks. The securities markets of many foreign countries involve securities of only a limited number of companies in a limited number of industries. As a result, the market prices of those securities may fluctuate more than those of U.S. securities. In addition, issuers of foreign securities often are not subject to the same degree of regulation as U.S. issuers. Reporting, accounting, custody, and auditing standards of foreign countries differ, in some cases significantly, from U.S. standards. Foreign portfolio transactions generally involve higher commission rates, transfer taxes, and custodial costs. The Fund may be subject to foreign taxation on realized capital gains, dividends or interest payable on those securities, on transactions in those securities, or otherwise on the repatriation of proceeds generated from those securities. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes. In addition, some jurisdictions may limit the Fund’s ability to profit from short term trading (as defined in the jurisdiction). Also, for investments in lesser developed countries, nationalization, expropriation or confiscatory taxation of assets of issuers to which the Fund is exposed, adverse changes in investment regulations, capital requirements or exchange controls (which may include suspension of the ability to transfer currency from a country), political changes, and diplomatic developments could adversely affect the value of the Fund’s investments. In some foreign markets, custody arrangements for foreign securities may offer significantly fewer protections than custody arrangements in U.S. markets, and prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers.

          U.S. investors are required to maintain a license to invest directly in many foreign markets, and there are risks associated with any license that the Fund needs to maintain. These licenses are often subject to limitations, including maximum investment amounts. Once a license is obtained, the Fund’s ability to continue to invest directly is subject to the risk that the license will be terminated or suspended. If a license is terminated or suspended, the Fund will be required to obtain exposure to the market through the purchase of American Depositary Receipts, Global Depositary Receipts, shares of other funds that are licensed to invest directly, or derivative instruments. The receipt of a foreign license by one of the Manager’s clients may preclude other clients, including the Fund, from obtaining a similar license, and this could limit the Fund’s investment opportunities. In addition, the activities of another of the Manager’s clients could cause the suspension or revocation of a license and thereby limit the Fund’s investment opportunities.

          Because the Fund may invest a significant portion of its assets in securities of issuers tied economically to emerging countries, it is subject to greater foreign investment risk than funds that invest primarily in more developed foreign countries. The risks of investing in those securities include: greater fluctuations in currency exchange rates; increased risk of default (by both government and private issuers); greater social, economic, and political uncertainty and instability (including the risk of war or natural disaster); increased risk of nationalization, expropriation, or other confiscation of assets of issuers to which the Fund is exposed; greater governmental involvement in the economy; less governmental supervision and regulation of the securities markets and participants in those markets; controls on foreign investment, capital controls and limitations on repatriation of invested capital, dividends, interest and other income and on the Fund’s ability to exchange local currencies for U.S. dollars; inability to purchase

and sell investments or otherwise settle security or derivative transactions (i.e., a market freeze); unavailability of currency hedging techniques; differences in, or lack of, auditing and financial reporting standards and resulting unavailability of material information about issuers; slower clearance and settlement; difficulties in obtaining and/or enforcing legal judgments; and significantly smaller market capitalizations of issuers. These risks may be particularly pronounced the Fund to the extent it invests in investments tied economically to emerging countries or invests in sovereign debt of emerging countries.

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MARKET RISK — FIXED INCOME SECURITIES

          The Fund’s investments in fixed income securities (including bonds, notes, bills, synthetic debt instruments, and asset-backed securities) are subject to various market risks. These risks include, but are not limited to, loss on investments in asset-backed and other fixed income securities, lack of liquidity of these investments and impact of fluctuating interest rates.

          The most significant market risk for the Fund’s investment in fixed income securities is that the securities in which it invests experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. See “Credit and Counterparty Risk” above for more information about credit risk.

          With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.

          The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations

underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and the Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.

          The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. See “Focused Investment Risk” below for more information about risks of investing in correlated sectors. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.

          Besides the market risks associated with investing in asset-backed securities, the Fund is exposed to liquidity risk and interest rate risk. Liquidity risk has become more pronounced for other types of fixed income securities because of the deterioration in worldwide economic and liquidity conditions discussed above and under “Liquidity Risk” above. Even in the absence of a credit downgrade or default, the price of fixed income securities held by the Fund may decline significantly due to a reduction in market demand.

          In addition, a principal risk of the Fund is that an increase in prevailing interest rates will cause the value of its investments to decline. The risk associated with increases in interest rates (also called “interest rate risk”) is generally greater when the Fund invests in fixed income securities with longer durations and in some cases duration can increase.

          The extent to which a security’s value moves with interest rates is referred to as interest rate duration, which can be measured mathematically or empirically. Longer-maturity investments generally have longer interest rate durations because the investment’s fixed rate is locked in for longer periods of time. Floating-rate or adjustable-rate securities, however, generally have shorter interest rate durations because their interest rates are not fixed but rather float up and down with the level of prevailing interest rates. The Fund also is permitted to invest, from time to time, in fixed income securities paying no interest, such as zero coupon and principal-only securities. To the extent the Fund makes investments in fixed income securities paying no interest, it will be exposed to additional interest rate risk.

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MARKET RISK — EQUITY SECURITIES

          The Fund runs the risk that the market value of its equity investments will decline. The market value of equity investments may decline for reasons that directly relate to the issuing company, such as management performance, financial leverage and reduced demand for the issuer’s goods or services. It also may decline due to factors that affect a particular industry or industries, such as a decline in demand, labor or raw material shortages, increased production costs, regulation, or competitive industry conditions. In addition, it may decline due to general market conditions that are not specifically related to a company or industry, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, or adverse investor sentiment generally.

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MARKET DISRUPTION AND GEOPOLITICAL RISK

          The Fund is subject to the risk that geopolitical events will disrupt securities markets and adversely affect global economies and markets. The wars in Iraq and Afghanistan have had a substantial effect on economies and securities markets in the U.S. and worldwide. Terrorism in the U.S. and around the world has had a similar global impact and has increased geopolitical risk. The terrorist attacks of September 11, 2001 resulted in the closure of some U.S. securities markets for four days, and similar

future events are possible. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, systemic market dislocations of the kind surrounding the insolvency of Lehman Brothers in 2008 may be highly disruptive to economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Fund’s investments. At such times, the Fund’s exposure to the risks described elsewhere in this “Description of Principal Risks” section, including market risk, liquidity risk, foreign investment risk, currency risk, and credit and counterparty risk, will likely increase. Market disruptions can also prevent the Fund from implementing its investment program for a period of time and achieving its investment objective. For example, a disruption may cause the Fund’s derivatives counterparties to discontinue offering derivatives on some underlying commodities, securities, reference rates, or indices or to offer such products on a more limited basis, or the current global economic crisis may strain the U.S. Treasury’s ability to satisfy its obligations.

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LARGE SHAREHOLDER RISK

          Because shares of the Fund are expected to be held only by GMO Funds and certain other accredited investors whose assets are managed in an asset allocation strategy by the Manager’s Asset Allocation Division, the Fund is subject to the risk that these shareholders will purchase or redeem Fund shares in large amounts and/or on a frequent basis. These transactions could adversely affect the Fund if it is forced to sell portfolio securities to raise the cash that is necessary to satisfy shareholder redemption requests or purchase portfolio securities to invest cash. This risk is particularly pronounced when one shareholder owns a substantial portion of the Fund. See “Beneficial Owners of 5% or More of the Funds’ Shares” in the SAI for more information. Asset allocation decisions by the Manager may result in substantial redemptions from (or investments into) the Fund. These transactions may adversely affect the Fund’s performance to the extent that the Fund is required to sell investments (or invest cash) at times when it would not otherwise do so. These transactions also may accelerate the realization of taxable income to shareholders if such sales of investments resulted in gains, and also may increase transaction costs. To the extent the Fund invests in other GMO Funds having large shareholders, the Fund is indirectly subject to this risk.

