GMO TRUST, 497, 1998-07-28

GMO TRUST
497, 1998-07-28

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<PAGE> 1
Filing pursuant to
Rule 497(c)

GMO TAX-MANAGED U.S. EQUITIES FUND
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
40 Rowes Wharf, Boston, Massachusetts 02110
The GMO TAX-MANAGED U.S. EQUITIES FUND (the "TAX-MANAGED U.S. EQUITIES
FUND") and the GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (the "TAX-MANAGED
INTERNATIONAL EQUITIES FUND") (each a "FUND" and collectively the "FUNDS") are
two of thirty-six separate investment portfolios currently offered by GMO Trust
(the "Trust"), an open-end management investment company. The other portfolios
are offered pursuant to separate prospectuses. The Fund's investment manager is
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC (the "MANAGER" or "GMO").

The Tax-Managed U.S. Equities Fund seeks to maximize after-tax total
return through investment in a portfolio of common stocks traded in the U.S.

The Tax-Managed International Equities Fund seeks to maximize after-tax
total return through investment in a portfolio of common stocks of non-U.S.
issuers.

Both Funds are "non-diversified" portfolios, as defined in the
Investment Company Act of 1940 (the "1940 Act"). See "Description and Risks of
Fund Investments--Diversified and Non-Diversified Portfolios." A TABLE OF
CONTENTS APPEARS ON PAGE I OF THIS PROSPECTUS.

Each Fund has four classes of shares: Class I, Class II, Class III and
Class IV. Eligibility for the classes is generally based on the total amount of
assets that a client has invested with GMO (with Class I requiring the least
total assets and Class IV the most), as described more fully herein. See
"Multiple Classes--Eligibility for Classes." Each Fund is currently offering
Class III Shares only.

The classes differ solely with regard to the level of SHAREHOLDER
SERVICE FEE borne by the class. This difference is described briefly below and
in more detail elsewhere in this Prospectus. ALL CLASSES OF THE FUNDS HAVE AN
INTEREST IN THE SAME UNDERLYING ASSETS, ARE MANAGED BY GMO, AND PAY THE SAME
INVESTMENT MANAGEMENT FEE.

INVESTMENT MANAGEr
Grantham, Mayo, Van Otterloo & Co. LLC ("GMO")
<TABLE>
<CAPTION>

<S> <C>
CLIENT SERVICE PROVIDER SHAREHOLDER SERVICE FEE

GMO The level of Shareholder Service Fee for
Tel:(617) 330-7500 each class is set forth on the following page
Fax:(617) 439-4192 and described more fully under "Multiple
Classes--Shareholder Service Fee."
</TABLE>

- ----------------------

This Prospectus concisely describes the information which investors
ought to know about the Funds before investing. Please read this Prospectus
carefully and keep it for further reference. A Statement of Additional
Information dated July 17, 1998, as revised from time to time, is available free
of charge by writing to GMO, 40 Rowes Wharf, Boston, Massachusetts 02110 or by
calling (617) 330-7500. The Statement, 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 Prospectus.

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

PROSPECTUS JULY 17, 1998

CLASSES AND FEES

ELIGIBILITY
REQUIREMENT* SHAREHOLDER SERVICE FEE**

TAX-MANAGED U.S. EQUITIES FUND

<S> <C> <C>
Class I N/A 0.28%
Class II N/A 0.22%
Class III $1 million 0.15%
Class IV N/A 0.105%

TAX-MANAGED INTERNATIONAL EQUITIES FUND

Class I N/A 0.28%
Class II N/A 0.22%
Class III $1 million 0.15%
Class IV N/A 0.09%

</TABLE>

- ----------
* More detailed explanation of eligibility criteria is provided below and
under "Multiple Classes -- Eligibility for Classes."

** As noted above, all classes of shares of each Fund pay the same
investment management fee.

CLASS ELIGIBILITY

For full details of the class eligibility criteria summarized below and
an explanation of how conversions between classes will occur, see "Multiple
Classes - Eligibility for Classes" and "Multiple Classes - Conversions Between
Classes."

Class I Shares. Class I Shares are not currently being offered by either Fund,
but may be offered in the future. Class I Shares bear a Shareholder Service Fee
of 0.28%.

Class II Shares. Class II Shares are not currently being offered by either Fund,
but may be offered in the future. Class II Shares bear a Shareholder Service Fee
of 0.22%.

Class III Shares. Class III Shares of each Fund are available to any investor
who commits assets to GMO management to establish a "Total Investment" (as
defined herein) with GMO of at least $1 million. Class III Shares bear a
Shareholder Service Fee of 0.15% of average net assets.

Class IV Shares. Class IV Shares are not currently being offered by either Fund,
but may be offered in the future. Class IV Shares bear a Shareholder Service Fee
of 0.105% and 0.09% for the Tax-Managed U.S. Equities Fund and Tax-Managed
International Equities Fund, respectively. See "Multiple Classes--Eligibility
for Classes" and "Multiple Classes--Conversions Between Classes" for full
details of the eligibility criteria for the Class IV Shares (which work
differently than that for Class I, II and III Shares) and an explanation of how
conversions between classes will occur.

Purchasers of all classes of shares should follow purchase instructions
described under "Purchase of Shares" and direct questions to the Trust at (617)
330-7500.

<PAGE> 3

TABLE OF CONTENTS

Page

SCHEDULE OF FEES AND EXPENSES ......................................... 1

INVESTMENT OBJECTIVE AND POLICIES ..................................... 3

DESCRIPTION AND RISKS OF FUND ......................................... 5
INVESTMENTS .................................................. 5
Portfolio Turnover ........................................... 5
Diversified and Non-Diversified Portfolios ................... 5
Certain Risks of Foreign Investments ......................... 6
Depository Receipts .......................................... 8
Convertible Securities ....................................... 8
Futures and Options .......................................... 8
Uses of Options, Futures and Options on Futures .............. 12
Swap Contracts and Other Two-Party Contracts ................. 14
Foreign Currency Transactions ................................ 15
Repurchase Agreements ........................................ 17
Debt and Other Fixed Income Securities Generally ............. 17
Temporary High Quality Cash Items ............................ 18
U.S. Government Securities and Foreign Government Securities . 18
Lower Rated Securities ....................................... 19
Indexed Securities ........................................... 19
Firm Commitments ............................................. 20
Reverse Repurchase Agreements and Dollar Roll Agreements ..... 20
Illiquid Securities .......................................... 20
Special Year 2000 Risk Considerations ........................ 21

ADDITIONAL INVESTMENT RESTRICTIONS .................................... 21

MULTIPLE CLASSES ...................................................... 23
Shareholder Service Fees ..................................... 23
Eligibility for Classes ..................................... 23
Conversions Between Classes .................................. 25

PURCHASE OF SHARES .................................................... 26
Purchase Procedures .......................................... 27

REDEMPTION OF SHARES .................................................. 27

DETERMINATION OF NET ASSET VALUE ...................................... 28

DISTRIBUTIONS ......................................................... 29

TAXES ................................................................. 30
Withholding on Distributions to Foreign Investors ............ 31
Foreign Tax Credits .......................................... 31
Tax Implications of Certain Investments ...................... 31
Loss of Regulated Investment Company Status .................. 32

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<PAGE> 4

MANAGEMENT OF THE TRUST ............................................... 32

ORGANIZATION AND CAPITALIZATIONOF THE TRUST ........................... 33

Appendix A ............................................................ 34

RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS ................... 34
Limitations on the Use of Options and Futures
Portfolio Strategies ................................... 34
Risk Factors in Options Transactions ......................... 34
Risk Factors in Futures Transactions ......................... 35
Risk Factors in Swap Contracts, OTC Options and
other Two-Party Contract ............................... 36
Additional Regulatory Limitations on the Use of
Futures and Related Options, Interest
Rate Floors, Caps and Collars and Interest
Rate and Currency Swap Contracts ....................... 36

Appendix B ............................................................ 37

COMMERCIAL PAPER AND CORPORATE DEBT RATINGS ........................... 37
Commercial Paper Ratings ..................................... 37
Corporate Debt Ratings ....................................... 37
Standard & Poor's Corporation ....................... 37
Moody's Investors Service, Inc. ..................... 38

-ii-

SCHEDULE OF FEES AND EXPENSES

- --------------------------------------------------------------------------------------------------------------------------

GMO Shareholder
Fund Name Transaction Expenses Annual Operating Expenses Examples
- --------------------------------------------------------------------------------------------------------------------------
Cash Redemption Inv. Share- Other Total You would pay You would pay the
Purchase Fees (as a Mgmt. holder Ex- Operating the following following expenses
Premium percentage Fees Service penses Expenses 3 expenses on a on the same
(as a of amount after Fee Fee 2 3, 4 $1,000 investment investment
percentage redeemed) 1 Waiver 3 assuming 5% assuming no
of amount annual return redemption:
invested) 1 with redemption
at the end of
each time period:
- -----------------------------------------------------------------------------------------------------------------------
TAX-MANAGED
U.S. EQUITIES FUND 1 Yr. 3 Yr. 1 Yr. 3 Yr.
----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class I .14% 5 None .25% .28% .08% .61% $8 $21 $8 $21
Class II .14% 5 None .25% .22% .08% .55% $7 $19 $7 $19
Class III .14% 5 None .25% .15% .08% .48% $6 $17 $6 $17
Class IV .14% 5 None .25% .105% .08% .435% $6 $15 $6 $15

TAX-MANAGED
INTERNATIONAL
EQUITIES FUND
Class I .60% 5 None .30% .28% .24% .82% $14 $32 $14 $32
Class II .60% 5 None .30% .22% .24% .76% $14 $30 $14 $30
Class III .60% 5 None .30% .15% .24% .69% $13 $28 $13 $28
Class IV .60% 5 None .30% .09% .24% .63% $12 $26 $12 $26

- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

The footnotes set forth below are important to understanding this table.

The purpose of the foregoing table is to assist investors in understanding the
various costs and expenses of the Funds that are borne by holders of Fund
shares. THE FIVE PERCENT ANNUAL RETURN AND EXPENSE NUMBERS USED ARE NOT
REPRESENTATIONS OF FUTURE PERFORMANCE OR EXPENSES. SUBJECT TO THE MANAGER'S
UNDERTAKING TO WAIVE ITS FEE AND/OR BEAR CERTAIN EXPENSES FOR THE FUNDS AS
DESCRIBED IN THE TABLE, ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS
THAN SHOWN. Where a purchase premium and/or redemption fee is indicated as being
charged by the Funds in certain instances, the foregoing examples assume the
payment of such purchase premium and/or redemption fee even though such purchase
premium and/or redemption fee is not applicable in all cases. (See "Purchase of
Shares" and "Redemption of Shares").

NOTES TO SCHEDULE OF FEES AND EXPENSES

1. Purchase premiums and redemption fees generally apply only to cash
transactions as set forth under "Purchase of Shares" and "Redemption of
Shares" respectively. These fees are paid to and retained by the Fund
itself and are designed to allocate transaction costs caused by
shareholder activity to the shareholder generating the activity, rather
than to the Fund as a whole. As described in greater detail in
footnotes below, for certain Funds the Manager may reduce purchase
premiums and/or redemption fees if the Manager determines there are
minimal brokerage and/or other transaction costs caused by a particular
purchase or redemption. However, the instances in which such fees may
be properly waived are extremely limited.

Normally no purchase premium is charged with respect to in-kind
purchases of Fund shares. However, in the case of in-kind purchases
involving transfers of large positions in markets where the cost of
re-registration

-1-

<PAGE> 6

and/or other transfer expenses are high, the Tax-Managed International
Equities Fund may charge a premium of up to 0.10% on in-kind purchases.

2. Shareholder Service Fee ("SSF") paid to GMO for providing client
services and reporting services. For Class III Shares, the SSF is 0.15%
of daily net assets.

The level of SSF is the sole economic distinction between the various
classes of Fund shares. A lower SSF for larger investments reflects
that the cost of servicing client accounts is lower for larger accounts
when expressed as a percentage of the account. See "Multiple
Classes-Shareholder Service Fees" for more information.

3. The Manager has voluntarily undertaken to reduce its management fees
and to bear certain expenses with respect to the Fund until further
notice to the extent that the Fund's total annual operating expenses
(excluding Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary,
non-recurring and certain other unusual expenses (including taxes),
securities lending fees and expenses and transfer taxes) would
otherwise exceed the percentage of that Fund's daily net assets
specified below. Therefore, so long as the Manager agrees to reduce its
fees and bear certain expenses, total annual operating expenses
(subject to such exclusions) of the Fund will not exceed these stated
limitations. Absent such undertakings, management fees for each Fund
and the annual operating expenses for each class would be as shown
below.
<TABLE>
<CAPTION>

------------------------------- ---------------- ---------------- ---------------------------------------
Voluntary Management Fee Total Class
Fund Expense Limit (Absent Waiver) Operating Expenses (Absent Waiver)
=============================== ================ ================ ========= ========= ========= ---------
Class I Class II Class Class IV
III
=============================== ================ ================ ========= ========= ========= =========
<S> <C> <C> <C> <C> <C> <C>
Tax-Managed U.S. Equities Fund 0.33% 0.525% 0.885% 0.825% 0.755% 0.710%
Tax-Managed International 0.54% 0.75% 1.27% 1.21% 1.14% 1.08%
Equities Fund
------------------------------- ---------------- ---------------- --------- --------- --------- ---------
</TABLE>

4. Based on estimated amounts for the Fund's first fiscal year.

5. The purchase premium and/or redemption fee for this Fund may generally
not be waived due to offsetting transactions, and may be waived in only
rare circumstances. The purchase premium or redemption fee for this
Fund will only be waived (i) if the purchase or redemption is part of a
transfer from or to another Fund where the Manager is able to transfer
securities among the Funds to effect the transaction, (ii) during
periods (expected to exist only rarely) where the Manager determines
that the Fund is either substantially overweighted or underweighted
with respect to its cash position so that a redemption or purchase will
not require a securities transaction, or (iii) in certain other
instances (not including offsetting transactions) where it is
compelling to the Manager that the purchase or redemption will not
result in transaction costs to the Fund. Any waiver with respect to
this Fund must be arranged in advance with the Manager.

