<Page>
OMB APPROVAL
OMB Number: 3235-0570
Expires: Nov. 30, 2005
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-04347
---------------------------------------------
GMO Trust
-------------------------------------------------------
(Exact name of registrant as specified in charter)
40 Rowes Wharf, Boston, MA 02110
-------------------------------------------------------
(Address of principal executive offices) (Zip code)
Scott Eston, Chief Executive Officer
40 Rowes Wharf, Boston, MA 02110
-------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-330-7500
----------------------------
Date of fiscal year end: 02/28/2003
-------------------------
Date of reporting period: 03/01/02 - 02/28/03
-------------------------
<Page>
FORM N-CSR(2 OF 3)
ITEM 1 (REPORT TO SHAREHOLDERS): The Annual Report is attached.
ITEM 2 (CODE OF ETHICS): Not applicable to this filing.
ITEM 3 (AUDIT COMMITTEE FINANCIAL EXPERT): Not applicable to this filing.
ITEM 4 (PRINCIPAL ACCOUNTANT FEES AND SERVICES): Not applicable to this filing.
ITEM 5 (RESERVED)
ITEM 6 (RESERVED)
ITEM 7 (DISCLOSURE OF PROXY VOTING POLICIES & PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES): Not applicable to this filing.
ITEM 8 (RESERVED)
ITEM 9 (CONTROLS AND PROCEDURES):
SUB-ITEM 9a - Not applicable to this filing.
SUB-ITEM 9b - Not applicable to this filing.
ITEM 10 (EXHIBITS):
SUB-ITEM 10a - Not applicable to this filing.
SUB-ITEM 10b - Certification Exhibits are attached.
<Page>
FORM N-CSR(3 OF 3)
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GMO Trust
By: /s/ Scott Eston
----------------------------------------------------
Scott Eston, Chief Executive Officer
Date May 9, 2003
-------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities, and on the
dates indicated.
By: /s/ Scott Eston
----------------------------------------------------
Scott Eston, Chief Executive Officer
Date May 9, 2003
-------------------------
By: /s/ Susan Randall Harbert
----------------------------------------------------
Susan Randall Harbert, Chief Financial Officer
Date May 9, 2003
-------------------------
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
Emerging Markets Quantitative Division at Grantham, Mayo, Van Otterloo & Co.
LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Asia Fund returned -9.8% for the fiscal year
ended February 28, 2003. The Fund's benchmark, the GMO Asia 7 Index, returned
- -11.6% during the same period.
The bulk of added value over the last 12 months came from stock selection.
Like the previous three years, our largest overweight for 2002 came in the TIP
(Thailand, Indonesia, Philippines) region. While Philippines disappointed this
year (falling over 30%), Thailand and Indonesia were two of the top performing
markets on the back of strengthening economies and political reforms. Both
markets in the TIP region were approximately flat over the past 12 months,
outperforming Asia by 12%. Our overweight of this region added over 2% to
performance. However, our 10% underweight of Malaysia cost the portfolio 1% as
strong commodity prices and a stable currency caused this market to also
outperform for the year.
Stock selection was strong after another good year for value stocks. The
cheapest third of the region outperformed by 8% and the most expensive third
underperformed by the same margin. Our positions in these groups added over 1%
to performance. Stock selection was particularly strong in Thailand where our
two largest holdings -- Siam Cement and Land and Houses -- both rose over 50%.
OUTLOOK
For the second year running, emerging Asia significantly outperformed its global
counterparts in a difficult environment. The S&P 500 and MSCI EAFE fell 22.7%
and 17.5%, respectively, over the year ended February 28, 2003.
Nevertheless, there is even more hope for the future. A couple of secular trends
fuel this optimism. First, there is a realization among emerging market
policymakers that they need to reduce their dependence on export-led growth and
boost their domestic economies. This has led to low interest rates, driving up
consumption in most of our markets.