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FUND OF FUNDS RISK AND RELATED CONSIDERATIONS

          The Fund may invest in shares of other investment companies, including certain other GMO Funds and money market funds (“underlying funds”), and is exposed to the risk that the underlying funds do not perform as expected. The Fund also is indirectly exposed to all of the risks applicable to an investment in the underlying funds. Because the Fund bears the fees and expenses of the underlying funds in which it invests (absent reimbursement of those expenses), the Fund will incur additional expenses when investing in underlying funds. The Fund also is indirectly exposed to all of the risks applicable to an investment in the underlying funds. In addition, funds that invest in shares of other GMO Funds also are likely to be subject to Large Shareholder Risk because underlying GMO Funds are more likely to have large shareholders (e.g., other GMO Funds).

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NON-DIVERSIFIED FUND

          The Fund is not a “diversified” investment company within the meaning of the 1940 Act. This means the Fund is allowed to invest in the securities of a relatively small number of issuers and/or foreign currencies. As a result, the Fund may be subject to greater credit, market, and other risks, and poor performance by a single issuer may have a greater impact on the Fund’s performance than if the Fund were “diversified.”

MANAGEMENT OF THE FUND

          GMO, 40 Rowes Wharf, Boston, Massachusetts 02110, provides investment management and shareholder services to the Fund and other GMO Funds. GMO is a private company, founded in 1977. As of May 31, 2010, GMO managed on a worldwide basis more than $95 billion of assets for the GMO Funds and institutional investors, such as pension plans, endowments, and foundations.

          Subject to the approval of the Trustees, the Manager establishes and modifies when it deems appropriate the investment strategies of the Fund. In addition to its management of the Fund’s investment portfolio and the shareholder services it provides to the Fund, the Manager administers the Fund’s business affairs.

          The Fund pays the Manager shareholder service fees for providing client service and reporting, such as performance information reporting, client account information, personal and electronic access to Fund information, access to analysis and explanations of Fund reports, and assistance in maintaining and correcting client-related information.

          For the fiscal year ended February 28, 2010, the Manager received an investment management fee (after applicable waivers or reimbursements) equal to 0.33% of the Fund’s average daily net assets for each class of shares.

          A discussion of the basis for the Trustees’ approval of the Fund’s investment management contract is included in the Fund’s shareholder report for the period during which the Trustees approved that contract.

          GMO’s Asset Allocation Division is responsible for day-to-day investment management of the Fund. The Division’s investment professionals work collaboratively to manage the Fund’s portfolio, and no one person is primarily responsible for day-to-day investment management of the Fund.

          Ben Inker is the senior member and director of the Asset Allocation Division. Mr. Inker has been a senior member of the Division since 1996. As senior member and director of the Division, Mr. Inker allocates responsibility for portions of the Fund’s portfolio to members of the Division, oversees the implementation of trades, reviews the overall composition of the portfolio, including compliance with its stated investment objective and strategies, and monitors cash.

          The SAI contains other information about how GMO determines the compensation of the senior member, other accounts he manages and related conflicts, and his ownership of the Fund.

Custodian, Fund Accounting Agent, and Transfer Agent

          State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02111, serves as the Fund’s custodian, fund accounting agent, and transfer agent.

Expense Reimbursement

          As more fully described in the Fund’s “Annual Fund Operating Expenses” table under the caption “Fees and Expenses” in the Fund’s summary, the Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s total annual operating expenses that exceed 0.37% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” As used in this Private Placement Memorandum, “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and

expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

          In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount.

          The Fund’s contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

Note: There can be no assurance that brokers will be able to provide bid prices. If quotes are not used, the Fund would seek alternative valuation methodologies (e.g., valuing the relevant assets at “fair value” as described below).

Certain debt obligations (previously acquired and having sixty days or less to final maturity)

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Amortized cost (unless circumstances dictate otherwise; for example, if the issuer’s creditworthiness has become impaired)

All other fixed income securities (includes bonds, asset backed securities, loans, structured notes)

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Most recent bid supplied by a single pricing source chosen by the Manager

Shares of other GMO Funds and other open-end registered investment companies

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Most recent NAV

“Fair Value” Pricing

          For all other assets and securities, including derivatives, and in cases where market prices are not readily available or circumstances make an existing methodology or procedure unreliable, the Fund’s investments are valued at “fair value,” as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees.

          With respect to the Fund’s use of “fair value” pricing, you should note the following:

	•		In some cases, a significant percentage of the Fund’s assets may be “fair valued.” The value of assets that are “fair valued” is determined by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Factors that may be considered in determining “fair value” include, among others, the value of other financial instruments traded on other markets, trading volumes, changes in interest rates, observations from financial institutions, significant events (which may be considered to include changes in the value of U.S. securities or securities indices) that occur after the close of the relevant market and before the Fund’s net asset value is calculated, other news events, and significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments). Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the fair value determined for a particular security may be materially different from the value realized upon its sale.
	•		Many foreign equity securities markets and exchanges close prior to the close of the NYSE, and, therefore, the closing prices for foreign securities in those markets or on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE

close using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor using that vendor’s proprietary models.

          The values of foreign securities quoted in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 p.m. Boston time, at then current exchange rates or at such other rates as the Trustees or persons acting at their direction may determine in computing net asset value.

          The Manager evaluates pricing sources on an ongoing basis and may change a pricing source at any time. The Manager normally does not evaluate the prices supplied by pricing sources on a day-to-day basis. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices often are available for many securities held by the Fund, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. In addition, because the Fund may hold portfolio securities listed on foreign exchanges that trade on days on which the NYSE is closed, the net asset value of the Fund’s shares may change significantly on days when shares cannot be redeemed.

DISCLOSURE OF PORTFOLIO HOLDINGS

          The Fund has established a policy with respect to disclosure of its portfolio holdings. That policy is described in the SAI. Information regarding the Fund’s portfolio holdings as of each month’s end is made available to shareholders of the Trust, qualified potential shareholders as determined by GMO (“potential shareholders”), and their consultants or agents through a secured link on GMO’s website approximately five days after month end. Periodically, in response to heightened market interest in specific issuers, the Fund’s holdings in one or more issuers may be made available on a more frequent basis to shareholders of the Trust, potential shareholders, and their consultants or agents through a secured link on GMO’s website. This information may be posted as soon as the business day following the date to which the information relates.

          To access this information on GMO’s website (http://www.gmo.com/america/strategies), shareholders, potential shareholders, and their consultants and agents must contact GMO to obtain a password and user name (to the extent they do not already have them) and enter into a confidentiality agreement with GMO and the Trust that permits the information to be used only for purposes determined by GMO to be in the best interest of the shareholders of the Fund. GMO may make portfolio holdings information available in alternate formats under the conditions described in the SAI.

          The Fund or GMO may suspend the posting of portfolio holdings, and the Fund may modify the disclosure policy, without notice to shareholders. Once posted, the Fund’s portfolio holdings will remain available on the website at least until the Fund files a Form N-CSR (annual/semiannual report) or Form N-Q (quarterly schedule of portfolio holdings) for the period that includes the date of those holdings.

HOW TO PURCHASE SHARES

          Currently, shares of the Fund are principally available for purchase by other GMO Funds and certain other accredited investors. All investors must be “accredited investors” as defined in Regulation D under the Securities Act of 1933.