-2-

<PAGE> 7

INVESTMENT OBJECTIVE AND POLICIES

TAX-MANAGED U.S. EQUITIES FUND

Current Benchmark: S&P 500 (After Tax)

The investment objective of the Tax-Managed U.S. Equities Fund is to
maximize after-tax total return through investment in a portfolio of common
stocks traded in the U.S. The Fund expects that substantially all of its assets
will be invested in or exposed to the equity securities of at least 125
companies chosen from among the Wilshire 5000 Index (the "Wilshire 5000") and
that it will be invested primarily in the approximately 1,200 companies with the
largest equity capitalization (i.e., number of shares outstanding multiplied by
the market price per share) at the time of investment which are also listed on a
United States national securities exchange (the "Large Cap 1200"). The
Tax-Managed U.S. Equities Fund may, from time to time, invest in fewer issuers
if, in the opinion of the Manager, there are not at least 125 attractive
investment opportunities from among such companies.

The Fund will employ several strategies designed to minimize the impact
of taxes on investors' returns. The Manager will seek to minimize portfolio
turnover in order to defer the realization and minimize the distributions of
capital gains. The Manager may, when appropriate, sell securities in order to
realize capital losses so as to offset realized capital gains, thus reducing net
capital gains distributions. In addition, when making sales of specific
securities, the Manager will attempt to sell shares on which it has the highest
cost basis in order to minimize capital gains distributions. Finally, the
Manager reserves the right to meet redemption requests through in-kind
redemptions, that is, to pay the redemption price in whole or in part by a
distribution of appreciated securities held by the Fund in lieu of cash. By
redeeming a shareholder in kind with appreciated securities, the Fund will not
be required to distribute the capital gains in those securities to the
shareholders in the Fund. The effect to the redeeming shareholder is the same
for federal income tax purposes as a redemption in cash. Shareholders receiving
the redemption in kind would pay tax on the capital gains realized, if any, on
the Fund shares redeemed. See "Redemption of Shares" for more information on
in-kind redemptions. There can be no assurance that the Manager will be
successful in employing these strategies.

In pursuing its objective, the Fund may invest in securities of foreign
issuers traded principally on U.S. securities exchanges, invest without limit in
depository receipts of foreign issuers, and purchase convertible securities. The
Fund may also purchase interests in real estate investment trusts ("REITs"). The
Fund may also invest up to 15% of its net assets in illiquid securities, lend
portfolio securities valued at up to one-third of total assets, and enter into
repurchase agreements.

In addition, the Fund may purchase index futures on the S&P 500 and
other domestic indexes for investment, anticipatory hedging and risk management
and to effect synthetic sales and purchases. The Fund may also buy exchange
traded or over-the-counter put and call options, sell (write) covered options
and enter into futures contracts and options on futures contracts for hedging
and risk management. The Fund may also use equity swap contracts and contracts
for differences for these purposes.

It is a policy of the Fund to stay fully invested in domestic common
stocks, index futures, equity swap contracts and contracts for differences even
when the Manager believes that equity securities generally may underperform
other types of investments. The Fund expects that, not including the margin
deposits or the segregated accounts created in connection with index futures and
other derivatives, less than 5% of its total assets will be exposed to cash or
high quality money market instruments such as securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund will at all times invest at least 65% of
its total assets in domestic common stocks and domestic equity derivatives. The
Fund does not expect that it will invest in long or short-term fixed income
securities for temporary defensive purposes.

For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."

-3-

<PAGE> 8

TAX-MANAGED INTERNATIONAL EQUITIES FUND

Current Benchmark: EAFE-Lite (After Tax)

The investment objective of the Tax-Managed International Equities Fund
is to maximize after-tax total return through investment in a portfolio of
common stocks of non-U.S. issuers. The Fund will usually be primarily invested
in or exposed to common stocks. The Fund may also invest in convertible bonds,
convertible preferred stocks, warrants or rights.

There are no prescribed limits on geographic asset distribution and the
Fund has the authority to invest in securities traded in securities markets of
any country in the world, although under normal market conditions at least 65%
of the Fund's total assets will be invested in or exposed to securities
principally traded in the securities markets of at least three foreign
countries. The responsibility for allocating the Fund's assets among the various
securities markets of the world is borne by the Manager. In making these
allocations, the Manager will consider such factors as the condition and growth
potential of the various economic and securities markets, currency and taxation
considerations and other pertinent financial, social, national and political
factors. The Fund generally will not invest in securities of U.S. issuers,
except that for temporary defensive purposes the Fund may invest up to 100
percent of its assets in United States securities. Normally, at least 90% of the
developed market equity securities held by the Fund will be selected from the
universe of issuers included in the Morgan Stanley Capital International
Perspectives publication. This publication includes issuers in the MSCI EAFE
index, as well as smaller companies and companies in Canada.

The Fund may use forward foreign currency contracts, currency futures
contracts, currency swap contracts, options on currencies and buy and sell
foreign currencies for hedging, investment, and for currency risk management,
although the Fund's foreign currency exposure will not generally vary by more
than 30% from the foreign currency exposure of the EAFE-Lite Index (described
below). The put and call options on currency futures written by the Fund will
always be covered. For more information on foreign currency transactions, see
"Description and Risks of Fund Investments - Foreign Currency Transactions." The
stocks held by the Fund will not be chosen to approximate the weightings of the
EAFE-Lite Index. The EAFE-Lite Index is a modification of the Morgan Stanley
Capital International Europe, Australia and Far East Index ("EAFE"), a
well-known, independently maintained and published large capitalization
international stock index. EAFE-Lite is maintained by the Manager, and
represents a modification of EAFE where the Manager reduces the market
capitalization of Japan by 40% relative to EAFE.

The Fund may also invest in securities of investment companies, such as
closed-end investment management companies which invest in foreign markets, to
the extent permitted under the 1940 Act. As a shareholder of an investment
company, the Fund may indirectly bear service fees which are in addition to the
fees the Fund pays to its service providers.

-4-
<PAGE> 9

In addition, the Fund may invest in securities of foreign issuers
traded on U.S. exchanges and securities traded abroad, American Depositary
Receipts, European Depository Receipts and other similar securities convertible
into securities of foreign issuers. The Fund may also enter into repurchase
agreements, lend portfolio securities valued at up to 25% of total assets, and
may invest up to 15% of its net assets in illiquid securities. The Fund may
invest up to 15% of its assets in securities of issuers in newly industrializing
countries in Asia, Latin America, the Middle East, Southern Europe, Eastern
Europe and Africa ("Emerging Market Countries"). The Fund expects that, not
including the margin deposits or the segregated accounts created in connection
with index futures and other derivatives, less than 5% of its total assets will
be exposed to cash or high quality money market instruments such as securities
issued by the U.S. government and agencies thereof, bankers' acceptances,
commercial paper, and bank certificates of deposit.

The Fund may also buy put and call options, sell (write) covered
options and enter into futures contracts and options on futures contracts for
hedging and risk management. The Fund's use of options on particular securities
(as opposed to market indexes) is limited such that the time premiums paid by
the Fund on all outstanding options it has purchased may not exceed 5% of its
total assets. The Fund may also write options in connection with buy-and-write
transactions, and use index futures (on foreign stock indexes), options on
futures, equity swap contracts and contracts for differences for investment,
anticipatory hedging and risk management and to effect synthetic sales and
purchases.

For a detailed description of the investment practices described in the
preceding paragraphs and the risks associated with them, see "Description and
Risks of Fund Investments."

DESCRIPTION AND RISKS OF FUND
INVESTMENTS

The following is a detailed description of the various investment
practices in which the Funds may engage and the risks associated with their use.
Both Funds may not necessarily engage in all practices described below. Please
refer to "Investment Objectives and Policies" above for a determination of which
practices a particular Fund may engage in.

PORTFOLIO TURNOVER

The after-tax impact of portfolio turnover will be considered when
making investment decisions for the Funds. Each Fund's portfolio turnover rate
is expected not to exceed 15%.

In any particular year, market conditions may well result in greater
rates than are presently anticipated. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Funds. To the extent that portfolio turnover
results in the recognition of short-term capital gains, such gains are
ordinarily taxed to shareholders at ordinary income tax rates.

DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS

The Funds are both "non-diversified" funds under the 1940 Act, and as
such are not required to satisfy the "diversified" fund requirement set forth in
the 1940 Act. As non-diversified funds, each of the Funds is permitted to (but
not required to) invest a higher percentage of its assets in the securities of
fewer issuers, relative to diversified funds. Such concentration could increase
the risk of loss to each Fund should there be a decline in the market value of
any one portfolio security, relative to diversified funds. Investment in a
non-diversified fund may therefore entail greater risks than investment in a
diversified fund. The Fund, however, must meet certain diversification standards
to qualify as a "regulated investment company" under the Internal Revenue Code
of 1986, as amended.

-5-

<PAGE> 10

CERTAIN RISKS OF FOREIGN INVESTMENTS

GENERAL . Investment in foreign issuers or securities principally
traded overseas may involve certain special risks due to foreign economic,
political and legal developments, including favorable or unfavorable changes in
currency exchange rates, exchange control regulations (including currency
blockage), expropriation or nationalization of assets, imposition of withholding
taxes on dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign governments and companies and foreign securities markets are less
liquid and at times more volatile than comparable U.S. securities and securities
markets. Foreign brokerage commissions and other fees are also generally higher
than in the United States. The laws of some foreign countries may limit a Fund's
ability to invest in securities of certain issuers located in these foreign
countries. There are also special tax considerations which apply to securities
of foreign issuers and securities principally traded overseas. Investors should
also be aware that under certain circumstances, markets which are perceived to
have similar characteristics to troubled markets may be adversely affected
whether or not similarities actually exist.

EMERGING MARKETS . The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the U.S. and developed foreign securities markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign securities markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries in which they trade. The economies of countries with emerging
markets may also be predominantly based on only a few industries or dependent on
revenues from particular commodities. In addition, custodial services and other
costs relating to investment in foreign markets may be more expensive in
emerging markets than in many developed foreign markets, which could reduce a
Fund's income from such securities. Finally, because publicly traded debt
instruments of emerging markets represent a relatively recent innovation in the
world debt markets, there is little historical data or related market experience
concerning the attributes of such instruments under all economic, market and
political conditions.

In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.

INVESTMENTS IN ASIA . In addition to the foregoing risks of foreign
investments and risks specific to emerging markets, investments by the
Tax-Managed International Equities Fund in Asia involve additional risks
specific to investment in the region. The region encompasses countries at
varying levels of economic development--ranging from emerging market to more
developed economies. Each country provides unique investment risks, yet the
political and economic prospects of one country or group of countries may impact
other countries in the region. For example, some Asian economies are directly
affected by Japanese capital investment in the region and by Japanese consumer
demands. In addition, a recession, a debt-crisis or a decline in currency
valuation in one country can spread to other countries.

-6-

<PAGE> 11

The Fund is susceptible to political and social factors affecting
issuers in Asian countries. Some countries have authoritarian or relatively
unstable governments. Certain governments in the region provide less supervision
and regulation of financial markets then is typical of other emerging markets,
and less financial information is available. Restrictions on direct foreign
investments in securities markets also exist in some countries. For example,
Taiwan permits foreign investment only through authorized qualified foreign
institutional investors. The recent return of Hong Kong to China will continue
to affect the region.

Some countries in the region are heavily dependent upon foreign trade.
The economies of some Asian countries are not diversified and are based upon
only a few commodities or industries. Markets in some of these countries are in
the early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.

In the latter half of 1997, the region began experiencing increased
market volatility and declines in foreign currency exchange rates. Fluctuation
in currency exchange rates can affect a country's ability to service its debt.
Currency fluctuation will affect the value of the securities in the Fund's
portfolio because the prices of these securities are generally denominated or
quoted in currencies other than the U.S. dollar.

DIRECT INVESTMENT IN RUSSIAN SECURITIES. The Tax-Managed International
Equities Fund may invest directly in securities of Russian issuers. Investment
in securities of such issuers presents many of the same risks as investing in
securities of issuers in other emerging market economies, as described in the
immediately preceding section. However, the political, legal and operational
risks of investing in Russian issuers, and of having assets custodied within
Russia, may be particularly acute.

A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When the Fund invests in a Russian issuer, it will receive a "share
extract," but that extract is not legally determinative of ownership. The
official record of ownership of a company's share is maintained by the company's
share registrar. Such share registrars are completely under the control of the
issuer, and investors are provided with few legal rights against such
registrars.

SECURITIES LENDING

A Fund may make secured loans of portfolio securities amounting to not
more than one-third of the Fund's total assets. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. However, such loans will be made only to
broker-dealers that are believed by the Manager to be of relatively high credit
standing. Securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or U.S.
Government Securities at least equal at all times to the market value of the
securities lent. The borrower pays to the lending Fund an amount equal to any
dividends or interest the Fund would have received had the securities not been
lent. If the loan is collateralized by U.S. Government Securities, the Fund will
receive a fee from the borrower. In the case of loans collateralized by cash,
the Fund typically invests the cash collateral for its own account in
interest-bearing, short-term securities and pays a fee to the borrower. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or consent
to matters materially affecting the investment. A Fund may also call such loans
in order to sell the securities involved. The Manager has retained lending
agents on behalf of the Funds that are compensated based on a percentage of each
Fund's return on the securities lending activity. The Funds also pay various
fees in connection with such loans including shipping fees and reasonable
custodian fees approved by the Trustees of the Trust or persons acting pursuant
to direction of the Board.

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DEPOSITORY RECEIPTS

A Fund may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with the Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.

CONVERTIBLE SECURITIES

A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar non-convertible
securities. Convertible securities provide, through their conversion feature, an
opportunity to participate in capital appreciation resulting from a market price
advance in a convertible security's underlying common stock. The price of a
convertible security is influenced by the market value of the underlying common
stock and tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. The Manager regards convertible securities as a form of equity
security.

FUTURES AND OPTIONS

As described under "Investment Objectives and Policies" above, a Fund
may use futures and options for various purposes. Such transactions may involve
options, futures and related options on futures contracts, and those instruments
may relate to particular equity and fixed income securities, equity and fixed
income indexes, and foreign currencies. A Fund may also enter into a combination
of long and short positions (including spreads and straddles) for a variety of
investment strategies, including protecting against changes in certain yield
relationships.