Second, as western economies struggle to recover from the overhang of the
bubble, cost control through outsourcing has become a mainstream strategy.
Production and services are being moved aggressively to lower-cost destinations,
primarily in emerging markets.
As always, short-term (absolute) performance of the asset class will likely be
driven by global equity moves, global growth, and any developments in the
conflict with Iraq. But, trading at approximately 10 times price to earnings,
with strong growth prospects, Asia has a safety net that the rest of global
equities do not. We expect the region to continue to outperform global equities.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO
& CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE.
THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO ASIA FUND CLASS III SHARES AND THE MSCI EMF ASIA INDEX
AS OF FEBRUARY 28, 2003
GMO Asia Fund MSCI EMF Asia Index GMO Asia 7 Index*
2/18/98 $9,920 $10,000 $10,000
3/31/98 $10,466 $10,689 $11,032
6/30/98 $6,825 $7,144 $6,790
9/30/98 $5,545 $6,122 $6,235
12/31/98 $8,474 $8,189 $9,722
3/31/99 $8,414 $9,095 $9,562
6/30/99 $13,450 $12,725 $15,265
9/30/99 $10,779 $11,748 $12,644
12/31/99 $14,194 $13,872 $16,224
3/31/2000 $13,311 $14,480 $15,977
6/30/2000 $10,898 $12,520 $13,757
9/30/2000 $9,306 $9,750 $11,077
12/31/2000 $8,394 $8,075 $9,511
3/31/2001 $7,980 $8,095 $9,455
6/30/2001 $8,311 $8,005 $9,819
9/30/2001 $7,444 $6,426 $8,296
12/31/2001 $8,117 $8,549 $9,850
3/31/2002 $10,474 $9,861 $11,842
6/30/2002 $10,221 $9,276 $11,549
9/30/2002 $8,470 $7,739 $9,768
12/31/2002 $8,809 $8,123 $9,994
2/28/2003 $8,703 $7,806 $9,854
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
Since
1 Year 5 Year Inception
2/18/98
Class III -11.26% -3.56% -2.72%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 80 bp on the purchase and 80 bp on the redemption.
Transaction fees are retained by the Fund to cover trading costs. Past
performance is not indicative of future results. Information is unaudited. * The
GMO Asia 7 Index is composed of the IFC Investable Country Indexes, equally
weighted, for seven Asian countries (China, Indonesia, Korea, Malaysia, the
Philipines, Taiwan and Thailand).
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
COMMON STOCKS -- 99.5%
CHINA -- 17.2%
571,000 Bengang Steel Plates Co Ltd Class B 231,355
3,146,000 Brilliance China Automotive Holdings Ltd 734,151
1,688,000 China Everbright Ltd 508,623
319,000 China International Marine Containers Co Ltd Class B 350,122
1,134,000 China Mobile Ltd* 2,442,743
45,200 China Mobile Ltd ADR* 494,488
4,508,000 China Petroleum & Chemical Corp 849,683
359,500 China Resources Enterprise Ltd 322,665
931,000 China Unicom* 564,036
24,000 China Unicom ADR* 148,080
1,012,000 Chongqing Changan Automobile Co Ltd Class B 512,546
815,000 CNOOC Ltd 1,144,267
14,500 CNOOC Ltd ADR 404,115
834,000 Cosco Pacific Ltd 753,895
304,000 CSG Technology Holding Co Ltd Class B 154,356
4,251,000 Denway Motors Ltd 1,635,189
834,000 Founder Holdings Ltd* 74,855
7,047,000 Guangdong Investments Ltd* 1,066,208
6,000 Huaneng Power International Inc ADR 217,560
358,000 Huaneng Power International Inc Class H 319,024