          Under ordinary circumstances, you may purchase the Fund’s shares directly from the Trust on days when the NYSE is open for business. For instructions on purchasing shares, call the Trust at 1-617-

346-7646 or send an e-mail to SHS@GMO.com. The Trust will not accept a purchase request until it has received a GMO Trust Application deemed to be in good order by the Trust or its designated agent. In addition, the Trust will not accept a purchase request unless an IRS Form W-9 (for U.S. shareholders) or the appropriate IRS Form W-8 (for foreign shareholders) with a correct taxpayer identification number (if required) is on file with GMO and that W-9 or W-8 is deemed to be in good order by the Trust’s withholding agent, State Street Bank and Trust Company. Subject to future guidance from the Internal Revenue Service, the Trust may require additional tax-related certifications, representations or information from you in order to comply with the “Foreign Account Tax Compliance” provisions of the recently enacted Hiring Incentives to Restore Employment Act. Please consult your tax adviser to ensure all tax forms provided to the Trust are completed properly and maintained, as required, in good order. GMO has the right to make final good order assessments.

Purchase Policies. You must submit a purchase request in good order to avoid having it rejected by the Trust or its designated agent. In general, a purchase request is in good order if it includes:

	•		The name and/or CUSIP number of the Fund being purchased;
	•		The U.S. dollar amount of the shares to be purchased;
	•		The date on which the purchase is to be made (subject to receipt prior to the close of regular trading on that date);
	•		The name and/or the account number (if any) set forth with sufficient clarity to avoid ambiguity; and
	•		The signature of an authorized signatory as identified in the GMO Trust Application or subsequent authorized signers list.

          If payment in full (by check, wire, or, when approved, securities) is not received by the Trust or its designated agent prior to the earlier of the close of the NYSE or 4:00 p.m. Boston time on the intended purchase date, the request may be rejected or deferred until payment is received unless prior arrangements for later payment have been approved by GMO.

          If the purchase request is received in good order by the Trust prior to the close of regular trading on the NYSE (generally 4:00 p.m. Boston time), the purchase price for the Fund shares to be purchased is the net asset value per share determined on that day (plus any applicable purchase premium). If that request is received after the close of regular trading on the NYSE, the purchase price for the Fund shares to be purchased is the net asset value per share determined on the next business day that the NYSE is open (plus any applicable purchase premium). Purchase premiums (if any) are not charged on reinvestments of distributions.

          To help the U.S. government fight the funding of terrorism and money laundering activities, federal law requires the Trust to verify identifying information provided by each investor in its GMO Trust Application. Additional identifying documentation also may be required. If the Trust is unable to verify the information shortly after your account is opened, the account may be closed and your shares redeemed at their net asset value at the time of the redemption.

          The Trust reserves the right to reject any purchase order. In addition, without notice, the Fund in its sole discretion may temporarily or permanently suspend sales of its shares to new investors and, in some circumstances, existing shareholders.

          Minimum investment amounts (by class) are set forth in the table on page 24 of this Private Placement Memorandum. No minimum additional investment is required to purchase additional shares of a class of the Fund. The Trust may waive initial minimums for some investors.

          Funds advised or sub-advised by GMO (“Top Funds”) may purchase shares of the Fund after the close of regular trading on the NYSE (the “Cut-off Time”) and receive the current day’s price if the following conditions are met: (i) the Top Fund received a good order purchase request prior to the Cut-off Time on that day; and (ii) the purchase(s) by the Top Fund of shares of the Fund are executed pursuant to an allocation predetermined by GMO prior to that day’s Cut-off Time.

           Submitting Your Purchase Order Form . Completed purchase order forms can be submitted by mail or by facsimile or other form of communication pre-approved by Shareholder Services to the Trust at:

GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: 1-617-439-4192
Attention: Shareholder Services

          Call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com to confirm that GMO received, made a good order determination regarding, and accepted your purchase order form. Do not send cash, checks, or securities directly to the Trust. A purchase request submitted by mail is “received” by the Trust when it is actually delivered to the Trust or its designated agent. A purchase request delivered by facsimile is “received” by the Trust when it is actually received by the Trust or its designated agent.

           Funding Your Investment . You may purchase shares:

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with cash (via wire transfer or check)

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By wire . Instruct your bank to wire the amount of your investment to:

State Street Bank and Trust Company, Boston, Massachusetts
ABA#: 011000028
Attn: Transfer Agent
Credit: GMO Deposit Account 00330902
Further credit: GMO Special Situations Fund/Account name and number

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By check . All checks must be made payable to the Fund or to GMO Trust. The Trust will not accept checks payable to a third party that have been endorsed by the payee to the Trust. Mail checks to:

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in exchange for securities acceptable to the Manager

	•		securities must be approved by the Manager prior to transfer to the Fund
	•		securities will be valued as set forth under “Determination of Net Asset Value”

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by a combination of cash and securities

           Frequent Trading Activity. As a matter of policy, the Trust will not honor requests for purchases or exchanges by shareholders identified as engaging in frequent trading strategies, including market timing, that GMO determines could be harmful to certain other GMO Funds and their shareholders. Frequent trading strategies are generally strategies that involve repeated exchanges and/or purchases and redemptions (or redemptions and purchases) within a short period of time. Frequent trading strategies may be disruptive to the efficient management of such Funds, materially increase portfolio transaction costs and taxes, dilute the value of shares held by long-term investors, or otherwise be harmful to such Funds and their shareholders. Notwithstanding the foregoing, these policies and procedures do not limit frequent trading of the Fund.

HOW TO REDEEM SHARES

          Under ordinary circumstances, you may redeem the Fund’s shares on days when the NYSE is open for business. Redemption requests should be submitted directly to the Trust. For instructions on redeeming shares, call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com. The Trust may take up to seven days to remit proceeds.

           Redemption Policies. You must submit a redemption request in good order to avoid having it rejected by the Trust. In general, a redemption request is in good order if it includes:

	•		The name and/or CUSIP number of the Fund being redeemed;
	•		The number of shares or the dollar amount of the shares to be redeemed or that the client wants to receive;
	•		The date on which the redemption is to be made (subject to receipt prior to the close of regular trading on the NYSE on that date);
	•		The name and/or the account number set forth with sufficient clarity to avoid ambiguity;
	•		The signature of an authorized signatory as identified in the GMO Trust Application or subsequent authorized signers list; and
	•		Wire instructions or registration address that match the wire instructions or registration address (as applicable) on file at GMO or confirmation from an authorized signatory that the wire instructions are valid.

          If a redemption request in good order is received by the Trust prior to the close of regular trading on the NYSE (generally 4:00 p.m. Boston time), the redemption price for the Fund shares to be redeemed is the net asset value per share determined on that day (less any applicable redemption fee). If that redemption request is received after the close of regular trading on the NYSE, the redemption price for the Fund shares to be redeemed is the net asset value per share determined on the next business day (less any applicable redemption fee) unless you or another authorized person on your account have instructed GMO Shareholder Services in writing to defer the redemption to another day. If you or another authorized person on your account have instructed GMO Shareholder Services to defer the redemption to another day, you or another authorized person on your account may revoke your redemption request in

writing at any time prior to 4:00 p.m. Boston time or before the close of regular trading on the NYSE (whichever is earlier) on the redemption date. Redemption fees, if any, apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). In the event of a disaster affecting Boston, Massachusetts, please contact GMO to confirm that your redemption request was received and is in good order.