The use of futures contracts and options on futures contracts involves
risk. Thus, while a Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices, or currency
exchange rates may result in poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. Losses
incurred in transactions in futures and options on futures and the costs of
these transactions will affect a Fund's performance. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of a Fund's investments in futures contracts and
related options.

OPTIONS. As has been noted above, a Fund may use options and (1) may
enter into contracts giving third parties the right to buy the Fund's portfolio
securities for a fixed price at a future date (writing "covered call options");
(2) may enter into contracts giving third parties the right to sell securities
to the Fund for a fixed price at a future date (writing "covered put options");
and (3) may buy the right to purchase securities from third parties ("call
options") or the right to sell securities to third parties ("put options") for a
fixed price at a future date.

WRITING COVERED OPTIONS. A Fund may seek to increase its return by
writing covered call or put options on optionable securities or indexes. A call
option written by a Fund on a security gives the holder the right to buy the
underlying security from the Fund at a stated exercise price; a put option gives
the holder the right to sell the underlying security to the Fund at a stated
exercise price. In the case of options on indexes, the options are usually cash
settled based on the difference between the strike price and the value of the
index.

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A Fund will receive a premium for writing put or call options, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, a Fund limits its opportunity to profit from any increase
in the market value of the underlying security above the exercise price of the
option. By writing a put option on a security, a Fund assumes the risk that it
may be required to purchase the underlying security for an exercise price higher
than the then current market value, resulting in a potential capital loss unless
the security subsequently appreciates in value. In the case of options on an
index, if a Fund writes a call, any profit by the Fund in respect of portfolio
securities expected to correlate with the index will be limited by an increase
in the index above the exercise price of the option. If a Fund writes a put on
an index, the Fund may be required to make a cash settlement greater than the
premium received if the index declines.

A call option on a security is "covered" if the Fund owns the
underlying security or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same security
as the call written where the exercise price of the call held is equal to or
less than the exercise price of the call written or greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
U.S. Government Securities or other high grade debt obligations in a segregated
account with its custodian. A put option is "covered" if the Fund maintains
cash, U.S. Government Securities or other high grade debt obligations with a
value equal to the exercise price in a segregated account with its custodian, or
else holds on a share-for-share basis a put on the same security as the put
written where the exercise price of the put held is equal to or greater than the
exercise price of the put written.

If the writer of an option wishes to terminate its obligation, it may
effect a "closing purchase transaction." This is accomplished, in the case of
exchange traded options, by buying an option of the same series as the option
previously written. The effect of the purchase is that the writer's position
will be canceled by the clearing corporation. The writer of an option may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that a Fund will be able to effect a closing purchase or a
closing sale transaction at any particular time. Also, an over-the-counter
option may be closed out only with the other party to the option transaction.

Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or high
grade debt obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.

A Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; a Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security or securities owned by the Fund.

A Fund may write options in connection with buy-and-write transactions;
that is, a Fund may purchase a security and then write a call option against
that security. The exercise price of the call the Fund determines to write

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will depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period.
Buy-and-write transactions using out-of-the-money call options may be used when
it is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, a Fund's
maximum gain will be the premium received by it for writing the option, adjusted
upward or downward by the difference between the Fund's purchase price of the
security and the exercise price. If the options are not exercised and the price
of the underlying security declines, the amount of such decline will be offset
in part, or entirely, by the premium received.

The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by a Fund in market environments analogous
to those in which call options are used in buy-and-write transactions.

The extent to which a Fund will be able to write and purchase call and
put options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.

FUTURES . A financial futures contract sale creates an obligation by
the seller to deliver the type of financial instrument called for in the
contract in a specified delivery month for a stated price. A financial futures
contract purchase creates an obligation by the purchaser to pay for and take
delivery of the type of financial instrument called for in the contract in a
specified delivery month, at a stated price. In some cases, the specific
instruments delivered or taken, respectively, at settlement date are not
determined until on or near that date. The determination is made in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made. Some futures contracts are "cash settled" (rather than "physically
settled," as described above) which means that the purchase price is subtracted
from the current market value of the instrument and the net amount if positive
is paid to the purchaser, and if negative is paid by the purchaser. Futures
contracts are traded in the United States only on commodity exchanges or boards
of trade -- known as "contract markets" -- approved for such trading by the
Commodity Futures Trading Commission ("CFTC"), and must be executed through a
futures commission merchant or brokerage firm which is a member of the relevant
contract market. Under U.S. law, futures contracts on individual equity
securities are not permitted. See Appendix A, "Risks and Limitations of Options,
Futures and Swaps" for more information concerning these practices and their
accompanying risks.

The purchase or sale of a futures contract differs from the purchase or
sale of a security or option in that no price or premium is paid or received.
Instead, an amount of cash or U.S. Government Securities generally not exceeding
5% of the face amount of the futures contract must be deposited with the broker.
This amount is known as initial margin. Subsequent payments to and from the
broker, known as variation margin, are made on a daily basis as the price of the
underlying futures contract fluctuates making the long and short positions in
the futures contract more or less valuable, a process known as "marking to
market." Prior to the settlement date of the futures contract, the position may
be closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. In addition, a commission is paid on
each completed purchase and sale transaction.

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In most cases futures contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by purchasing a futures contract for the same aggregate amount
of the specific type of financial instrument or commodity and the same delivery
date. If the price of the initial sale of the futures contract exceeds the price
of the offsetting purchase, the seller is paid the difference and realizes a
gain. Conversely, if the price of the offsetting purchase exceeds the price of
the initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.

The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.

INDEX FUTURES . A Fund may purchase futures contracts on various
securities indexes ("Index Futures"). A Fund's purchase and sale of Index
Futures is limited to contracts and exchanges which have been approved by the
CFTC.

An Index Future may call for "physical delivery" or be "cash settled."
An Index Future that calls for physical delivery is a con tract to buy an
integral number of units of the particular securities index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value from time to time of the relevant index. While a Fund that purchases an
Index Future that calls for physical delivery is obligated to pay the face
amount on the stated date, such an Index Future may be closed out on that date
or any earlier date by selling an Index Future with the same face amount and
contract date. This will terminate the Fund's position and the Fund will realize
a profit or a loss based on the difference between the cost of purchasing the
original Index Future and the price obtained from selling the closing Index
Future. The amount of the profit or loss is determined by the change in the
value of the relevant index while the Index Future was held.

Index Futures that are "cash settled" provide by their terms for
settlement on a net basis reflecting changes in the value of the underlying
index. Thus, the purchaser of such an Index Future is never obligated to pay the
face amount of the contract. The net payment obligation may in fact be very
small in relation to the face amount.

A Fund may close open positions on the futures exchange on which Index
Futures are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day) with settlement made, in the
case of S&P 500 Index Futures, with the Commodities Clearing House. Because the
specific procedures for trading foreign stock Index Futures on futures exchanges
are still under development, additional or different margin requirements as well
as settlement procedures may be applicable to foreign stock Index Futures at the
time the Fund purchases foreign stock Index Futures.

The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the S&P 500 Index and futures markets. Secondly, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. In addition, trading hours for foreign stock Index Futures
may not correspond perfectly to hours of trading on the foreign exchange to
which a particular foreign stock Index Future relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.

The use of Index Futures involves risk. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps" for a more detailed discussion of the
limits, conditions and risks of the Funds' investment in futures contracts.

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INTEREST RATE FUTURES . For the purposes previously described, a Fund
may engage in a variety of transactions involving the use of futures with
respect to U.S. Government Securities and other fixed income securities. The use
of interest rate futures involves risk. See Appendix A, "Risks and Limitations
of Options, Futures and Swaps" for a more detailed discussion of the limits,
conditions and risks of a Fund's investment in futures contracts.

OPTIONS ON FUTURES CONTRACTS . Options on futures contracts give the
purchaser the right in return for the premium paid to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option. A Fund may use options on futures contracts in lieu of
writing or buying options directly on the underlying securities or purchasing
and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, a Fund may purchase
put options or write call options on futures contracts rather than selling
futures contracts. Similarly, a Fund may purchase call options or write put
options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund expects to purchase. Such options generally operate in the same manner
as options purchased or written directly on the underlying investments. See
"Description and Risks of Fund Investment Practices -- Foreign Currency
Transactions" for a description of the Funds' use of options on currency
futures.

USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES

RISK MANAGEMENT . When futures and options on futures are used for risk
management, a Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. In the case
of futures and options on futures, a Fund is only required to deposit the
initial and variation margin as required by relevant CFTC regulations and the
rules of the contract markets. Because the Fund will then be obligated to
purchase the security or index at a set price on a future date, the Fund's net
asset value will fluctuate with the value of the security as if it were already
included in the Fund's portfolio. Risk management transactions have the effect
of providing a degree of investment leverage, particularly when a Fund does not
segregate assets equal to the face amount of the contract (i.e., in cash settled
futures contracts) since the futures contract (and related options) will
increase or decrease in value at a rate which is a multiple of the rate of
increase or decrease in the value of the initial and variable margin that the
Fund is required to deposit. As a result, the value of the Fund's portfolio will
generally be more volatile than the value of comparable portfolios which do not
engage in risk management transactions. A Fund will not, however, use futures
and options on futures to obtain greater volatility than it could obtain through
direct investment in securities; that is, a Fund will not normally engage in
risk management to increase the average volatility (beta) of the Fund's
portfolio above 1.00, the level of risk (as measured by volatility) that would
be present if the Fund were fully invested in the securities comprising the
relevant index. However, a Fund may invest in futures and options on futures
without regard to this limitation if the face value of such investments, when
aggregated with the Index Futures equity swaps and contracts for differences as
described below does not exceed 10% of the Fund's assets.

HEDGING . To the extent indicated elsewhere, a Fund may also enter into
options, futures contracts and buy and sell options thereon for hedging. For
example, if a Fund wants to hedge certain of its fixed income securities against
a decline in value resulting from a general increase in market rates of
interest, it might sell futures contracts with respect to fixed income
securities or indexes of fixed income securities. If the hedge is effective,
then should the anticipated change in market rates cause a decline in the value
of the Fund's fixed income security, the value of the futures contract should
increase. A Fund may also use futures contracts in anticipatory hedge
transactions by taking a long position in a futures contract with respect to a
security, index or foreign currency that the Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions (including the
proceeds from this offering) to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in a Fund's portfolio is expected to decline as a result
of an increase in rates, the Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, a Fund may purchase call options or write put options
as a substitute for the purchase of futures contracts. See "Description and

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Risks of Fund Investment Practices -- Foreign Currency Transactions" for more
information regarding the Funds' currency hedging practices.

INVESTMENT PURPOSES . To the extent indicated elsewhere, a Fund may
also enter into futures contracts and buy and sell options thereon for
investment. For example, a Fund may invest in futures when its Manager believes
that there are not enough attractive securities available to maintain the
standards of diversity and liquidity set for the Fund pending investment in such
securities if or when they do become available. Through this use of futures and
related options, a Fund may diversify risk in its portfolio without incurring
the substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit a Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.

When a Fund purchases futures contracts for investment, it will
maintain cash, U.S. Government Securities or other high grade debt obligations
in a segregated account with its custodian in an amount which, together with the
initial and variation margin deposited on the futures contracts, is equal to the
face value of the futures contracts at all times while the futures contracts are
held.

Incidental to other transactions in fixed income securities, for
investment purposes a Fund may also combine futures contracts or options on
fixed income securities with cash, cash equivalent investments or other fixed
income securities in order to create "synthetic" bonds which approximate desired
risk and return profiles. This may be done where a "non-synthetic" security
having the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). A Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security which approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency Transactions" below.
When a Fund creates a "synthetic" bond with a futures contract, it will maintain
cash, U.S. Government securities or other high grade debt obligations in a
segregated account with its custodian with a value at least equal to the face
amount of the futures contract (less the amount of any initial or variation
margin on deposit).

SYNTHETIC SALES AND PURCHASES . Futures contracts may also be used to
reduce transaction costs associated with short-term restructuring of a Fund's
portfolios. For example, if a Fund's portfolio includes stocks of companies with
medium-sized equity capitalization (e.g., between $300 million and $5.2 billion)
and, in the opinion of the Manager, such stocks are likely to underperform
larger capitalization stocks, the Fund might sell some or all of its
mid-capitalization stocks, buy large capitalization stocks with the proceeds and
then, when the expected trend had played out, sell the large capitalization
stocks and repurchase the mid-capitalization stocks with the proceeds. In the
alternative, a Fund may use futures to achieve a similar result with reduced
transaction costs. In that case, the Fund might simultaneously enter into short
futures positions on an appropriate index (e.g., the S&P Mid Cap 400 Index) (to
synthetically "sell" the stocks in the Fund) and long futures positions on
another index (e.g., the S&P 500) (to synthetically buy the larger
capitalization stocks). When the expected trend has played out, the Fund would
then close out both futures contract positions. A Fund will only enter into
these combined positions if (1) the short position (adjusted for historic
volatility) operates as a hedge of existing portfolio holdings, (2) the face
amount of the long futures position is less than or equal to the value of the
portfolio securities that the Fund would like to dispose of, (3) the contract
settlement date for the short futures position is approximately the same as that
for the long futures position and (4) the Fund segregates an amount of cash,
U.S. Government Securities and other high-quality debt obligations whose value,
marked-to-market daily, is equal to the Fund's current obligations in respect of
the long futures contract positions. If a Fund uses such combined short and long
positions, in addition to possible declines in the values of its investment
securities, the Fund may also suffer losses associated with a securities index
underlying the long futures position underperforming the securities index
underlying the short futures position. However, the Manager will enter into
these combined positions only if the Manager expects that, overall, a Fund will
perform as if it had sold the securities hedged by the short position and
purchased the securities underlying the long position. A Fund may also

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use swaps and options on futures to achieve the same objective. For more
information, see Appendix A, "Risks and Limitations of Options, Futures and
Swaps."

SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS

As has been described in the "Investment Objectives and Policies"
section above, a Fund may use swap contracts and other two-party contracts for
the same or similar purposes as they may use options, futures and related
options. The use of swap contracts and other two-party contracts involves risk.
See Appendix A, "Risks and Limitations of Options, Futures and Swaps" for a more
detailed discussion of the limits, conditions and risks of the Funds'
investments in swaps and other two-party contracts.