2,924,000 Maanshan Iron & Steel Co Ltd Class H 258,691
10,702,000 PetroChina Co Ltd Class H 2,236,702
1,406,000 Shandong International Power Development Co Ltd Class H 319,091
80,000 Shanghai Industrial Holdings Ltd Class H 124,117
629,000 Shenzhen SEG Co Ltd Class B* 272,598
1,582,000 Sinopec Shanghai Petrochemical Co Ltd Class H* 265,726
3,110,000 Stone Electronic Technology Ltd* 179,444
1,076,000 TCL International Holdings Ltd 279,378
736,000 Tsingtao Brewing Co Ltd 441,179
626,000 Yanzhou Coal Mining Co Ltd Class H 268,890
829,000 Zhejiang Southeast Electric Power Co Class B 512,322
-----------
18,086,099
-----------
INDONESIA -- 20.4%
2,520,000 Astra International Tbk* 666,629
17,116,300 Bank Central Asia Tbk 4,768,711
1,744,600 Bimantara Citra Tbk PT 471,328
9,188,800 Citra Marga Nusaphala Persad* 351,685
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
INDONESIA -- CONTINUED
5,012,000 Gajah Tunggal Tbk* 118,480
452,500 Gudang Garam 384,575
7,171,000 HM Sampoerna Tbk 2,381,319
13,929,500 Indah Kiat Pulp & Paper* 274,403
17,050,500 Indofood Sukses Makmur Tbk 1,103,623
602,500 Indonesian Satellite Corp Tbk PT 532,406
5,135,000 Indorama Synthetics* 234,105
1,529,000 International Nickel* 1,101,548
7,415,000 PT Bank Pan Indonesia Tbk* 141,898
21,000 PT Indosat (Persero) Tbk Class B ADR 182,700
16,013,500 PT Matahari Putra Prima Tbk 703,019
1,000,000 Ramayana Lestari Sentosa 247,650
93,200 Telekomunikasi Indonesia Class B ADR 745,600
17,689,000 Telekomunikasi IndonesiaTbk PT Class B 7,118,610
-----------
21,528,289
-----------
MALAYSIA -- 4.0%
460,600 Affin Holdings Berhad 99,393
38,000 Edaran Otomobil Berhad 78,000
781,000 Highlands and Lowlands Berhad 604,247
86,000 Kuala Lumpur Kepong Berhad 141,447
149,000 Malaysia Mining Corp 76,068
229,000 Malaysian International Shipping (Foreign Registered) 433,895
412,000 Maxis Communications Berhad* 585,474
339,000 Perusahaan Otomobil Nasional 713,684
70,000 Petronas Dagangan Berhad 99,474
1,654,000 Renong Berhad* 202,397
161,000 Resorts World Berhad 400,382
222,000 Sime Darby Berhad 297,947
99,000 Star Publications Malaysia Berhad 153,711
1,374,000 TA Enterprise Berhad 178,982
80,000 Tenaga Nasional Berhad 197,895
-----------
4,262,996
-----------
PHILIPPINES -- 14.4%
4,141,325 Aboitiz Equity Ventures Inc* 173,172
5,317,756 Ayala Corp 414,497
55,302,700 Ayala Land Inc 4,716,324
681,995 Equitable Banking Corp* 287,682
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
PHILIPPINES -- CONTINUED
15,208,850 Filinvest Land Inc* 242,672
2,577,190 First Philippine Holdings* 387,583
108,912 Globe Telecom Inc* 1,048,671
2,099,014 Ionics Circuits Inc 19,248
2,097,500 La Tondena Distillers Inc 1,230,995
14,213,000 Megaworld Corp* 151,188
380,260 Metropolitan Bank & Trust Co 191,786
371,770 Philippine Long Distance Telephone* 1,994,365
1,382,275 San Miguel Corp Class B 1,698,531
26,753,000 SM Prime Holdings 2,600,475
-----------
15,157,189
-----------
SINGAPORE -- 2.6%
148,000 DBS Group Holdings Ltd 816,951
3,707 Haw Par Corp Ltd 7,375
273,000 Oversea-Chinese Banking Corp 1,381,364
90,690 United Overseas Bank 542,320
-----------
2,748,010
-----------
SOUTH KOREA -- 5.2%
40,600 Chohung Bank* 124,999