          Failure to provide the Trust with a properly authorized redemption request or otherwise satisfy the Trust as to the validity of any change to the wire instructions or registration address may result in a delay in processing a redemption request, delay in remittance of redemption proceeds, or a rejection of the redemption request.

          As with all GMO Funds, if the Manager determines, in its sole discretion, that paying redemption proceeds wholly or partly in cash would be detrimental to the best interests of the Fund’s remaining shareholders, the Fund may pay the redemption proceeds in whole or in part with securities instead of cash. In particular, if market conditions deteriorate and the Manager believes a Fund’s redemption fee (if any) is not fair compensation for transaction costs, the Fund may limit cash redemptions (honoring redemptions with portfolio securities) to protect the interests of all Fund shareholders. Redemptions in-kind may require shareholders to enter into new custodial arrangements if they do not have accounts available for holding securities directly.

          If a redemption is paid in cash:

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payment will generally be made by means of a federal funds transfer to the bank account designated in a recordable format by an authorized signatory in the GMO Trust Application to purchase the Fund shares being redeemed

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designation of one or more additional bank accounts or any change in the bank accounts originally designated in the GMO Trust Application must be made in a recordable format by an authorized signatory according to the procedures in the GMO Trust Redemption Order Form

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upon request, payment will be made by check mailed to the registration address (unless another address is specified according to the procedures in the GMO Trust Redemption Order Form).

          The Trust will not pay redemption proceeds to third-parties and does not offer check-writing privileges.

          If a redemption is paid with securities, you should note that:

	•		the securities will be valued as set forth under “Determination of Net Asset Value”
	•		the securities will be selected by the Manager in light of the Fund’s objective and may not represent a pro rata distribution of each security held in the Fund’s portfolio
	•		you may incur brokerage charges on the sale of the securities
	•		the securities will be transferred and delivered by the Trust as directed in writing by an authorized person on your account.

          The Fund may suspend the right of redemption and may postpone payment for more than seven days:

	•		if the NYSE and/or the Federal Reserve Bank are closed on days other than weekends or holidays
	•		during periods when trading on the NYSE is restricted
	•		during an emergency that makes it impracticable for the Fund to dispose of its securities or to fairly determine the net asset value of the Fund
	•		during any other period permitted by the SEC for your protection.

          Pursuant to the Trust’s Amended and Restated Agreement and Declaration of Trust, the Trust has the unilateral right to redeem Fund shares held by a shareholder at any time if at that time: (i) the shares of the Fund or a class held by the shareholder have an aggregate net asset value of less than an amount determined from time to time by the Trustees; or (ii) the shares of the Fund or the class held by the shareholder exceed a percentage of the outstanding shares of the Fund or class determined from time to time by the Trustees. The Trustees have authorized GMO in its sole discretion to redeem shares to prevent a shareholder from becoming an affiliated person of the Fund.

          Top Funds may redeem shares of the Fund after the Cut-off Time and receive the current day’s price if the following conditions are met: (i) the Top Fund received a redemption request prior to the Cut-off Time on that day; and (ii) the redemption of the shares of the Fund is executed pursuant to an allocation predetermined by GMO prior to that day’s Cut-off Time.

           Submitting Your Redemption Request . Redemption requests can be submitted by mail or by facsimile to the Trust at the address/facsimile number set forth under “How to Purchase Shares — Submitting Your Purchase Order Form.” Redemption requests submitted by mail are “received” by the Trust when actually delivered to the Trust. Call the Trust at 1-617-346-7646 or send an e-mail to SHS@GMO.com to confirm that GMO received, made a good order determination regarding, and accepted your redemption request.

PURCHASE PREMIUMS AND REDEMPTION FEES

          Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non de minimis estimated portfolio transaction costs and other related costs (e.g., bid to ask spreads, stamp duties, and transfer fees) incurred by the Fund (directly or indirectly through investments in underlying funds) as a result of the purchase or redemption by allocating estimated transaction costs to the purchasing or redeeming shareholder. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). At present, the Fund does not charge any purchase premium or redemption fee. However, the Fund may impose a new purchase premium and/or redemption fee at any time.

MULTIPLE CLASSES AND ELIGIBILITY

          The Fund currently offers multiple classes of shares. The sole economic difference among the classes of shares described in this Private Placement Memorandum is in their shareholder service fee. Differences in the fee reflect the fact that, as the size of a client relationship increases, the cost to service that client decreases as a percentage of the client’s assets. Thus, the shareholder service fee generally is lower for classes requiring greater minimum investments.

          Eligibility to purchase Fund shares or different classes of Fund shares depends on the client’s meeting either (i) the minimum “Total Fund Investment,” which includes only a client’s total investment in the Fund, or (ii) the minimum “Total GMO Investment,” both set forth in the table below. No minimum additional investment is required to purchase additional shares of the Fund.

          A client’s Total GMO Investment equals the Manager’s estimate of the market value of all the client’s assets managed by GMO and its affiliates (i) at the time of the client’s initial investment, (ii) at the close of business on the last business day of each calendar quarter, or (iii) at other times as determined by the Manager (including those described below under “Conversions between Classes”) (each, a “Determination Date”). When purchasing shares of the Fund, investors should consult with the Manager to determine the applicable Determination Date and the share class for which they are eligible.

          Upon request GMO may permit a client to undertake in writing to meet the applicable Total Fund Investment or Total GMO Investment minimums over a specified period (a “Commitment Letter”).

          You should note:

	•		No minimum additional investment is required to purchase additional shares of the Fund for any class of shares.
	•		The Manager makes all determinations as to the aggregation of client accounts for purposes of determining eligibility. See the SAI for a discussion of factors the Manager considers relevant when making those determinations.
	•		Eligibility requirements for each class of shares are subject to change upon notice to shareholders.
	•		The Trust may waive eligibility requirements for certain persons, accounts or special situations. As of the date of this Private Placement Memorandum, these waivers include the waiver of eligibility requirements for (i) GMO Funds and other accounts over which the Manager has investment discretion that invest in other GMO Funds, (ii) GMO employees and their family members, and (iii) the Trustees of the Trust, each of which may invest in the least expensive class of those GMO Funds offered at the time of investment without regard to the amount invested.
	•		Investments through an intermediary generally are invested in Class III Shares.

Conversions between Classes

          As described in the Fund’s summary, in determining whether a client is eligible to purchase Fund shares, GMO considers each client’s Total Fund Investment and Total GMO Investment on each Determination Date. Based on this determination, and subject to the following, each client’s shares of the Fund eligible for conversion will be converted to the class of shares of the Fund with the lowest

shareholder service fee for which the client satisfies all minimum investment requirements (or, to the extent the client already holds shares of that class, the client will remain in that class). Except as noted below, with respect to the Fund:

	•		To the extent a client satisfies all minimum investment requirements for a class of shares then being offered that bears a lower shareholder service fee than the class held by the client on the Determination Date (generally at the close of business on the last business day of each calendar quarter), the client’s shares eligible for conversion generally will be automatically converted to that class within 45 calendar days following the Determination Date on a date selected by the Manager.
	•		If a client no longer satisfies all minimum investment requirements for the class of shares of the Fund held by the client on the last Determination Date of a calendar year (generally at the close of business on the last business day of the calendar year), the Fund generally will convert the client’s shares to the class it is then offering bearing the lowest shareholder service fee for which the client satisfies all minimum investment requirements (and which class will typically bear a higher shareholder service fee than the class then held by the client). If a client no longer satisfies all minimum investment requirements for any class of the Fund as of the last Determination Date of a calendar year, the Fund will convert the client’s shares to the class of the Fund then being offered bearing the highest shareholder service fee. Notwithstanding the foregoing, a client’s shares will not be converted to a class of shares bearing a higher shareholder service fee without at least 15 calendar days’ prior notice, and if the client makes an additional investment and/or the value of the client’s shares otherwise increases prior to the end of the notice period so as to satisfy all minimum investment requirements for the client’s current class of shares, the client will remain in the class of shares then held by the client. Solely for the purpose of determining whether a client has satisfied the minimum investment requirements for the client’s current class of shares, the value of the client’s shares is considered to be the greater of (i) the value of the client’s shares on the relevant Determination Date or (ii) the value of the client’s shares on the date that GMO reassesses the value of the client’s account for the purpose of sending notice of a proposed conversion. If the client is not able to make an additional investment in the Fund solely because the Fund is closed to new investment or is capacity constrained, the class of shares then held by the client will not be converted unless the Manager approves reopening the Fund to permit the client to make an additional investment. The conversion of a client’s shares to a class of shares bearing a higher shareholder service fee generally will occur within 60 calendar days following the last Determination Date of a calendar year or, in the case of conversion due to an abusive pattern of investments and/or redemptions, on any other date the Manager determines.