SWAP CONTRACTS . Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange returns (or differentials in rates of return) calculated with respect
to a "notional amount," e.g., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. A Fund
will usually enter into swaps on a net basis, i.e., the two returns are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two returns.

INTEREST RATE AND CURRENCY SWAP CONTRACTS . Interest rate swaps involve
the exchange of the two parties' respective commitments to pay or receive
interest on a notional principal amount (e.g., an exchange of floating rate
payments for fixed rate payments). Currency swaps involve the exchange of the
two parties' respective commitments to pay or receive fluctuations with respect
to a notional amount of two different currencies (e.g., an exchange of payments
with respect to fluctuations in the value of the U.S. dollar relative to the
Japanese yen).

EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES . Equity swap
contracts involve the exchange of one party's obligation to pay the loss, if
any, with respect to a notional amount of a particular equity index (e.g., the
S&P 500 Index) plus interest on such notional amount at a designated rate (e.g.,
the London Inter-Bank Offered Rate) in exchange for the other party's obligation
to pay the gain, if any, with respect to the notional amount of such index.

If a Fund enters into a long equity swap contract, the Fund's net asset
value will fluctuate as a result of changes in the value of the equity index on
which the equity swap is based as if it had purchased the notional amount of
securities comprising the index. A Fund will not use long equity swap contracts
to obtain greater volatility than it could obtain through direct investment in
securities; that is, a Fund will not normally enter an equity swap contract to
increase the volatility (beta) of the Fund's portfolio above 1.00, the
volatility that would be present in the stocks comprising the Fund's benchmark
index. However, a Fund may invest in long equity swap contracts without regard
to this limitation if the notional amount of such equity swap contracts, when
aggregated with the Index Futures as described above and the contracts for
differences as described below, does not exceed 10% of the Fund's net assets.

Contracts for differences are swap arrangements in which a Fund may
agree with a counterparty that its return (or loss) will be based on the
relative performance of two different groups or "baskets" of securities. As to
one of the baskets, the Fund's return is based on theoretical long futures
positions in the securities comprising that basket (with an aggregate face value
equal to the notional amount of the contract for differences) and as to the
other basket, the Fund's return is based on theoretical short futures positions
in the securities comprising the basket. A Fund may also use actual long and
short futures positions to achieve the same market exposure(s) as contracts for
differences. A Fund will only enter into contracts for differences where payment
obligations of the two legs of the contract are netted and thus based on changes
in the relative value of the baskets of securities rather than on the aggregate
change in the value of the two legs. A Fund will only enter into contracts for
differences (and analogous futures positions) when the Manager believes that the
basket of securities constituting the long leg will outperform the basket
constituting the short leg. However, it is possible that the short basket will
outperform the long basket resulting in a loss to a Fund, even in circumstances
where the securities in both the long and short baskets appreciate in value.

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Except for instances in which a Fund elects to obtain leverage up to
the 10% limitation mentioned above, the Funds will maintain cash, U.S.
Government Securities or other high grade debt obligations in a segregated
account with its custodian in an amount equal to the aggregate of net payment
obligations on its swap contracts and contracts for differences, marked to
market daily.

A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not normally enter into a contract for differences
to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a
Fund may invest in contracts for differences without regard to this limitation
if the aggregate amount by which the theoretical long positions of such
contracts exceed the theoretical short positions of such contacts, when
aggregated with the Index Futures and equity swaps contracts as described above,
does not exceed 10% of the Fund's net assets.

INTEREST RATE CAPS, FLOORS AND COLLARS . A Fund may use interest rate
caps, floors and collars for the same purposes or similar purposes as for which
they use interest rate futures contracts and related options. Interest rate
caps, floors and collars are similar to interest rate swap contracts because the
payment obligations are measured by changes in interest rates as applied to a
notional amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate collar.
Except when using such contracts for risk management, a Fund will maintain cash,
U.S. Government Securities or other high grade debt obligations in a segregated
account with its custodian in an amount at least equal to its obligations, if
any, under interest rate cap, floor and collar arrangements. As with futures
contracts, when a Fund uses notional amount contracts for risk management it is
only required to segregate assets equal to its net payment obligation, not the
notional amount of the contract. In those cases, the notional amount contract
will have the effect of providing a degree of investment leverage similar to the
leverage associated with non-segregated futures contracts. A Fund's use of
interest rate caps, floors and collars for the same or similar purposes as those
for which they use futures contracts and related options present the same risks
and similar opportunities to those associated with futures and related options.
For a description of certain limitations on the Funds' use of caps, floors and
collars, see Appendix A, "Risks and Limitations of Options, Futures and Swaps --
Additional Regulatory Limitations on the Use of Futures, Related Options,
Interest Rate Floors, Caps and Collars and Interest Rate and Currency Swap
Contracts." Because caps, floors and collars are recent innovations for which
standardized documentation has not yet been developed they are deemed by the SEC
to be relatively illiquid investments which are subject to each Fund's
limitation on investment in illiquid securities. See "Description and Risks of
Fund Investments -- Illiquid Securities."

FOREIGN CURRENCY TRANSACTIONS

Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, significant uncertainty surrounds the proposed introduction
of the "euro" (a common currency unit for the European Union) in January 1999.
These and other currencies in which a Fund's assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the Fund.

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<PAGE> 20

A Fund may be permitted to invest in securities denominated in foreign
currencies and may buy or sell foreign currencies, deal in forward foreign
currency contracts, currency futures contracts and related options and options
on currencies. A Fund may use such currency instruments for hedging, investment
or currency risk management. Currency risk management may include taking active
currency positions relative to both the securities portfolio of a Fund and a
Fund's performance benchmark.

Forward foreign currency contracts are contracts between two parties to
purchase and sell a specific quality of a particular currency at a specified
price, with delivery and settlement to take place on a specified future date.
Currency futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.

A Fund may enter into forward contracts for hedging under three
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, a Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold and the date
on which payment is made or received.

Second, when the Manager of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.

Third, a Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, a Fund
assumes the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies. See Appendix A, "Risks and
Limitations of Options, Futures and Swaps."

A Fund is not required to enter into hedging transactions with regard
to its foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, a
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.

A Fund may also enter foreign currency forward contracts for investment
and currency risk management. When a Fund uses currency instruments for such
purposes, the foreign currency exposure of the Fund may differ substantially
from the currencies in which the Fund's investment securities are denominated.
However, a Fund's aggregate foreign currency exposure will not normally exceed
100% of the value of the Fund's securities, except that a Fund may use currency
instruments without regard to this limitation if the amount of such excess, when
aggregated with futures contracts, equity swap contracts and contracts for
differences used in similar ways, does not exceed 10% of the Fund's net assets.

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<PAGE> 21

Except to the extent that a Fund may use such contracts for risk
management, whenever a Fund enters into a foreign currency forward contract,
other than a forward contract entered into for hedging, it will maintain cash,
U.S. Government securities or other high grade debt obligations in a segregated
account with its custodian with a value, marked to market daily, equal to the
amount of the currency required to be delivered. A Fund's ability to engage in
forward contracts may be limited by tax considerations.

A Fund may use currency futures contracts and related options and
options on currencies for the same reasons for which they use currency forwards.
Except to the extent that a Fund may use futures contracts and related options
for risk management, a Fund will, so long as it is obligated as the writer of a
call option on currency futures, own on a contract-for-contract basis an equal
long position in currency futures with the same delivery date or a call option
on currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
maintained by the Fund in cash, U.S. Government securities or other high grade
debt obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the call purchased by a Fund falls below
100% of the market value of the call written by the Fund, such Fund will
maintain an amount of cash, U.S. Government securities or other high grade debt
obligations in a segregated account with its custodian equal in value to the
difference. Alternatively, a Fund may cover the call option by owning securities
denominated in the currency with a value equal to the face amount of the
contract(s) or through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund.

REPURCHASE AGREEMENTS

A Fund may enter into repurchase agreements with banks and
broker-dealers by which it acquires a security (usually an obligation of the
Government where the transaction is initiated or in whose currency the agreement
is denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for a Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject a Fund to
expenses, delays and risks of loss including: (a) possible declines in the value
of the underlying security during the period while the Fund seeks to enforce its
rights thereto, (b) possible reduced levels of income and lack of access to
income during this period and (c) inability to enforce rights and the expenses
involved in attempted enforcement.

DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY

Debt and Other Fixed Income Securities include fixed income securities
of any maturity. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically by reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.

Fixed income securities are subject to market and credit risk. Market
risk relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.

Because interest rates vary, it is impossible to predict the future
income of a Fund investing in such securities. The net asset value of a Fund's
shares will vary as a result of changes in the value of the securities in its
portfolio and will be affected by the absence and/or success of hedging
strategies.

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<PAGE> 22

TEMPORARY HIGH QUALITY CASH ITEMS

As described under "Investment Objectives and Policies" above, a Fund
may temporarily invest a portion of its assets in cash or cash items pending
other investments or in connection with the maintenance of a segregated account.
These cash items must be of high quality and may include a number of money
market instruments such as securities issued by the United States government and
agencies thereof, bankers' acceptances, commercial paper, and bank certificates
of deposit. By investing only in high quality money market securities a Fund
will seek to minimize credit risk with respect to such investments.

U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES

U.S. Government Securities include securities issued or guaranteed by
the U.S. government or its authorities, agencies or instrumentalities. Foreign
Government Securities include securities issued or guaranteed by foreign
governments (including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political instability in such countries and the possible
inability of a Fund to enforce its rights against the foreign government issuer.

Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.

Like other fixed income securities, U.S. Government Securities and
Foreign Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.

In addition to investing directly in U.S. Government Securities and
Foreign Government Securities, a Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments or principal payments, or both, in U.S. Government Securities and
Foreign Government Securities. These certificates of accrual and similar
instruments may be more volatile than other government securities.

ADJUSTABLE RATE SECURITIES

Adjustable rate securities are securities that have interest rates that
are reset at periodic intervals, usually by reference to some interest rate
index or market interest rate. They may be U.S. Government Securities or
securities of other issuers. Some adjustable rate securities are backed by pools
of mortgage loans. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because the interest
rate is reset only periodically, changes in the interest rates on adjustable
rate securities may lag changes in prevailing market interest rates. Also, some
adjustable rate securities (or, in the case of securities backed by mortgage
loans, the underlying mortgages) are subject to caps or floors that limit the
maximum change in interest rate during a specified period or over the life of
the security. Because of the resetting of interest rates, adjustable rate
securities are less likely than non-adjustable rate securities of comparable
quality and maturity to increase significantly in value when market interest
rates fall.

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LOWER RATED SECURITIES

A Fund may invest some or all of its assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). A Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although the Manager will monitor the investment
to determine whether continued investment in the security will assist in meeting
the Fund's investment objective.

Lower Rated Securities generally provide higher yields, but are subject
to greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of a Fund investing in Lower Rated Securities may be
more dependent on the Manager's own credit analysis than is the case with higher
quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale of these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See Appendix B for more information concerning commercial paper
and corporate debt ratings.

INDEXED SECURITIES

Indexed Securities are securities the redemption values and/or the
coupons of which are indexed to the prices of a specific instrument or
statistic. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity or coupon rate is determined by reference to
other securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.

The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.

Indexed securities in which a Fund may invest include so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market interest rates increase
and increase as short-term market rates decline. Such securities have the effect
of providing a degree of investment leverage, since they will generally increase
or decrease in value in response to changes in market interest rates at a rate
which is a multiple of the rate at which fixed-rate long-term securities
increase or decrease in response to such changes. As a result, the market values
of such securities will generally be more volatile than the market values of
fixed rate securities.

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<PAGE> 24

A Fund's investment in indexed securities may also create taxable
income in excess of the cash such investments generate. See "Taxes - Tax
Implications of Certain Investments" in this Prospectus.

FIRM COMMITMENTS

A firm commitment agreement is an agreement with a bank or
broker-dealer for the purchase of securities at an agreed-upon price on a
specified future date. A Fund may enter into firm commitment agreements with
such banks and broker-dealers with respect to any of the instruments eligible
for purchase by the Fund. A Fund will only enter into firm commitment
arrangements with banks and broker-dealers which the Manager determines present
minimal credit risks. A Fund will maintain in a segregated account with its
custodian cash, U.S. Government Securities or other liquid high grade debt
obligations in an amount equal to the Fund's obligations under firm commitment
agreements.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS

A Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.

Dollar rolls are transactions in which a Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.

A Fund which makes such investments will establish segregated accounts
with its custodian in which it will maintain cash, U.S. Government Securities or
other liquid high grade debt obligations equal in value to its obligations in
respect of reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by a Fund may decline below the price of the securities the
Fund has sold but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement or dollar roll
files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party or its
trustee or receiver whether to enforce the Fund's obligation to repurchase the
securities. Reverse repurchase agreements and dollar rolls are not considered
borrowings by a Fund for purposes of a Fund's fundamental investment restriction
with respect to borrowings.

ILLIQUID SECURITIES

A Fund may purchase "illiquid securities," i.e., securities which may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The Funds currently intend to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.

In addition, the SEC staff considers equity swap contracts, caps,
floors and collars to be illiquid securities. Consequently, while the staff
maintains this position, a Fund will not enter into an equity swap contract or a
reverse equity swap contract or purchase a cap, floor or collar if, as a result
of the investment, the total value (i.e.,

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<PAGE> 25

marked-to-market value) of such investments (without regard to their notional
amount) together with that of all other illiquid securities which the Fund owns
would exceed 15% of the Fund's total assets.

SPECIAL YEAR 2000 RISK CONSIDERATIONS

Many of the services provided to the Funds depend on the proper
functioning of computer systems. Many systems in use today cannot distinguish
between the year 1900 and the year 2000. Should any of the Funds' service
systems fail to process information properly, that could have an adverse impact
on the Funds' operations and services provided to shareholders. GMO, as well as
the Funds' administrator, transfer agent, custodian and other service providers,
have reported that each is working toward mitigating the risks associated with
the so-called "Year 2000 problem." However, there can be no assurance that the
problems will be corrected in all respects and that the Funds' operations and
services provided to shareholders will not be adversely affected.