75,500 Daesang Corp 122,075
2,300 Daum Communications Corp* 74,184
41,600 Hanjin Heavy Industry 98,803
17,680 Hyosung Corp 158,485
13,400 Hyundai Department Store Co Ltd* 111,363
3,100 Kangwon Land Inc 333,724
40,400 KIA Motors Corp 255,536
3,600 Kookmin Credit Card Co Ltd* 53,684
35,600 Korea Electric Power Corp 535,350
51,200 Korea Exchange Bank* 154,417
6,800 Korea Gas Corp 142,420
6,400 Korea Reinsurance 106,430
7,600 KT Corp 277,921
3,700 KT Corp ADR 68,450
25,000 KT&G Corp 350,815
2,500 LG Card Co Ltd 69,116
8,000 LG Chemicals Ltd 247,979
12,300 LG Investment & Securities Co Ltd 129,837
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
SOUTH KOREA -- CONTINUED
7,000 Samsung Electronics 1,639,090
32,500 Serome Technology Inc* 92,573
18,900 SK Corp 199,506
21,400 Ssangyong Motor* 102,191
-----------
5,448,948
-----------
TAIWAN -- 10.9%
830,000 Ambassador Hotel* 240,043
44,000 Ambit Microsystems Corp 135,482
938,300 Asustek Computer Inc 1,593,085
829,000 Cheng Loong Corp* 249,296
1,479,000 China Bills Finance Corp* 378,794
4,940,001 China Development Financial Holding Corp* 1,862,274
1,729,000 China Steel Corp 1,074,717
1,129,000 Chinatrust Financial Holding Co* 906,449
434,000 Compal Electronics Inc 418,388
540,000 Hsinchu International Bank* 218,331
1,311,200 Inventec Co Ltd 754,647
4,106,000 Ritek Corp 1,937,796
477,000 Synnex Technology International Corp 667,114
1,229,716 Taiwan Cement Corp* 433,497
848,000 Taiwan Pulp & Paper Corp* 164,719
1,215,000 Waterland Financial Holdings* 244,748
578,000 Yieh Loong Co Ltd* 235,358
-----------
11,514,738
-----------
THAILAND -- 24.8%
2,454,000 Advanced Info Service Pcl (Foreign Registered) 2,236,905
4,582,300 Bangkok Expressway Pcl (Foreign Registered)(a) 1,606,509
1,503,400 Bank of Ayudhya Pcl (Foreign Registered)* 281,108
452,600 Banpu Pcl (Foreign Registered)(a) 401,982
2,227,600 Central Pattana Pcl NVDR* 1,197,494
9,222,200 Charoen Pokphand Foods Pcl (Foreign Registered)(a) 905,300
307,330 Delta Electronics Pcl (Foreign Registered)(a) 173,832
191,000 Digital Onpa International Plc (Foreign Registered)*(a) 7,277
309,600 Electricity Generating Pcl (Foreign Registered) NVDR 289,447
414,100 Electricity Generating Pcl NVDR 382,306
2,164,000 Industrial Finance Corp of Thailand (Foreign
Registered)* 249,858
17,699,000 Land & House Pcl (Foreign Registered) 3,205,966
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
THAILAND -- CONTINUED
9,684,000 Land & House Pcl NVDR 1,686,240
1,653,100 National Finance Pcl NVDR* 506,150
671,000 National Petrochemical (Foreign Registered)(a) 791,995
999,200 PTT Exploration & Production Pcl (Foreign
Registered)(a) 3,012,663
672,000 PTT Pcl (Foreign Registered)(a) 687,157
893,000 Quality House Co Ltd (Foreign Registered)*(a) 128,362
1,939,850 Sahaviriya Steel Industry (Foreign Registered)*(a) 398,987
130,000 Siam Cement Pcl (Foreign Registered) 3,907,444
59,250 Siam Cement Pcl NVDR 1,706,112
353,000 Siam Panich Leasing Ltd (Foreign Registered)(a) 264,018
2,439,000 Tanayong Co Ltd (Foreign Registered)*(a)(b) 570
204,100 Thai Airways International (Foreign Registered)(a) 140,726
1,563,600 Thai Farmers Bank NVDR* 1,050,684
1,299,265 Thai Petrochemical (Foreign Registered)* 97,783