          The Fund may at any time without notice convert a client’s shares to the class it is then offering bearing the lowest shareholder service fee for which the client satisfied all minimum investment requirements (or, if the Fund has no such class, the class of that Fund bearing the highest shareholder service fee) if the client no longer satisfies all minimum investment requirements for the class of shares held by the client and: (i) the Manager believes the client has engaged in an abusive pattern of investments and/or redemptions (e.g., a large investment just before a Determination Date and a redemption right after the Determination Date), (ii) the client fails to meet the applicable Total Fund Investment or Total GMO Investment minimum by the time specified in the client’s Commitment Letter, or (iii) the total expense ratio borne by the client immediately following the conversion is equal to or less than the total expense ratio borne by the client immediately prior to such conversion (after giving effect to any applicable fee and expense waivers or reimbursements).

          The conversion of a client’s investment from one class of shares of the Fund to another class of shares of the Fund generally should not result in the recognition of gain or loss in the shares that are converted. Generally, the client’s tax basis in the new class of shares immediately after the conversion should equal the client’s basis in the converted shares immediately before conversion, and the holding period of the new class of shares should include the holding period of the converted shares.

which, for instance, can result in the recognition of ordinary income instead of capital gain on certain distributions of money. See “Taxes” in the SAI for more information.

	•		Certain of the Fund’s investment practices, including derivative transactions, short sales, hedging activities generally, and securities lending activities (if any), as well as the Fund’s investments in certain types of securities, including any interests in a subsidiary company, debt obligations issued or purchased at a discount, asset-backed securities, assets “marked to the market” for U.S. federal income tax purposes, and, potentially, so-called “indexed securities” (such as inflation-indexed bonds), will be subject to special and complex U.S. federal income tax provisions. These special rules may increase or accelerate Fund shareholders’ recognition of ordinary income and can otherwise affect the timing, character, and/or amount of income recognized by shareholders. See “Taxes” in the SAI for more information about the tax consequences of the Fund’s specific investment practices and investments.
	•		Any investment by the Fund in foreign securities may subject the Fund and/or its shareholders, directly or indirectly, to taxation, including withholding or other taxes on dividends, interest, or capital gains, and/or tax-filing obligations in foreign jurisdictions. The Fund and/or its shareholders may otherwise be subject to foreign taxation on repatriation proceeds generated from those securities or to other transaction-based foreign taxes on those securities. Subject to certain limitations, shareholders may be entitled to claim a credit or deduction (but not both) for their allocable share of certain foreign taxes incurred by the Fund. In addition, the Fund’s investment in foreign securities (other than equity securities), foreign currencies, or foreign currency derivatives may increase or accelerate Fund shareholders’ recognition of ordinary income. See “Taxes” in the SAI for more information.
	•		Under the GMO Funds’ securities lending arrangements, when a dividend is paid to a Fund security out on loan, the borrower is required to pay to that Fund a substitute payment at least equal, on an after-tax basis, to the dividend that the Fund would have received if it had received the dividend directly. Because some borrowers of foreign securities may be subject to levels of taxation that are lower than the rates applicable to the Fund, some borrowers are likely to be motivated by the ability to earn a profit on those differential tax rates and to pay that Fund for the opportunity to earn that profit. In the United States, certain swap and securities lending transactions designed to enable non-U.S. persons to reduce otherwise applicable U.S. withholding taxes on U.S. stock dividends have received the attention of U.S. lawmakers. In response, Congress enacted legislation in March 2010 to limit these practices. There can be no assurance that similar legislation will not be adopted in other jurisdictions with respect to foreign securities or that foreign taxing authorities will not otherwise challenge beneficial tax results arising from swap or securities lending arrangements.
	•		An allocable share of a tax-exempt shareholder’s income will likely be UBTI to the extent that the Fund borrows money (including through the use of reverse repurchase agreements) to acquire investments or invests in assets that produce UBTI.
	•		To the extent the Fund invests in other GMO Funds or other investment companies treated as partnerships or RICs for U.S. federal income tax purposes, the recognition of income by Fund shareholders could vary in terms of its timing, character, and/or amount from that which would have been recognized had the Fund invested directly in the portfolio securities and other assets held by the underlying investment companies. See “Taxes” in the SAI for more information.

	•		In general, in order to qualify as a RIC, a shareholder must, among other things, derive 90% of its gross income from certain specified sources (“good income”). Because shareholders will be required to take into account their distributive share of items of Fund income for each taxable year as though such items had been realized directly by the shareholder, special tax considerations apply to Fund shareholders that are RICs. In particular, income generated from certain of the Fund’s investments and taken into account by shareholders that are RICs may not qualify as good income for those RICs. Any investment by the Fund in a wholly owned subsidiary company is expected to generate good income for shareholders that are RICs. However, there is a risk that the Internal Revenue Service could recharacterize this investment in such a manner that it could generate “bad income” (i.e., non-qualifying income) for shareholders that are RICs. The Fund believes that the risk of such a recharacterization is remote.
	•		Any foreign subsidiary in which the Fund may invest may be subject to U.S. withholding tax on certain categories of its U.S.-source income. All of any such subsidiary’s net taxable income is expected to be includible in the Fund’s income at the end of its tax year, whether or not distributed by the subsidiary to the Fund, and all such net income is expected to be treated as ordinary income. Net losses incurred by a subsidiary during a tax year will not flow through to the Fund and thus will not be available to shareholders to offset income or capital gain generated from the Fund’s other investments.

          The above is a general summary of the principal U.S. federal income tax consequences of investing in the Fund for shareholders who are U.S. citizens, residents, or domestic corporations. You should consult your own tax advisors about the precise tax consequences of an investment in the Fund in light of your particular tax situation, including possible foreign, state, local, or other applicable taxes (including the federal alternative minimum tax). See “Taxes” in the SAI for more information, including a summary of certain tax consequences of investing in the Fund for non-U.S. shareholders.

FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)

          The financial highlights table is intended to help you understand the Fund’s financial performance for the period of the Fund’s operations. Some information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report, along with the Fund’s financial statements, is included in the Fund’s Annual Report, which is incorporated by reference in the SAI and available upon request.

INVESTMENT IN OTHER GMO FUNDS

           GMO U.S. Treasury Fund. GMO U.S. Treasury Fund (“U.S. Treasury Fund”), a series of the Trust, is offered through a separate prospectus. U.S. Treasury Fund is managed by GMO.