ADDITIONAL INVESTMENT RESTRICTIONS

Fundamental Restrictions:

Without a vote of the majority of the outstanding voting securities of
the relevant Fund, the Trust will not take any of the following actions with
respect to such Fund as indicated:

(1) Borrow money except under the following circumstances: (i) A Fund
may borrow money from banks so long as after such a transaction, the total
assets (including the amount borrowed) less liabilities other than debt
obligations, represent at least 300% of outstanding debt obligations; (ii) A
Fund may also borrow amounts equal to an additional 5% of its total assets
without regard to the foregoing limitation for temporary purposes, such as for
the clearance and settlement of portfolio transactions and to meet shareholder
redemption requests; (iii) A Fund may enter into transactions that are
technically borrowings under the 1940 Act because they involve the sale of a
security coupled with an agreement to repurchase that security (e.g., reverse
repurchase agreements, dollar rolls and other similar investment techniques)
without regard to the asset coverage restriction described in (i) above, so long
as and to the extent that the Fund establishes a segregated account with its
custodian in which it maintains cash and/or high grade debt securities equal in
value to its obligations in respect of these transactions. Under current
pronouncements of the SEC staff, such transactions are not treated as senior
securities so long as and to the extent that the Fund establishes a segregated
account with its custodian in which it maintains liquid assets, such as cash,
U.S. Government securities or other appropriate high grade debt securities equal
in value to its obligations in respect of these transactions.

(2) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities. (For
this purpose, the deposit or payment of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.)

(3) Make short sales of securities or maintain a short position for a
Fund's account unless at all times when a short position is open the Fund owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.

(4) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.

(5) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate.

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<PAGE> 26

(6) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of a Fund's portfolio
securities. Loans of portfolio securities may be made with respect to up to 100%
of a Fund's total assets.

(7) Concentrate more than 25% of the value of its total assets in any
one industry.

(8) Purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial futures contracts and options thereon.

(9) Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC. The SEC has
concluded that even though reverse repurchase agreements, firm commitment
agreements and standby commitment agreements fall within the functional meaning
of the term "evidence of indebtedness", the issue of compliance with Section 18
of the 1940 Act will not be raised with the SEC by the Division of Investment
Management if a Fund covers such securities by maintaining certain "segregated
accounts." Similarly, so long as such segregated accounts are maintained, the
issue of compliance with Section 18 will not be raised with respect to any of
the following: any swap contract or contract for differences; any pledge or
encumbrance of assets permitted by non-fundamental policy (5) below; any
borrowing permitted by restriction 1 above; any collateral arrangements with
respect to initial and variational margin permitted by non-fundamental policy
(5) below; and the purchase or sale of options, forward contracts, futures
contracts or options on futures contracts.

Non-Fundamental Restrictions:

It is contrary to the present policies of each Fund which may be
changed by the Trustees without shareholder approval, to:

(1) Invest in warrants or rights excluding options (other than warrants
or rights acquired by the Fund as a part of a unit or attached to securities at
the time of purchase), except that a Fund may invest in such warrants or rights
so long as the aggregate value thereof (taken at the lower of cost or market)
does not exceed 5% of the value of the Fund's total net assets; provided that
within this 5%, not more than 2% of its net assets may be invested in warrants
that are not listed on the New York or American Stock Exchange or a recognized
foreign exchange.

(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.

(3) Make investments for the purpose of gaining control of a company's
management.

(4) Invest more than 15% of net assets in illiquid securities. The
securities currently thought to be included as "illiquid securities" are
restricted securities under the Federal securities laws (including illiquid
securities traded under Rule 144A), repurchase agreements and securities that
are not readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.

(5) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 33 1/3% of a Fund's total assets (taken at cost). (For the purposes of
this restriction, collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively is not
deemed to be a pledge or encumbrance.)

Except as indicated above in Fundamental Restriction No. 1, all
percentage limitations on investments set forth herein and in the Prospectus
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.

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<PAGE> 27

The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to a Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.

MULTIPLE CLASSES

Each Fund has four classes of shares, Class I, Class II, Class III and
Class IV Shares, but is currently offering only Class III Shares. See
"Eligibility for Classes" below.

SHAREHOLDER SERVICE FEES

The principal economic difference among the various classes of shares
is the level of Shareholder Service Fee which the classes bear for client and
shareholder service, reporting and other support. The existence of multiple
classes reflects the fact that, as the size of a client relationship increases,
the cost to service that client decreases as a percentage of the assets in that
account. Thus, the Shareholder Service Fee is lower for classes where
eligibility criteria require greater total assets under GMO's management.

The Trust has adopted a Shareholder Servicing Plan with respect to the
Funds' multiple classes of shares. Pursuant to the terms of the Shareholder
Servicing Plan, the Funds' classes will pay the following Shareholder Service
Fees, expressed as an annual percentage of the average daily net assets
attributable to that class of shares:
<TABLE>
<CAPTION>

- --------------------------------------- ------------------- ------------------ ---------------- --------------------
Fund Class I Class II Class III Class IV
- ---- ------- -------- --------- --------
<S> <C> <C> <C> <C>
Tax-Managed U.S. Equities Fund 0.28% 0.22% 0.15% 0.105%
Tax-Managed International Equities 0.28% 0.22% 0.15% 0.09%
Fund
- --------------------------------------- ------------------- ------------------ ---------------- --------------------
</TABLE>

ELIGIBILITY FOR CLASSES

Class I, Class II, and Class III Shares: With certain exceptions
described below, eligibility for Class I, Class II and Class III Shares depends
on a client's "Total Investment" with GMO.

For clients establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment will be determined by GMO as of December 31 of
each year and on such other dates as may be determined by GMO (each a
"Determination Date"). Subject to as provided below, a client's Total Investment
as of any Determination Date will equal the greater of (a) the market value of
assets managed by GMO and its affiliates for the client (whether in a pooled
vehicle or otherwise) as of such Determination Date, and (b) the client's Total
Investment as of the previous Determination Date (less the market value of any
account managed by GMO's Domestic Active Division as of the previous
Determination Date), plus contributions made to, and less Large Withdrawals
(defined below) from, any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) since the previous Determination Date
(plus the market value of any account managed by GMO's Domestic Active Division
as of the then current Determination Date). For these purposes, "Large
Withdrawals" means the total of all withdrawals made from any GMO-managed
product or account (other than any account managed by GMO's Domestic Active
Division) since the previous Determination Date if such total exceeds 7% of the
sum of the client's Total Investment as of the previous Determination Date and
any contributions to any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) made since the previous Determination
Date. For clients that have accounts with GMO as of November 30, 1997, their
initial Total Investment is the greater of the market value of assets managed by
GMO and its affiliates for the client as of the close of business on November
30, 1997 or on December 31, 1997. For clients establishing a relationship with
GMO on or after December 1, 1997, their Total Investment will be determined as
described above. Notwithstanding anything to the contrary in this Prospectus,

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<PAGE> 28

assets invested in the Pelican Fund will not be considered when determining a
client's Total Investment. For purposes of this Prospectus, accounts managed by
GMO's Domestic Active Division do not include any GMO Trust Funds (other than
the Pelican Fund), and include only certain separate accounts managed by GMO.
Clients with any questions regarding whether certain of their assets are deemed
to be managed by GMO's Domestic Active Division should call GMO at (617)
330-7500.

Subject to the exceptions set forth following this table, the minimum
Total Investment for a new client (establishing a GMO Account after June 1,
1996) to be eligible for Class I, II or III Shares of the Funds is set forth in
the following table:

- ------------------------------------ -------------------------------------------
CLASS OF SHARES MINIMUM TOTAL INVESTMENT
Class I N/A*
Class II N/A*
Class III $1 Million
- ------------------------------------ -------------------------------------------

*not presently being offered by either Fund

Investments by defined contribution pension plans (such as 401(k)
plans) will be accepted only in the Class of Shares with the highest Shareholder
Service Fee then available, regardless of the size of the investment, and will
not be eligible to convert to other classes with lower Shareholder Service Fees.

For Clients with Accounts as of May 31, 1996: Any client of GMO whose
Total Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on July 31, 1997 or such later date as may be determined by the Manager.
For clients with GMO accounts as of May 31, 1996, their initial Total Investment
will equal the market value of all of their GMO investments as of the close of
business on May 31, 1996 and will subsequently be calculated as described in the
preceding section.

Class IV Shares: Class IV Shares bear significantly lower Shareholder
Service Fees than other classes and are designed to accommodate clients making
very large investments in the Funds or that are making investments into the
Funds in conjunction with a very large commitment of assets to investment
management by GMO.

Eligibility for Class IV Shares is dependent upon the client meeting
either (i) a minimum "Total Fund Investment" requirement, which includes only a
client's total investment in the relevant Fund or (ii) a minimum "Total
Investment" requirement calculated as described above for Class I, Class II and
Class III Shares.

For clients that have accounts with GMO as of November 30, 1997, their
initial Total Investment or initial Total Fund Investment for purposes of
determining eligibility for Class IV Shares will be the greater of the market
value of all of their investments advised by GMO and its affiliates, or the
market value of their investment in the Funds, as the case may be, as of the
close of business on November 30, 1997 or December 31, 1997. For clients
establishing a relationship with GMO on or after December 1, 1997, their Total
Fund Investment and Total Investment will be determined as described above.

-24-

<PAGE> 29

The minimum Total Fund Investment and/or Total Investment for a client
to be eligible for Class IV Shares is set forth in the following table:
<TABLE>
<CAPTION>

- ------------------------------------ ----------------------------------------- -------------------------------------
<S> <C> <C>
Class of Shares Minimum Total Fund Investment Minimum Total Investment
Class IV N/A* N/A*
- ------------------------------------ ----------------------------------------- -------------------------------------
</TABLE>

*not presently being offered by either Fund

There is no minimum for subsequent investments into any class of shares
of the Funds.

The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.

CONVERSIONS BETWEEN CLASSES

On December 31 of each year and on such other dates as may be
determined by GMO (each a "DETERMINATION DATE") the value of each client's Total
Investment and Total Fund Investment with GMO, as defined above, will be
determined. Based on that determination, each client's shares of each Fund will
be automatically converted to the class of shares of such Fund which is then
being offered with the lowest Shareholder Service Fee for which the client is
eligible based on the amount of their Total Investment or Total Fund Investment,
as the case may be, on the Determination Date. The conversion will occur within
15 business days following the Determination Date. Also, if a client makes an
investment in a GMO Fund (except for the Pelican Fund) or puts additional assets
under GMO's management (except for accounts managed by GMO Domestic Active
Division) so as to cause the client to be eligible for a new class of shares,
such determination will be made as of the close of business on the last day of
the calendar quarter in which the investment was made, and the conversion will
be effected within 15 business days of that quarter.

The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the same Fund
should not result in the recognition of gain or loss in the converted Fund's
shares. 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.

Certain special rules will be applied by the Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 is equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 is less than $7 million but greater than $0 will
be eligible to invest in or convert to Class II Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum), and such
conversion will not occur until on or after July 31, 1997. Notwithstanding the
foregoing special rules, clients shall always remain eligible to remain in
and/or to be converted to any class of shares of the Fund which the client would
be eligible to purchase pursuant to the eligibility requirements set forth
herein.

Investors should be aware that not all classes of the Funds are
available in all jurisdictions.

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<PAGE> 30

PURCHASE OF SHARES

Shares of the Funds are available only from the Trust and may be
purchased on any day when the New York Stock Exchange is open for business (a
"business day"). Shares may be purchased by calling (617) 330-7500. See
"Purchase Procedures" below.

The purchase price of a share of a Fund is (i) the net asset value next
determined after a purchase order is received in good order plus (ii) a premium,
if any, established from time to time by the Trust for the Fund. All purchase
premiums are paid to and retained by the relevant Fund and are intended to cover
the brokerage and other costs associated with putting the investment to work in
the relevant markets. Each class of shares of a Fund has the same rate of
purchase premium.

The purchase premiums currently in effect for the Tax-Managed U.S.
Equities Fund and Tax-Managed International Equities Fund are 0.14% and 0.60%,
respectively.

Purchase premiums generally apply only to cash transactions. These fees
are paid to and retained by the relevant Fund and are designed to allocate
transaction costs caused by shareholder activity to the shareholder generating
the activity, rather than to the Fund as a whole. Purchase premiums are not
sales loads.

In certain limited circumstances, the purchase premiums and/or
redemption fees for a Fund may be waived in part or in full. The circumstances
are described in the footnotes to the Schedule of Fees and Expenses in this
Prospectus.

Normally, no purchase premium is charged with respect to in-kind
purchases of Fund shares. However, in the case of in-kind purchases involving
transfers of large positions in markets where the costs of re-registration
and/or other transfer expenses are high, the Tax-Managed International Equities
Fund may charge a premium of 0.10%.

Shares may be purchased (i) in cash, (ii) in exchange for securities on
deposit at The Depository Trust Company ("DTC") (or such other depository
acceptable to the Manager), subject to the determination by the Manager that the
securities to be exchanged are acceptable, or (iii) by a combination of such
securities and cash. In all cases, the Manager reserves the right to reject any
particular investment. Securities acceptable to the Manager as consideration for
Fund shares will be valued as set forth under "Determination of Net Asset Value"
(generally the last quoted sale price) as of the time of the next determination
of net asset value after such acceptance. All dividends, subscription or other
rights which are reflected in the market price of accepted securities at the
time of valuation become the property of the relevant Fund and must be delivered
to the Trust upon receipt by the investor from the issuer. A gain or loss for
federal income tax purposes may be realized by investors subject to federal
income taxation upon the exchange, depending upon the investor's basis in the
securities tendered.

The Manager will not approve securities as acceptable consideration for
Fund shares unless (1) the Manager, in its sole discretion, believes the
securities are appropriate investments for the Fund; (2) the investor represents
and agrees that all securities offered to the Fund are not subject to any
restrictions upon their sale by the Fund under the Securities Act of 1933, or
otherwise; and (3) the securities may be acquired under the investment
restrictions applicable to the Fund. Investors interested in making in-kind
purchases should telephone the Manager at (617) 330-7500.

For purposes of calculating the purchase price of Trust shares, a
Purchase Order is received by the Trust on the day that it is in "good order"
and is accepted by the Trust. For a Purchase Order to be in "good order" on a
particular day, the investor's consideration must be received before the
relevant deadline on that day. If the investor makes a cash investment, the
deadline for wiring Federal funds to the Trust is 2:00 p.m.; if the investor
makes an investment in-kind, the investor's securities must be placed on deposit
at DTC (or such other depository as is acceptable to the Manager) and 2:00 p.m.
is the deadline for transferring those securities to the account designated by
the transfer agent, Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116.

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<PAGE> 31

Investors should be aware that approval of the securities to be used for
purchase must be obtained from the Manager prior to this time. When the
consideration is received by the Trust after the relevant deadline, the Purchase
Order is not considered to be in good order and is required to be resubmitted on
the following business day. With the prior consent of the Manager, in certain
circumstances the Manager may, in its discretion, permit purchases based on
receiving adequate written assurances that Federal Funds or securities, as the
case may be, will be delivered to the Trust by 2:00 p.m. on or prior to the
fourth business day after such assurances are received.

PURCHASE PROCEDURES :

(a) General: Investors should call the Trust at (617) 330-7500 before
attempting to place an order for Shares. The Trust reserves the right to reject
any order for Trust shares. DO NOT SEND CASH, CHECKS OR SECURITIES DIRECTLY TO
THE TRUST. Wire transfer and mailing instructions are contained on the Purchase
Order which can be obtained from the Trust at the telephone numbers set forth
above.

Purchases will be made in full and fractional shares of the relevant
Fund calculated to three decimal places. The Trust will send a written
confirmation (including a statement of shares owned) to shareholders at the time
of each transaction.

(b) Purchase Order: Investors must submit a Purchase Order to the Trust
and it must be accepted by the Trust before it will be considered in "good
order."

A Purchase Order for Shares may be obtained by calling the Trust at (617)
330-7500. The Purchase Order may be submitted to the Trust (i) By Mail to GMO
Trust c/o Grantham, Mayo, Van Otterloo & Co. LLC, 40 Rowes Wharf, Boston, MA
02110; Attention: Shareholder Services, or (ii) By Facsimile to (617) 439-4192;
Attention: Shareholder Services.

(c) Acceptance of Order: No Purchase Order is in "good order" until it
has been accepted by the Trust. As noted above, investors should call the Trust
at the telephone number indicated before attempting to place an order. If a
Purchase Order is faxed to the Trust without first contacting the Trust,
investors should not consider their order acknowledged until they have received
notification from the Trust or have confirmed receipt of the order by contacting
the Trust. A shareholder may confirm acceptance of a mailed or faxed Purchase
Order by calling the Trust at (617) 330-7500. If a Purchase Order is mailed to
the Trust, it will be acted upon when received.

(d) Payment: All Federal funds must be transmitted to Investors Bank &
Trust Company for the account of the Fund. "Federal funds" are monies credited
to Investors Bank & Trust Company's account with the Federal Reserve Bank of
Boston.

Note: The Trust may attempt to process orders for Trust shares that are
submitted less formally than as described above, but, in such cases, the
investor should carefully review confirmations sent by the Trust to verify that
the order was properly executed. The Trust cannot be held responsible for
failure to execute orders or improperly executing orders that are not submitted
in accordance with these procedures.

REDEMPTION OF SHARES

Shares of a Fund may be redeemed on any business day in cash or in
kind. The redemption price is the net asset value per share next determined
after receipt of the redemption request in "good order" less any applicable
redemption fee. All redemption fees are paid to and retained by the relevant
Fund and are intended to cover the brokerage and other Fund costs associated
with redemptions. Redemption fees are not sales loads or contingent deferred
sales charges. All classes of a Fund bear the same redemption fee rate, if any.

Neither Fund currently has a redemption fee in effect.

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<PAGE> 32

If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of a Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Securities used to redeem Fund shares in-kind will be valued in
accordance with the Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by a Fund in-kind
will be selected by the Manager in light of the Fund's objective and will not
generally represent a pro rata distribution of each security held in the Fund's
portfolio. Any in-kind redemptions will be of readily marketable securities to
the extent available. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.

Payment on redemption will be made as promptly as possible and in any
event within seven days after the request for redemption is received by the
Trust in "good order." A redemption request is in "good order" if it includes
the exact name in which shares are registered, the investor's account number and
the number of shares or the dollar amount of shares to be redeemed and if it is
signed exactly in accordance with the form of registration. In addition, for a
redemption request to be in "good order" on a particular day, the investor's
request must be received by the Trust by 4:15 p.m. on a business day. When a
redemption request is received after 4:15 p.m., the redemption request will not
be considered to be in "good order" and is required to be resubmitted on the
following business day. Persons acting in a fiduciary capacity, or on behalf of
a corporation, partnership or trust must specify, in full, the capacity in which
they are acting. The redemption request will be considered "received" by the
Trust only after (i) it is mailed to, and received by, the Trust at the address
set forth above for purchase orders, or (ii) it is faxed to the Trust at the
facsimile number set forth above for purchase orders, and the investor has
confirmed receipt of the faxed request by calling the Trust at (617) 330-7500.
In-kind distributions will be transferred and delivered as directed by the
investor. Cash payments will be made by transfer of Federal funds for payment
into the investor's account.

When opening an account with the Trust, shareholders will be required
to designate the account(s) to which funds or securities may be transferred upon
redemption. Designation of additional accounts and any change in the accounts
originally designated must be made in writing.

A Fund may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Fund to dispose of its
securities or to fairly determine the value of the net assets of the Fund, or
during any other period permitted by the Securities and Exchange Commission for
the protection of investors. Because a Fund may hold portfolio securities listed
on foreign exchanges which may trade on days on which the New York Stock
Exchange is closed, the net asset value of a Fund's shares may be significantly
affected on days when shareholders have no access to the Fund.

DETERMINATION OF NET ASSET VALUE

The net asset value of a share is determined for each Fund once on each
day on which the New York Stock Exchange is open as of 4:15 p.m., New York City
Time, except that a Fund may not determine its net asset value on days during
which no security is tendered for redemption and no order to purchase or sell
such security is received by the relevant Fund. A Fund's net asset value is
determined by dividing the total market value of the Fund's portfolio
investments and other assets, less any liabilities, by the total outstanding
shares of the Fund. Portfolio securities listed on a securities exchange for
which market quotations are available are valued at the last quoted sale price
on each business day, or, if there is no such reported sale, at the most recent
quoted bid price. Price information on listed securities is generally taken from
the closing price on the exchange where the security is primarily traded.
Unlisted securities for which market quotations are readily available are valued
at the most recent quoted bid price, except that debt obligations with sixty
days or less remaining until maturity may be valued at their amortized cost,
unless circumstances dictate otherwise. Circumstances may dictate otherwise,
among other times, when the issuer's creditworthiness has become impaired.

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<PAGE> 33

All other fixed income securities (which includes bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied from another source)
because of such price activity or because the Manager has other reasons to
suspect that a price supplied may not be reliable.

Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the Trustees
or persons acting at their direction. The values of foreign securities quoted in
foreign currencies are translated into U.S. dollars at current exchange rates or
at such other rates as the Trustees may determine in computing net asset value.

Because of time zone differences, foreign exchanges and securities
markets will usually be closed prior to the time of the closing of the New York
Stock Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may occasionally
occur between the earlier closings of such exchanges and securities markets and
the closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of a Fund. If an event materially affecting
the value of such foreign securities occurs during such period, then such
securities will be valued at fair value as determined in good faith by the
Trustees or persons acting at their direction.

Because foreign securities, options on foreign securities and foreign
futures are quoted in foreign currencies, fluctuations in the value of such
currencies in relation to the U.S. dollar will affect the net asset value of
shares of a Fund even though there has not been any change in the values of such
securities and options, measured in terms of the foreign currencies in which
they are denominated.

DISTRIBUTIONS

Each Fund intends to pay out as dividends, at least annually,
substantially all of its net investment income (which is derived from dividends
and interest it receives from its portfolio investments and net short-term
capital gains). For these purposes and for federal income tax purposes, a
portion of the premiums from certain expired call or put options written by the
Funds, net gains from certain closing purchase and sale transactions with
respect to such options and a portion of net gains from other options and
futures transactions are treated as short-term capital gain. Each Fund also
intends to distribute substantially all of its net long-term capital gains, if
any, after giving effect to any available capital loss carryovers. It is the
policy of the Funds to make distributions, at least annually, sufficient to
avoid the imposition of a non-deductible 4% excise tax on certain undistributed
amounts of taxable investment income and capital gains. The policy of the Tax-
Managed U.S. Equities Fund is to declare and pay distributions of its dividends
and interest quarterly. The policy of the Tax-Managed International Equities
Fund is to declare and pay distributions of its dividends, interest and foreign
currency gains semi-annually. Each Fund also intends to distribute net
short-term capital gains and net long-term capital gains at least annually.
Investors should be aware that by purchasing shares shortly before the record
date of a dividend or capital gains distribution, they will pay the full price
of the shares and shortly thereafter will receive some portion of the price paid
back as a taxable dividend or taxable capital gains distribution.

All dividends and/or distributions will be paid in shares of the
relevant Fund, at net asset value, unless the shareholder elects to receive
cash. There is no purchase premium on reinvested dividends or distributions.
Shareholders may make this election by marking the appropriate box on the
Application or by writing to the Trust.

Certain of the Funds' investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "indexed securities," will create taxable
income in excess of the cash they generate. In such cases, the relevant Fund may
be required to sell assets (including

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<PAGE> 34

when it is not advantageous to do so) to generate the cash necessary to
distribute as dividends to its shareholders all of its income and gains and
therefore to eliminate any tax liability at the Fund level.

TAXES

Each Fund is treated as a separate taxable entity for federal income
tax purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended, and
to meet all other requirements necessary for it to be relieved of federal taxes
on income and gains it distributes to shareholders. So long as each Fund so
qualifies, each Fund itself will not pay federal income taxes on the amounts
distributed.

Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested shares. Distributions from a Fund will be taxable to
shareholders as ordinary income to the extent derived from a Fund's investment
income and net short-term gains. Distributions of long-term capital gains will
be taxable to shareholders as such, regardless of how long a shareholder has
held the shares in the Fund. Any loss realized upon a taxable disposition of
shares held for six months or less will be treated as long-term capital loss to
the extent of any long-term capital gain distributions received by a shareholder
with respect to those shares. The recognition of certain losses upon the sale of
shares of a Fund may be limited to the extent shareholders dispose of shares of
one Fund and invest in shares of the same or another GMO Fund. A distribution
paid to shareholders by a Fund in January of a year generally is deemed to have
been received by shareholders on December 31 of the preceding year, if the
distribution was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. The Trust will provide
federal tax information annually, including information about dividends and
distributions paid during the preceding year to taxable investors and others
requesting such information.

For corporate shareholders, the dividends-received deduction will
generally apply (subject to a holding period requirement) to a Fund's dividends
paid from investment income to the extent derived from dividends received from
U.S. corporations. However, any distributions received by a Fund from REITs will
not qualify for the corporate dividends-received deduction. A Fund's investments
in REIT equity securities, if any, may require the Fund to accrue and distribute
income not yet received. In order to generate sufficient cash to make the
requisite distributions, the Fund may be required to sell securities in its
portfolio that it otherwise would have continued to hold (including when it is
not advantageous to do so). A Fund's investments in REIT equity securities may
at other times result in the Fund's receipt of cash in excess of the REIT's
earnings; if the Fund distributes such amounts, such distribution could
constitute a return of capital to Fund shareholders for federal income tax
purposes.

The back-up withholding rules do not apply to tax exempt entities so
long as each such entity furnishes the Trust with an appropriate certification.
However, other shareholders are subject to back-up withholding at a rate of 31%
on all distributions of net investment income and capital gain, whether received
in cash or reinvested in shares of a Fund, and on the amount of the proceeds of
any redemption of Fund shares paid or credited to any shareholder account for
which an incorrect or no taxpayer identification number has been provided, where
appropriate certification has not been provided for a foreign shareholder, or
where the Trust is notified that the shareholder has underreported income in the
past (or the shareholder fails to certify that he is not subject to such
withholding).

The foregoing is a general summary of the principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise tax consequences of an investment in a Fund in light
of each shareholder's particular tax situation. Shareholders should also consult
their own tax advisors about consequences under foreign, state, local or other
applicable tax laws (including possible liability for federal alternative
minimum tax).

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WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS

Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder will ordinarily not be subject to U.S.
taxation, unless the recipient or seller is a nonresident alien individual who
is present in the United States for more than 182 days during the taxable year.
However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Federal regulations generally require the Funds to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and gains realized upon a sale of securities
paid to a shareholder if such shareholder fails to certify either that the TIN
furnished in connection with opening an account is correct or that such
shareholder has not received notice from the IRS of being subject to backup
withholding as a result of a failure to properly report taxable dividend or
interest income on a Federal income tax return. Also, the IRS may notify a Fund
to institute backup withholding if the IRS determines a shareholder's TIN is
incorrect or if a shareholder has failed to properly report taxable dividend and
interest income on a Federal income tax return. A TIN is either the Social
Security number or employer identification number of the record owner of the
account. Any tax withheld as a result of backup withholding does not constitute
an additional tax imposed on the record owner of the account, and may be claimed
as a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from a Fund is "effectively connected"
with a U.S. trade or business carried on by such shareholder will in general be
subject to U.S. federal income tax on the income derived from the Fund at the
graduated rates applicable to U.S. citizens, residents or domestic corporations,
whether received in cash or reinvested in shares, and, in the case of a foreign
corporation, may also be subject to a branch profits tax. Again, foreign
shareholders who are resident in a country with an income tax treaty with the
United States may obtain different tax results, and are urged to consult their
tax advisors.

FOREIGN TAX CREDITS

If, at the end of the fiscal year, more than 50% of the total assets of
a Fund is represented by stock of foreign corporations, the Fund intends to make
an election which allows shareholders whose income from the Fund is subject to
U.S. taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations to claim a foreign tax credit or deduction (but not both)
on their U.S. income tax return. In such case, the amounts of foreign income
taxes paid by the Fund would be treated as additional income to Fund
shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their tax advisors for further
information relating to the foreign tax credit and deduction, which are subject
to certain restrictions and limitations (including a holding period requirement
applied at both the Fund and shareholder level). Shareholders whose income from
the Fund is not subject to U.S. taxation at the graduated rates applicable to
U.S. citizens, residents or domestic corporations may receive substantially
different tax treatment of distributions by the Fund, and may be disadvantaged
as a result of the election described in this paragraph.