          U.S. Treasury Fund pays an investment management fee to the Manager at the annual rate of 0.08% of U.S. Treasury Fund’s average daily net assets. Subject to Excluded Expenses, the Manager has contractually agreed to reimburse U.S. Treasury Fund to the extent U.S. Treasury Fund’s total annual operating expenses exceed 0.08% of U.S. Treasury Fund’s average daily net assets. This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by U.S. Treasury Fund’s Board of Trustees. In addition to this contractual expense limitation, the Manager has voluntarily agreed to waive U.S. Treasury Fund’s management fee and to reimburse U.S. Treasury Fund to the extent U.S. Treasury Fund’s total annual operating expenses exceed 0.00% of U.S. Treasury Fund’s average daily net assets (excluding Excluded Expenses). The Manager may change or terminate these voluntary waivers and reimbursements at any time. During any period for which these voluntary waivers and reimbursements are in effect, U.S. Treasury Fund will incur management fees at an annual rate lower than 0.08% of U.S. Treasury Fund’s average daily net assets, and, as a result net annual operating expenses for U.S. Treasury Fund will be lower. For these purposes, “Excluded Expenses” are expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

          U.S. Treasury Fund’s investment objective is liquidity and safety of principal with current income as a secondary objective.

          U.S. Treasury Fund primarily invests in U.S. Treasury securities. Under normal circumstances, U.S. Treasury Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Direct U.S. Treasury Obligations and repurchase agreements collateralized by these Obligations. “Direct U.S. Treasury Obligations” include U.S. Treasury bills, bonds, and notes and other securities issued by the U.S. Treasury, such as Separately Traded Registered Interest and Principal Securities (STRIPS) and other zero-coupon securities, that are backed by the full faith and credit of the U.S. government as well as repurchase agreements relating to the foregoing.

          U.S. Treasury Fund may enter into repurchase agreements, under which U.S. Treasury Fund purchases a security backed by the full faith and credit of the U.S. government from a seller who simultaneously commits to repurchase, on an agreed upon date in the future, the security from U.S. Treasury Fund at the original purchase price plus an agreed upon amount representing the original purchase price plus interest. The counterparties in repurchase agreements are typically broker-dealers and banks, and the safety of the arrangement is dependent on, among other things, U.S. Treasury Fund’s having an interest in the security that can be realized in the event of the insolvency of the counterparty.

          In addition to Direct U.S. Treasury Obligations, U.S. Treasury Fund also may invest in other fixed-income securities that are backed by the full faith and credit of the U.S. government, such as guaranteed securities issued by the Government National Mortgage Association (GNMA) and the Federal Deposit Insurance Corporation (FDIC). U.S. Treasury Fund also may invest in unaffiliated money market funds.

          U.S. Treasury Fund normally invests in Direct U.S. Treasury Obligations and other fixed-income securities backed by the full faith and credit of the U.S. government with a stated or remaining maturity of one year or less. This may not be true of Direct U.S. Treasury Obligations purchased pursuant to repurchase agreements, and, therefore, if the counterparty to the repurchase agreement defaults, U.S. Treasury Fund may own a security with a stated or remaining maturity of greater than one year.

          Although U.S. Treasury Fund primarily invests in short-term obligations, it is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds. In addition, the Manager normally seeks to maintain an interest rate duration of one year or less for U.S. Treasury Fund’s portfolio.

          In selecting U.S. Treasury securities for U.S. Treasury Fund’s portfolio, the Manager focuses primarily on the relative attractiveness of different obligations (such as bonds, notes, or bills), which can vary depending on the general level of interest rates as well as supply/demand imbalances and other market conditions.

          Other GMO Funds may invest in U.S. Treasury Fund to achieve exposure to U.S. Treasury securities, to invest cash, and/or to seek to generate a return similar to yields on U.S. Treasury securities.

          U.S. Treasury Fund’s benchmark is the Citigroup 3 Month Treasury Bill Index, an independently maintained and published short-term Treasury bill index.

          To the extent the Fund invests in U.S. Treasury Fund, it is subject to all of the risks to which U.S. Treasury Fund is exposed. The principal risks of an investment in U.S. Treasury Fund include Market Risk — Fixed Income Securities, Credit and Counterparty Risk, Focused Investment Risk, Large Shareholder Risk, Liquidity Risk, Management and Operational Risk, Market Disruption and Geopolitical Risk, and Fund of Funds Risk. Shareholders of the Fund are indirectly exposed to these risks, in addition to all risks associated with their investment in the Fund.

GMO TRUST

PRIVATE PLACEMENT MEMORANDUM

June 25, 2010

GMO Special Purpose Holding Fund
40 Rowes Wharf, Boston, Massachusetts 02110

      GMO Special Purpose Holding Fund (the “Fund”) is a separate investment portfolio of GMO Trust (the “Trust”). The Trust is an open-end management investment company and operates as a “series investment company” that consists of separate series of investment portfolios, including the Fund. Other portfolios are described in separate prospectuses or private placement memoranda. The Fund is presently closed to new subscriptions and additional investments from existing shareholders. The Fund’s shares are held by other funds of GMO Trust (“GMO Funds”) and certain other accredited investors.

Investment Manager
Grantham, Mayo, Van Otterloo & Co. LLC

     This Private Placement Memorandum concisely describes the information which you ought to know about the Fund before investing. Please read this memorandum carefully and keep it for further reference. A Statement of Additional Information dated June 25, 2010, as revised from time to time (“SAI”), is available free of charge by writing to GMO Shareholder Services, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling 1-617-346-7646. The SAI, which contains more detailed information about the Fund, has been filed with the Securities and Exchange Commission (“SEC”) and is incorporated by reference into this Private Placement Memorandum.

     THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE TRANSFERRED OR RESOLD UNLESS SO REGISTERED OR IN TRANSACTIONS EXEMPT THEREFROM. HOWEVER, THE SECURITIES ARE REDEEMABLE AS DESCRIBED IN THIS PRIVATE PLACEMENT MEMORANDUM. IN CERTAIN CASES INVESTORS MAY BE REDEEMED “IN KIND” AND RECEIVE PORTFOLIO SECURITIES HELD BY THE FUND IN LIEU OF CASH UPON REDEMPTION.

     THIS PRIVATE PLACEMENT MEMORANDUM AND THE INFORMATION CONTAINED HEREIN ARE FOR THE EXCLUSIVE USE OF THE RECIPIENT FOR THE SOLE PURPOSE OF EVALUATING THE PRIVATE PLACEMENT OF SHARES OF THE FUND DESCRIBED HEREIN. IT MAY NOT BE REPRODUCED, PROVIDED, OR DISCLOSED TO OTHERS, OR USED FOR ANY OTHER PURPOSE, WITHOUT WRITTEN AUTHORIZATION, AND DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SHARES OF THE FUND TO ANY ENTITY OR INDIVIDUAL NOT POSSESSING THE QUALIFICATIONS DESCRIBED IN THIS MEMORANDUM.

     NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR PROVIDE ANY INFORMATION WITH RESPECT TO THE SHARES EXCEPT SUCH INFORMATION AS IS CONTAINED IN THIS MEMORANDUM AND IN THE SAI OR IN OTHER MATERIALS APPROVED BY THE TRUST. NO SALES MADE IN RELIANCE ON THIS DOCUMENT SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN MATTERS DISCUSSED HEREIN SINCE THE DATE HEREOF.