TAX IMPLICATIONS OF CERTAIN INVESTMENTS

As described above under the heading "Distributions," certain of the
Funds' investments, including assets "marked to the market" for federal income
tax purposes, debt obligations issued or purchased at a discount and potentially
so-called "index securities," will create taxable income in excess of the cash
they generate. In such cases, a Fund may be required to sell assets (including
when it is not advantageous to do so) to generate the cash necessary to
distribute as dividends to its shareholders all of its income and gains and
therefore to eliminate any tax liability at the Fund level.

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<PAGE> 36

A Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Fund's
securities and convert short-term capital gains or losses into long-term capital
gains or losses. Qualification requirements noted above may restrict a Fund's
ability to engage in these transactions, and these transactions may affect the
amount, timing and character of distributions to shareholders.

Investment by a Fund in certain "passive foreign investment companies"
could subject the Fund to a U.S. federal income tax (including interest charges)
on distributions received from the company or on proceeds received from the
disposition of shares in the company, which tax cannot be eliminated by making
distributions to Fund shareholders. However, a Fund may elect to treat a passive
foreign investment company as a "qualified electing fund," in which case the
Fund will be required to include its share of the company's income and net
capital gain annually, regardless of whether it receives any distributions from
the company. A Fund may also make an election to mark the gains (and to a
limited extent losses) in such holdings "to the market" as though it had sold
and repurchased its holdings in those PFIC's on the last day of the Fund's
taxable year. Such gains and losses are treated as ordinary income and loss. The
QEF and mark-to-market elections may have the effect of accelerating the
recognition of income (without the receipt of cash) and increase the amount
required to be distributed for a Fund to avoid taxation. Making either of these
elections may therefore require a Fund to liquidate other investments (including
when it is not advantageous to do so) to meet its distribution requirement,
which may also accelerate the recognition of gain and affect the Fund's total
return.

LOSS OF REGULATED INVESTMENT COMPANY STATUS

A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If a
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, a Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.

MANAGEMENT OF THE TRUST

The Funds are advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC, 40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager" or "GMO")
which provides investment advisory services to a substantial number of
institutional and other investors, including one other registered investment
company. GMO converted from a general partnership to a limited liability company
on December 16, 1996. Each of the following four members holds a greater than 5%
interest in the Manager: R. Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van
Otterloo and Kingsley Durant.

Under separate Management Contracts with each Fund, the Manager selects
and reviews each Fund's investments and provides executive and other personnel
for the management of the Trust. Pursuant to the Trust's Agreement and
Declaration of Trust, the Board of Trustees supervises the affairs of the Trust
as conducted by the Manager. In the event that the Manager ceases to be the
manager of the Fund, the right of the Trust to use the identifying name "GMO"
may be withdrawn.

Each Management Contract provides for payment to the Manager of a
management fee at the stated annual rates set forth under Schedule of Fees and
Expenses. The management fee is computed and accrued daily, and paid monthly. In
addition, with respect to each Fund, the Manager has voluntarily agreed to waive
its fee and to bear certain expenses until further notice in order to limit each
Fund's annual expenses to specified limits (with certain exclusions). These
limits and the terms applicable to them are described under the Schedule of Fees
and Expenses.

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<PAGE> 37

Mr. R. Jeremy Grantham and Mr. Richard McQuaid will be primarily
responsible for the day to day management of the Tax-Managed U.S. Equities Fund
and the Tax-Managed International Equities Fund.

Pursuant to an Administrative Services Agreement with GMO, Investors
Bank & Trust Company provides administrative services to each Fund. GMO pays
Investors Bank & Trust Company an annual fee for its services to the Funds.

Pursuant to a Servicing Agreement with the Trust on behalf of each
class of shares of each Fund of the Trust, GMO, in its capacity as the Trust's
shareholder servicer (the "Shareholder Servicer"), provides direct client
service, maintenance and reporting to shareholders of each class of shares. Such
servicing and reporting services include, without limitation, professional and
informative reporting, client account information, personal and electronic
access to Fund information, access to analysis and explanations of Fund reports,
and assistance in the correction and maintenance of client-related information.

ORGANIZATION AND CAPITALIZATION
OF THE TRUST

The Trust was established on June 24, 1985 as a business trust under
Massachusetts law. The Trust has an unlimited authorized number of shares of
beneficial interest which may, without shareholder approval, be divided into an
unlimited number of series and classes of such shares. The Trusts's shares are
presently divided into thirty-seven series of shares, including for the
Tax-Managed U.S. Equities Fund and the Tax-Managed International Equities Fund,
as well as the Asia Fund, International Core Plus Allocation Fund, Fundamental
Value Fund, Pelican Fund, U.S. Core Fund, Tobacco-Free Core Fund, Value Fund,
Growth Fund, U.S. Sector Fund, Small Cap Value Fund, Small Cap Growth Fund, REIT
Fund, International Core Fund, Currency Hedged International Core Fund, Foreign
Fund, International Small Companies Fund, Japan Fund, Emerging Markets Fund,
Evolving Countries Fund, Global Properties Fund, Domestic Bond Fund, U.S.
Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund, International Bond
Fund, Currency Hedged International Bond Fund, Global Bond Fund, Emerging
Country Debt Fund, Emerging Country Debt Share Fund, Short-Term Income Fund,
Global Hedged Equity Fund, Inflation Indexed Bond Fund, International Equity
Allocation Fund, World Equity Allocation Fund, Global (U.S.+) Equity Allocation
Fund, and Global Balanced Allocation Fund, and up to eight classes of shares.
All shares of all series are entitled to vote at any meetings of shareholders.
The Trust does not generally hold annual meetings of shareholders and will do so
only when required by law. All shares entitle their holders to one vote per
share. Matters submitted to shareholder vote must be approved by each Fund
separately except (i) when required by the 1940 Act shares shall be voted
together as a single class and (ii) when the Trustees have determined that the
matter does not affect the Fund, then only shareholders of the Fund(s) affected
shall be entitled to vote on the matter. Shareholders of a particular class of
shares do not have separate class voting rights except with respect to matters
that affect only that class of shares or as otherwise required by law. Shares
are freely transferable, are entitled to dividends as declared by the Trustees,
and, in liquidation of the Trust, are entitled to receive the net assets of
their Fund, but not of any other Fund. Shareholders holding a majority of the
outstanding shares of all series may remove Trustees from office by votes cast
in person or by proxy at a meeting of shareholders or by written consent.

Shareholders could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the risk of a shareholder
incurring financial loss on account of that liability is considered remote since
it may arise only in very limited circumstances.

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APPENDIX A

RISKS AND LIMITATIONS OF OPTIONS, FUTURES AND SWAPS

Limitations on the Use of Options and Futures Portfolio Strategies .
As noted in "Descriptions and Risks of Fund Investment Practices--Futures and
Options" above, a Fund may use futures contracts and related options for hedging
and, in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management or investment, a Fund's
long futures contract positions (less its short positions) together with the
Fund's cash (i.e., equity or fixed income) positions will not exceed the Fund's
total net assets.

A Fund's ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that a Fund will be able to utilize these
instruments effectively for the purposes set forth above.

Risk Factors in Options Transactions . The option writer has no
control over when the underlying securities or futures contract must be sold, in
the case of a call option, or purchased, in the case of a put option, since the
writer may be assigned an exercise notice at any time prior to the termination
of the obligation. If an option expires unexercised, the writer realizes a gain
in the amount of the premium. Such a gain, of course, may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security or futures contract during the option period. If a call
option is exercised, the writer realizes a gain or loss from the sale of the
underlying security or futures contract. If a put option is exercised, the
writer must fulfill the obligation to purchase the underlying security or
futures contract at the exercise price, which will usually exceed the then
market value of the underlying security or futures contract.

An exchange-traded option may be closed out only on a national
securities exchange ("Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing transaction with respect to a particular option
with the result that the Fund holding the option would have to exercise the
option in order to realize any profit. For example, in the case of a written
call option, if the Fund is unable to effect a closing purchase transaction in a
secondary market (in the case of a listed option) or with the purchaser of the
option (in the case of an over-the-counter-option), the Fund will not be able to
sell the underlying security (or futures contract) until the option expires or
it delivers the underlying security (or futures contract) upon exercise. Reasons
for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange should continue to be exercisable in accordance with their terms.

The Exchanges have established limitations governing the maximum
number of options which may be written by an investor or group of investors
acting in concert. It is possible that the Funds, the Manager and other clients
of the Manager may be considered to be such a group. These position limits may
restrict the Funds' ability to purchase or sell options on a particular
security.

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<PAGE> 39

The amount of risk the Funds assume when they purchase an option is
the premium paid for the option plus related transaction costs. In addition to
the correlation risks discussed below, the purchase of an option also entails
the risk that changes in the value of the underlying security or futures
contract will not be fully reflected in the value of the option purchased.

Risk Factors in Futures Transactions . Investment in futures contracts
involves risk. If the futures are used for hedging, some of that risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or currency being hedged. The correlation
is higher between price movements of futures contracts and the instrument
underlying that futures contract. The correlation is lower when futures are used
to hedge securities other than such underlying instrument, such as when a
futures contract on an index of securities is used to hedge a single security, a
futures contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency (e.g., the German Mark) is used to hedge a security denominated
in another currency (e.g., the Spanish Peseta). In the event of an imperfect
correlation between a futures position and a portfolio position (or anticipated
position) which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
always possible to hedge fully or perfectly against currency fluctuations
affecting the value of the securities denominated in foreign currencies because
the value of such securities also is likely to fluctuate as a result of
independent factors not related to currency fluctuations. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches.

A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations a Fund may purchase or
sell futures contracts in a greater amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, a Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contract.

As noted in the Prospectus, a Fund may also purchase futures contracts
(or options thereon) as an anticipatory hedge against a possible increase in the
price of currency in which is denominated the securities the Fund anticipates
purchasing. In such instances, it is possible that the currency may instead
decline. If the Fund does not then invest in such securities because of concern
as to possible further market and/or currency decline or for other reasons, the
Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.

The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days. Short
positions in index futures may be closed out only by entering into a futures
contract purchase on the futures exchange on which the index futures are traded.

The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.

Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
a Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that the Fund might

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<PAGE> 40

realized in trading could be eliminated by adverse changes in the exchange rate,
or the Fund could incur losses as a result of those changes.

Risk Factors in Swap Contracts, OTC Options and other Two-Party
Contract s. A Fund may only close out a swap, contract for differences, cap
floor or collar or OTC option, with the particular counterparty. Also, if the
counterparty defaults, a Fund will have contractual remedies pursuant to the
agreement related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, the Fund will succeed in pursuing contractual
remedies. A Fund thus assumes the risk that it may be delayed or prevented from
obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor subject to the oversight of the Trustees, the creditworthiness
of contract counterparties and a Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service or
Standard and Poor's Corporation at the time of entering into such transaction or
if the counterparty has comparable credit as determined by the Manager. However,
the credit of the 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. The management of caps, floors, collars and swaps
may involve certain difficulties because the characteristics of many derivatives
have not been observed under all market conditions or through a full market
cycle.

Additional Regulatory Limitations on the Use of Futures and Related
Options, Interest Rate Floors, Caps and Collars and Interest Rate and Currency
Swap Contracts . In accordance with CFTC regulations, investments by the Fund as
provided in the Prospectus in futures contracts and related options for purposes
other than bona fide hedging are limited such that the aggregate amount that the
Funds may commit to initial margin on such contracts or time premiums on such
options may not exceed 5% of that Funds' net assets.

The Manager and the Trust do not believe that a Fund's respective
obligations under equity swap contracts, reverse equity swap contracts or Index
Futures are senior securities and, accordingly, the Fund will not treat them as
being subject to its borrowing restrictions. However, the net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each equity swap contract will be accrued on a daily basis and an amount of
cash, U.S. Government Securities or other high grade debt obligations having an
aggregate market value at least equal to the accrued excess will be maintained
in a segregated account by the Fund's custodian. Likewise, when a Fund takes a
short position with respect to an Index Futures contract the position must be
covered or the Fund must maintain at all times while that position is held by
the Fund, cash, U.S. government securities or other high grade debt obligations
in a segregated account with its custodian, in an amount which, together with
the initial margin deposit on the futures contract, is equal to the current
delivery or cash settlement value.

The use of unsegregated futures contracts, related written options,
interest rate floors, caps and collars and interest rate and currency swap
contracts for risk management by a Fund permitted to engage in any or all of
such practices is limited to no more than 10% of the Fund's total net assets
when aggregated with such Fund's traditional borrowings in accordance with SEC
pronouncements. This 10% limitation applies to the face amount of unsegregated
futures contracts and related options and to the amount of the Fund's net
payment obligation that is not segregated against in the case of interest rate
floors, caps and collars and interest rate and currency swap contracts.

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APPENDIX B

COMMERCIAL PAPER AND CORPORATE DEBT RATINGS

COMMERCIAL PAPER RATINGS

Commercial paper ratings of Standard & Poor's Corporation ("Standard &
Poor's") are current assessments of the likelihood of timely payment of debts
having original maturities of no more than 365 days. Commercial paper rated A-1
by Standard & Poor's indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+. Commercial paper
rated A-2 by Standard and Poor's indicates that capacity for timely payment on
issues is strong. However, the relative degree of safety is not as high as for
issues designated A-1. Commercial paper rated A-3 indicates capacity for timely
payment. It is, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.

The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained. Issuers rated
Prime-3 have an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement of
relatively high financial leverage. Adequate alternate liquidity is maintained.

CORPORATE DEBT RATINGS

Standard & Poor's Corporation . A Standard & Poor's corporate debt
rating is a current assessment of the creditworthiness of an obligor with
respect to a specific obligation. The following is a summary of the ratings used
by Standard & Poor's for corporate debt:

AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.

AA - Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree. A - Bonds rated A
have a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions.

BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.

BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

C - The rating C is reserved for income bonds on which no interest is being
paid.

D - Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.

Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

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<PAGE> 42

Moody's Investors Service, Inc. The following is a summary of the
ratings used by Moody's Investor Services, Inc. for corporate debt:

AAA - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

AA - Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.(1)

A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.(1)

BAA - Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.

BA - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

CAA - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. CA - Bonds which are rated Ca represent obligations which are
speculative in a high degree.
Such issues are often in default or have other marked shortcomings.

C - Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing. Should no rating be assigned by Moody's, the reason
may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.

3. There is lack of essential data pertaining to the issue or issuer.

4. The issue was privately placed in which case the rating is not
published in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols 1Aa1,
A1, Baa1, and B1.

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<PAGE> 43

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SHAREHOLDER INQUIRIES
Shareholders may direct inquiries
to Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
(1-617-330-7500)

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<PAGE> 44

GMO TAX-MANAGED U.S. EQUITIES FUND
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND

STATEMENT OF ADDITIONAL INFORMATION

JULY 17, 1998

This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus for the GMO
Tax-Managed U.S. Equities Fund and GMO Tax-Managed International Equities Fund
dated July 17, 1998, as amended from time to time, and should be read in
conjunction therewith. A copy of the Prospectus may be obtained from GMO Trust,
40 Rowes Wharf, Boston, Massachusetts 02110.

<PAGE> 45

TABLE OF CONTENTS

Page

INVESTMENT OBJECTIVES AND POLICIES ............................. 1

MISCELLANEOUS INVESTMENT PRACTICES ............................. 1

MANAGEMENT OF THE TRUST ........................................ 1

INVESTMENT ADVISORY AND OTHER SERVICES ......................... 2

PORTFOLIO TRANSACTIONS ......................................... 4

DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES ............... 5

PERFORMANCE INFORMATION ........................................ 6

<PAGE> 46

INVESTMENT OBJECTIVES AND POLICIES

The investment objectives and policies of the GMO Tax-Managed U.S.
Equities Fund (the "Tax-Managed U.S. Equities Fund") and the GMO Tax-Managed
International Equities Fund (the "Tax-Managed International Equities Fund")
(each a "Fund" and collectively the "Funds") are described in the Funds'
Prospectus. Unless otherwise indicated in the Prospectus or this Statement of
Additional Information, the investment objectives and policies of the Funds may
be changed without shareholder approval.

MISCELLANEOUS INVESTMENT PRACTICES

Index Futures. As stated in the Prospectus under the heading
"Description and Risks of Fund Investments -- Futures and Options," each Fund
may purchase futures contracts on various securities indexes ("Index Futures").
As indicated in the Prospectus, an Index Future is a contract to buy or sell an
integral number of units of the particular stock index at a specified future
date at a price agreed upon when the contract is made. A unit is the value from
time to time of the relevant index. Entering into a contract to buy units is
commonly referred to as buying or purchasing a contract or holding a long
position in the relevant index.

For example, if the value of a unit of a particular index were $1,000,
a contract to purchase 500 units would be worth $500,000 (500 units x $1,000).
The Index Futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the relevant index at the
expiration of the contract. For example, if a Fund enters into one futures
contract to buy 500 units of an index at a specified future date at a contract
price of $1,000 per unit and the index is at $1,010 on that future date, the
Fund will gain $5,000 (500 units x gain of $10).

MANAGEMENT OF THE TRUST

The names and ages of the Trustees and officers of the Trust and their
principal occupations during the past five years are as follows:

*R. Jeremy Grantham (59). President-Quantitative and Trustee of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC

Harvey R. Margolis (55). Trustee of the Trust. Mathematics Professor,
Boston College .

Jay O. Light (54). Trustee of the Trust. Professor of Business
Administration, Harvard University; Senior Associate Dean, Harvard
University (1988-1992).

Eyk del Mol Van Otterloo (61). President-International of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC

Richard Mayo (56). President-Domestic Active of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC

Kingsley Durant (66). Vice President and Secretary of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC

Susan Randall Harbert (41). Secretary and Treasurer of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC

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<PAGE> 47

William R. Royer, Esq. (32). Vice President and Assistant Treasurer of
the Trust. General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC
(January 1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September 1992 - January 1995) .

Jui Lai (49). Secretary of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC

Ann Spruill (44). Secretary of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC

Alison E. Baur, Esq. (34). Clerk of the Trust. Associate General
Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (February 1997 -
Present). Attorney, Securities and Exchange Commission (April 1991 -
January 1997) .

Robert V. Brokaw, Jr. (54). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC

*Trustee is deemed to be an "interested person" of the Trust and the Manager, as
defined by the 1940 Act.

The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110.

Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.

Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:

Total Annual Compensation
Name of Person, Position from the Trust
------------------------ -------------------------
Harvey R. Margolis, Trustee $70,000
Jay O. Light, Trustee $70,000

Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai and Brokaw, and
Mses. Harbert and Spruill, as members of the Manager, will benefit from the
management fees paid by each Fund of the Trust.

INVESTMENT ADVISORY AND OTHER SERVICES

Management Contracts

As disclosed in the Prospectus under the heading "Management of the
Fund," under a separate Management Contract (the "Management Contract") between
the Trust and Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager"), subject to
such policies as the Trustees of the Trust may determine, the Manager will
furnish continuously an investment program for each Fund and will make
investment decisions on behalf of each Fund and place all orders for each
purchase and sale of portfolio securities. Subject to the control of the
Trustees, the Manager also manages, supervises and conducts the other affairs
and business of the Trust, furnishes office space and equipment, provides
bookkeeping and certain clerical services and pays all salaries, fees and
expenses of officers and Trustees of the Trust who are affiliated with the
Manager. As indicated under "Portfolio Transactions -- Brokerage and Research
Services," the Trust's portfolio transactions may be placed with broker-dealers
which furnish the Manager, at no cost, certain research, statistical and
quotation services of value to the Manager in advising the Trust or its other
clients.

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<PAGE> 48

As is disclosed in the Prospectus, the Manager's compensation with
respect to a Fund will be reduced to the extent that the Fund's annual expenses
incurred in the operation of the Fund (including the management fee but
excluding Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses and transfer taxes) would exceed the percentage of the Fund's
average daily net assets described therein. Because the Manager's compensation
is fixed at an annual rate equal to this expense limitation, it is expected that
the Manager will pay such expenses (with the exceptions noted) as they arise. In
addition, the Manager's compensation under each Management Contract is subject
to reduction to the extent that in any year the expenses of the Fund exceed the
limits on investment company expenses imposed by any statute or regulatory
authority of any jurisdiction in which shares of the Fund are qualified for
offer and sale. The term "expenses" is defined in the statutes or regulations of
such jurisdictions, and, generally speaking, excludes brokerage commissions,
taxes, interest and extraordinary expenses. The Funds are not currently subject
to any state imposed limit on expenses.

Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.

Each Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who are not "interested persons" of the
Manager) and by the relevant Fund's initial sole shareholder in connection with
the organization of the Trust and the establishment of the Fund. Each Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) vote, cast in person at a meeting called for that purpose, of a majority
of those Trustees who are not "interested persons" of the Manager or the Trust,
and by (ii) the majority vote of either the full Board of Trustees or the vote
of a majority of the outstanding shares of the Fund. Each Management Contract
automatically terminates on assignment, and is terminable on not more than 60
days' notice by the Trust to the Manager. In addition, each Management Contract
may be terminated on not more than 60 days' written notice by the Manager to the
Trust.

Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116 serves as the Trust's custodian on
behalf of the Tax-Managed U.S. Equities Fund. Brown Brothers Harriman & Co.
("BBH"), 40 Water Street, Boston, Massachusetts 02109 serves as the Trust's
custodian on behalf of the Tax-Managed International Equities Fund. As such, IBT
and BBH hold in safekeeping certificated securities and cash belonging to each
Fund and, in such capacity, are the registered owners of securities in
book-entry form belonging to the relevant Fund. Upon instruction, IBT and BBH
receive and deliver cash and securities of the relevant Fund in connection with
the relevant Fund's transactions and collects all dividends and other
distributions made with respect to the relevant Fund's portfolio securities. IBT
and BBH also maintain certain accounts and records of the Trust and calculate
the total net asset value, total net income and net asset value per share of the
relevant Fund on a daily basis.

Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with each Fund of the
Trust, Grantham, Mayo, Van Otterloo & Co. LLC ("GMO") provides direct client
service, maintenance and reporting to shareholders of each Fund. The Servicing
Agreement was approved by the Trustees of the Trust (including a majority of the
Trustees who are not "interested persons" of the Manager or the Trust). The
Servicing Agreement will continue in effect for a period more than one year from
the date of its execution only so long as its continuance is approved at least
annually by (i) vote, cast in person at a meeting called for the purpose, of a
majority of those Trustees who are not "interested persons" of the Manager or
the Trust, and by (ii) the majority vote of the full Board of Trustees. The
Servicing Agreement automatically terminates on assignment (except as
specifically provided in the Servicing Agreement) and is terminable by either
party upon not more than 60 days written notice to the other party.

The Trust initially entered into the Servicing Agreement with GMO on
May 30, 1996.

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<PAGE> 49

Independent Accountants. The Trust's independent accountants are Price
Waterhouse Coopers, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse Coopers conducts annual audits of the Trust's financial statements,
assists in the preparation of each Fund's federal and state income tax returns,
consults with the Trust as to matters of accounting and federal and state income
taxation and provides assistance in connection with the preparation of various
Securities and Exchange Commission filings.

PORTFOLIO TRANSACTIONS

The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account's being
preferred over any other account.

Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the relevant Fund; (b) such securities are acquired for
investment and not for resale; (c) such securities are liquid securities which
are not restricted as to transfer either by law or liquidity of market; and (d)
such securities have a value which is readily ascertainable as evidenced by a
listing on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.

Brokerage and Research Services. In placing orders for the portfolio
transactions of the Funds, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the relevant
Fund (involving price paid or received and any commissions and other costs
paid), the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, availability of
the broker to stand ready to execute possibly difficult transactions in the
future and the financial strength and stability of the broker. Because of such
factors, a broker-dealer effecting a transaction may be paid a commission higher
than that charged by another broker-dealer. Most of the foregoing are judgmental
considerations.

Over-the-counter transactions often involve dealers acting for their
own account.

Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Fund's portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients
(including other Funds of the Trust) as well as the Funds.

As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction.

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<PAGE> 50

DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES

The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for each
Fund ends on February 28.

Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-seven series: one for each of the Tax-Managed U.S. Equities Fund and
Tax-Managed International Equities Fund and one for each of the Asia Fund,
International Core Plus Allocation Fund, Fundamental Value Fund, Pelican Fund,
U.S. Core Fund, Tobacco-Free Core Fund, Value Fund, Growth Fund, U.S. Sector
Fund, Small Cap Value Fund, Small Cap Growth Fund, REIT Fund, International Core
Fund, Currency Hedged International Core Fund, Foreign Fund, International Small
Companies Fund, Japan Fund, Emerging Markets Fund, Evolving Countries Fund,
Global Properties Fund, Domestic Bond Fund, U.S. Bond/Global Alpha A Fund, U.S.
Bond/Global Alpha B Fund, International Bond Fund, Currency Hedged International
Bond Fund, Global Bond Fund, Emerging Country Debt Fund, Emerging Country Debt
Share Fund, Short-Term Income Fund, Global Hedged Equity Fund, Inflation Indexed
Bond Fund, International Equity Allocation Fund, World Equity Allocation Fund,
Global (U.S.+) Equity Allocation Fund, and Global Balanced Allocation Fund.
Interests in each portfolio (Fund) are represented by shares of the
corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of a Fund, shareholders of the corresponding series are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial and transfer agency expenses, but there is
no present intention to make such charges.

The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.

The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.

The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the Investment Company Act of 1940 (the
"1940 Act") requires that the Trust receive the authorization of a majority of
its outstanding shares in order to change the nature of its business so as to
cease to be an investment company.

Voting Rights

As summarized in the Prospectus, shareholders are entitled to one vote
for each full share held (with fractional votes for fractional shares held) and
will vote (to the extent provided herein) in the election of Trustees and the
termination of the Trust and on other matters submitted to the vote of
shareholders. Shareholders vote by individual Fund on all matters except (i)
when required by the 1940 Act, shares shall be voted in the aggregate and not by
individual Fund, and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Funds, then only shareholders of such
affected Funds shall be entitled to vote thereon. Shareholders of one Fund shall
not be entitled to vote on matters exclusively affecting another Fund, such
matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the other Fund and the

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<PAGE> 51

approval of the investment advisory contracts of the other Fund. Shareholders of
a particular class of shares do not have separate class voting rights except
with respect to matters that affect only that class of shares and as otherwise
required by law.

There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.

No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.

Shareholder and Trustee Liability

Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.

The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.

PERFORMANCE INFORMATION

Each Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.

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<PAGE> 52

Quotations of average annual total return for a Fund will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or class over periods of one, three, five, and ten years
(or for such shorter or longer periods as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $1,000, T = the average annual total return, n =
the number of years, and ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period). Except as noted below, all
total return figures reflect the deduction of a proportional share of Fund
expenses on an annual basis, and assume that (i) the maximum purchase premium is
deducted from the initial $1,000 payment, (ii) all dividends and distributions
are reinvested when paid and (iii) the maximum redemption fee is charged at the
end of the relevant period. Quotations of total return may also be shown for
other periods. The Funds may also, with respect to certain periods of less than
one year, provide total return information for that period that is unannualized.
Any such information would be accompanied by standardized total return
information.

Each Fund may also from time to time advertise net return and gross
return data for each month and calendar quarter since the Fund's inception.
Monthly and quarterly return data is calculated by linking daily performance for
a Fund (current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemptions
fees. All quotations of monthly and quarterly returns would be accompanied by
standardized total return information.
Quotations of a Fund's gross return do not reflect any reduction for
any Fund fees or expenses unless otherwise noted; if the gross return data
reflected the estimated fees and expenses of the Fund, the returns would be
lower than those shown. Quotations of gross return for a Fund for a particular
month or quarter will be calculated in accordance with the following formula:

Gross Return =
Net Return + (Total Annual Operating Expense Ratio) (# of days in relevant
period/365)

Information relating to a Fund's return for a particular month or calendar
quarter is provided to permit evaluation of the Fund's performance and
volatility in different market conditions, and should not be considered in
isolation.

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