FUND SUMMARY

Tax Information

     The Fund has elected to be treated as a partnership for U.S. federal income tax purposes and thus is not itself subject to U.S. federal income tax. Instead, in computing its income tax liability, each shareholder is required to take into account its distributive share of the Fund’s income, gain, loss, deduction, credit, and other tax items for each taxable year substantially as though such items had been realized directly by the shareholder and without regard to whether the Fund has distributed or will distribute any amount to its shareholders. The Fund will generally distribute proceeds and other cash receipts received from its underlying investments as soon as practicable after any such proceeds are received, subject to the discretion of the Trustees (or their delegates). It is possible that a shareholder will incur income tax liabilities in a taxable year in respect of its investment in the Fund in excess of non-redeeming cash distributions (if any) made by the Fund for that year.

     In November 2002, the NPF Securities were transferred to SPV to facilitate the redemption of the NPF Securities in-kind, if necessary, to protect the interests of non-redeeming shareholders. In connection with the Fund’s placement of the NPF Securities in SPV, the Fund assigned to SPV the right to any proceeds received in connection with any claims or actions against various parties arising out of the Fund’s purchase of the NPF Securities (including those described below). The Fund’s pro rata portion of the costs associated with the Fund’s attempted recovery of losses associated with the NPF Securities will be borne by the Fund, subject to a priority reimbursement of such costs by SPV in the event SPV receives any proceeds in connection with any claims or actions.

     In 2003, the Fund joined with certain other holders of the NPF Securities in filing a lawsuit against certain parties related to the NCFE offerings, including the indenture trustees, underwriters, and certain other parties. In April 2004, a plan of liquidation was approved by the bankruptcy court with respect to NCFE and its affiliated operations (including the Issuers). Pursuant to such plan, SPV received cash distributions, which were distributed, less expenses, to holders of SPV, including the Fund. SPV also received interests in liquidating trusts, which it continues to hold. In July 2005 and April 2006, the Fund entered into settlement agreements with two of the defendants in the lawsuit and received (through its investment in SPV) cash settlements in connection therewith. Litigation against the remaining defendants continues at this time.

     As of June 1, 2010, the Fund’s investment in the SPV represented approximately 74.91% of the Fund’s net assets.

     The cash items and high quality debt securities in which the Fund may invest may include securities issued by the U.S. government and agencies thereof (including securities neither guaranteed nor insured by the U.S. government), bankers’ acceptances, commercial paper, bank certificates of deposit, and money market mutual funds. The Fund is also permitted to invest in debt securities of any quality or type, including governmental and corporate and other private issuers.

     For purposes of this Private Placement Memorandum, the term “investment grade” refers to a rating of Baa3/P-2 or better given by Moody’s Investors Service, Inc. (“Moody’s”) or BBB-/A-2 or better given by Standard & Poor’s Ratings Services (“S&P”) to a particular fixed income security/commercial paper, and the term “below investment grade” refers to any rating below Baa3/P-2 given by Moody’s or below BBB-/A-2 given by S&P to a particular fixed income security/commercial paper. Fixed income securities rated below investment grade are also known as high yield or “junk” bonds. In addition, in this Private Placement Memorandum, investment grade securities/commercial paper that are given a rating of Aa/P-1 or better by Moody’s or AA/A-1 or better by S&P are referred to as “high quality.” Securities referred to in this Private Placement Memorandum as investment grade, below investment grade, or high quality include not only securities rated by Moody’s and/or S&P, but also unrated securities that the Manager determines have credit qualities comparable to securities rated by Moody’s or S&P as investment grade, below investment grade, or high quality, as applicable. In addition, the term “fixed income securities” includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by combining derivatives (e.g., a futures contract, swap contract, or option) on a non-synthetic fixed income security with cash, a cash equivalent, or a non-synthetic fixed income security. Additionally, for purposes of this Private Placement Memorandum, the term “bond” refers to any fixed income security.

     The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. Unless otherwise specified in this Private Placement Memorandum or in the SAI, the Manager is not obligated to and generally will not consider tax consequences when seeking to achieve the Fund’s investment objective (e.g., the Fund may engage in transactions that are not tax efficient for U.S. federal income or other federal, state, local, or non-U.S. tax purposes).

      Annual Fund Operating Expenses — Other Expenses and Acquired Fund Fees and Expenses. The amount listed under “Other expenses” in the “Annual Fund Operating Expenses” table included in the Fund’s summary generally reflects direct expenses associated with an investment in the Fund for the fiscal year ended February 28, 2010. The Fund also invests in SPV and may invest in certain other pooled investment vehicles (“underlying funds”), and the indirect net expenses associated with the Fund’s investment in underlying funds for the fiscal year ended February 28, 2010 are reflected in the “Annual Fund Operating Expenses” table under “Acquired fund fees and expenses.” Acquired fund fees and expenses do not include expenses associated with investments in the securities of unaffiliated issuers unless those issuers hold themselves out to be investment companies, and actual indirect expenses will vary depending on the particular underlying funds in which the Fund invests.

Description of Principal Risks

     Investing in the Fund involves many risks, and factors that may affect the Fund’s portfolio as a whole, called “principal risks,” are summarized in this section. The risks of investing in the Fund depend on the types of investments in its portfolio and the investment strategies the Manager employs on its behalf. This section describes the nature of these principal risks and some related risks, but is not intended to include every potential risk. The Fund could be subject to additional risks because the types of investments it makes and market conditions may change over time. The SAI includes more information about the Fund and its investments.

     The Fund is not intended to provide a complete investment program. Investment in the Fund is intended to serve as part of a diversified portfolio of investments. An investment in the Fund is not a bank deposit and, therefore, is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

     The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified.

•

LITIGATION-RELATED RISK

     The ultimate amount of the Fund’s recovery (through its investment in SPV) of losses on the defaulted NPF Securities and the total costs the Fund may incur with respect to its funding of litigation related to the NPF Securities is unknown at this time. Therefore, the Fund is subject to the risk that SPV may ultimately be unable to recover certain losses related to the NPF Securities. This could occur because an insufficient amount of money or other assets is (or has been) paid to SPV out of the bankruptcy estates of NCFE, its affiliated operations, and certain other related entities and/or is (or has been) paid to the Fund in connection with litigation related to the NPF Securities. In addition, any cash reserves of the Fund and any recovery by the Fund as a result of the litigation or bankruptcy claims may be used to offset costs with respect to the litigation rather than to recover losses on the defaulted NPF Securities. The Fund (through its investment in SPV) has received distributions out of the bankruptcy estate of NCFE and its affiliated operations, but it is uncertain whether or not more distributions may follow. In addition, the Fund (through its investment in SPV) has received cash settlements against certain defendants related to the NCFE offerings, but the litigation against the remaining defendants is not predictable, and the amount of time it may take to settle the remaining litigation is unknown at this time.

•

LIQUIDITY RISK

     The Fund is exposed to liquidity risk when low trading volume, lack of a market maker, a large position, or legal restrictions limit or prevent the Fund from selling securities at desirable prices. Liquidity risk is particularly pronounced for the Fund due to the nature and size of its investment in the NPF Securities (through the SPV). The Fund may be exposed (through the SPV) to the NPF Securities for an indefinite period of time and may experience a substantial loss in the event the SPV sells the NPF Securities.

•

MARKET RISK — FIXED INCOME SECURITIES

     The Fund is subject to market risk, which is the risk of unfavorable changes in the value of Fund holdings. The following summarizes certain general market risks associated with investments in fixed income securities.

     Because the Fund invests in fixed income securities (including bonds, notes, and asset-backed securities), it is subject to various market risks. The most significant market risk for the Fund is that the securities in which it invests experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. Other risks include, but are not limited to, loss on investments in asset-backed and other fixed income securities, lack of liquidity of these investments and impact of fluctuating interest rates.

     Liquidity risk has become more pronounced for fixed income securities because of the deterioration in worldwide economic and liquidity conditions discussed above that occurred and became acute in 2008. Even in the absence of a credit downgrade or default, the price of fixed income securities held by the Fund may decline significantly due to a reduction in market demand.

     In addition, a principal risk of the Fund is that an increase in prevailing interest rates will cause the value of its investments to decline. The risk associated with increases in interest rates (also called “interest rate risk”) is generally greater when the Fund invests in fixed income securities with longer durations and in some cases duration can increase.

     The extent to which a security’s value moves with interest rates is referred to as interest rate duration, which can be measured mathematically or empirically. Longer-maturity investments generally have longer interest rate durations because the investment’s fixed rate is locked in for longer periods of time. Floating-rate or adjustable-rate securities, however, generally have shorter interest rate durations because their interest rates are not fixed but rather float up and down with the level of prevailing interest rates.

•

CREDIT RISK

     This is the risk that the issuer or guarantor of a fixed income security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise to honor its obligations. This risk is particularly acute in environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.

     Credit risk for fixed income securities is the risk that the issuer will be unable to make scheduled contractual payments of principal and interest. The value of a fixed income security normally will decline as a result of the issuer’s defaulting on its payment obligations or the market’s expectation of a default, which may be triggered by the downgrading of the issuer’s credit rating.

     All fixed income securities are subject to credit risk. The risk varies depending upon whether the issuer is a corporation or domestic or foreign government (or sub-division or instrumentality) and whether the particular security has a priority in payment of principal and interest. U.S. government securities are subject to varying degrees of credit risk depending upon whether the securities are supported by the full faith and credit of the United States, supported by the ability to borrow from the U.S. Treasury, supported only by the credit of the issuing U.S. government agency, instrumentality, or corporation, or otherwise supported by the United States. For example, issuers of many types of U.S. government securities (e.g., the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and Federal Home Loan Banks), although chartered or sponsored by Congress, are not funded by Congressional appropriations and their fixed income securities, including mortgage-backed and other asset-backed securities, are neither guaranteed nor insured by the U.S. government. These securities are subject to more credit risk than U.S. government securities that are supported by the full faith and credit of the United States (e.g., U.S. Treasury bonds).

     Credit risk is particularly pronounced for below investment grade securities (also known as “junk bonds”). During periods of economic uncertainty and change, the market price of the Fund’s investments in below investment grade securities may be particularly volatile. Although offering the potential for higher investment returns, junk bonds often are less liquid than higher quality securities, present a greater risk of default and are more susceptible to real or perceived adverse economic and competitive industry conditions. Often junk bonds also are subject to greater sensitivity to interest rate and economic changes and present valuation difficulties. The market price of these securities can change suddenly and unexpectedly. From time to time, the Fund may acquire or hold below investment grade securities and will be subject to these risks.

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MARKET DISRUPTION AND GEOPOLITICAL RISK

     The Fund is subject to the risk that geopolitical events will disrupt securities markets and adversely affect global economies and markets. The wars in Iraq and Afghanistan have had a substantial effect on economies and securities markets in the U.S. and worldwide. Terrorism in the U.S. and around the world has had a similar global impact and has increased geopolitical risk. The terrorist attacks of September 11, 2001 resulted in the closure of some U.S. securities markets for four days, and similar future events are possible. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, systemic market dislocations of the kind surrounding the insolvency of Lehman Brothers in 2008 may be highly disruptive to economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Fund’s investments. At such times, the Fund’s exposure to the risks described elsewhere in this section, including market risk, liquidity risk, and credit risk, will likely increase. Market disruptions can also prevent the Fund from implementing its investment program for a period of time and achieving its investment objective.

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MANAGEMENT AND OPERATIONAL RISK

     The Fund is subject to management risk because it relies on the Manager’s ability to achieve its investment objective. The Manager uses proprietary investment techniques and risk analyses in making investment decisions for the Fund, but there is no assurance that the Manager will achieve the desired results and the Fund may incur significant losses.

     The Fund also is subject to operational risk associated with the Manager’s provision of investment management, administrative, and shareholder services to the Fund. Operational risk is the risk

that deficiencies in the Manager’s internal systems or controls, or in those of a service provider to whom the Manager has contractually delegated responsibilities, will cause losses for the Fund or hinder Fund operations. Operational risk results from inadequate procedures and controls, human error, and system failures by the Manager or a service provider. For example, trading delays or errors (both human and systematic) caused by the Manager could prevent the Fund from purchasing a security that the Manager expects will appreciate in value, thus reducing the Fund’s opportunity to benefit from the security’s appreciation. The Manager is not contractually liable to the Fund for losses associated with operational risk absent the Manager’s willful misfeasance, bad faith, gross negligence, or reckless disregard of its contractual obligations to provide services to the Fund.

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NON-DIVERSIFIED FUND

     The Fund is not a “diversified” investment company within the meaning of the 1940 Act. This means the Fund is allowed to invest in the securities of a relatively small number of issuers and/or foreign currencies. As a result, the Fund may be subject to greater credit, market, and other risks, and poor performance by a single issuer may have a greater impact on the Fund’s performance than if the Fund were “diversified.”

MANAGEMENT OF THE FUND

     GMO, 40 Rowes Wharf, Boston, Massachusetts 02110, provides investment management and shareholder services to the Fund and other GMO Funds. GMO is a private company, founded in 1977. As of May 31, 2010, GMO managed on a worldwide basis more than $95 billion of assets for the GMO Funds and institutional investors, such as pension plans, endowments, and foundations.

     Subject to the approval of the Trustees, the Manager establishes and modifies when it deems appropriate the investment strategies of the Fund. In addition to its management of the Fund’s investment portfolio and the shareholder services it provides to the Fund, the Manager administers the Fund’s business affairs. The Manager does not charge the Fund a management fee for management and administrative services provided to the Fund.

     A discussion of the basis for the Trustees’ approval of the Fund’s investment management contract is included in the Fund’s shareholder report for the period during which the Trustees approved that contract.

     GMO’s Fixed Income Division is responsible for day-to-day investment management of the Fund. The Division’s investment professionals work collaboratively to manage the Fund’s portfolio, and no one person is primarily responsible for day-to-day investment management of the Fund.

     William Nemerever and Thomas Cooper are the senior members and co-directors of the Fixed Income Division. Each has been a senior member of the Division since 1993. As senior members and co-directors, Mr. Nemerever and Mr. Cooper jointly allocate responsibility for portions of the Fund’s portfolio to members of the Division, oversee the implementation of trades, review the overall composition of the portfolio, including compliance with its stated investment objective and strategies, and monitor cash.

     Mr. Nemerever and Mr. Cooper have been jointly responsible for overseeing the portfolio management of GMO’s global fixed income portfolios since 1993. In general, Mr. Nemerever focuses on investment strategy, while Mr. Cooper focuses on instrument selection.

     The SAI contains other information about how GMO determines the compensation of the senior members, other accounts they manage and related conflicts, and their ownership of the Fund.

Custodian, Fund Accounting Agent, and Transfer Agent

     State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts 02111, serves as the Fund’s custodian, fund accounting agent, and transfer agent.

Expense Reimbursement

     As more fully described in the Fund’s “Annual Fund Operating Expenses” table under the caption “Fees and Expenses” in the Fund’s summary, the Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s total annual operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” As used in this Private Placement Memorandum, “Excluded Fund Fees and Expenses” means fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-

related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Fund’s contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.