1,338,500 Thai Union Frozen Products Pcl (Foreign Registered) 575,632
553,000 Tisco Finance Pcl (Foreign Registered)*(a) 242,992
-----------
26,135,499
-----------
TOTAL COMMON STOCKS (COST $107,423,471) 104,881,768
-----------
PREFERRED STOCKS -- 0.2%
SOUTH KOREA -- 0.2%
2,000 Samsung Electronics (Non Voting) 4.08% 224,521
-----------
TOTAL PREFERRED STOCKS (COST $289,113) 224,521
-----------
RIGHTS AND WARRANTS -- 0.1%
MALAYSIA -- 0.0%
162,600 Affin Holdings Berhad Warrants, Expires 7/08/05* 5,990
-----------
THAILAND -- 0.1%
315,000 Adkinson Securities Warrants, Expires 6/14/03* --
315,000 Adkinson Securities Warrants, Expires 6/14/05* --
1,138,620 Charoen Pokphand Foods Pcl Warrants, Expires 4/29/05
(Foreign Registered)* 62,806
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
THAILAND -- CONTINUED
480,663 Telecomasia Corp Pcl Warrants, Expires 4/03/08* --
-----------
62,806
-----------
TOTAL RIGHTS AND WARRANTS (COST $262,040) 68,796
-----------
TOTAL INVESTMENTS -- 99.8%
(Cost $107,974,624) 105,175,085
Other Assets and Liabilities (net) -- 0.2% 178,719
-----------
TOTAL NET ASSETS -- 100.0% $105,353,804
===========
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
ADR - American Depositary Receipt
NVDR - Non-Voting Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) Bankrupt issuer.
6 See accompanying notes to the financial statements.
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Financials 24.4%
Telecommunication Services 17.5
Materials 12.4
Consumer Discretionary 12.1
Consumer Staples 8.6
Energy 8.6
Information Technology 7.9
Industrials 5.2
Utilities 3.3
-----
100.0%
=====
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $107,974,624) (Note 1) $105,175,085
Cash 65,343
Foreign currency, at value (cost $3,984) (Note 1) 3,994
Receivable for investments sold 183,513
Dividends and interest receivable 107,530
Receivable for expenses reimbursed by Manager (Note 2) 4,536
------------
Total assets 105,540,001
------------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 66,663
Shareholder service fee 12,345
Accrued expenses 107,189
------------
Total liabilities 186,197
------------
NET ASSETS $105,353,804
============
NET ASSETS CONSIST OF:
Paid-in capital $143,319,094
Accumulated undistributed net investment income 803,288
Accumulated net realized loss (35,970,805)
Net unrealized depreciation (2,797,773)
------------
$105,353,804
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $105,353,804
============
SHARES OUTSTANDING:
Class III 14,540,112
============
NET ASSET VALUE PER SHARE:
Class III $ 7.25
============
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $376,646) $ 2,396,064
Interest (net of withholding taxes of $186) 60,399
------------
Total income 2,456,463
------------
EXPENSES:
Management fee (Note 2) 924,981
Custodian fees 430,650
Audit fees 42,762
Transfer agent fees 28,284
Legal fees 9,157
Trustees fees and related expenses (Note 2) 3,372
Registration fees 1,042
Miscellaneous 1,926
Fees reimbursed by Manager (Note 2) (72,393)
------------
1,369,781
Shareholder service fee (Note 2) - Class III 171,293
------------
Net expenses 1,541,074
------------
Net investment income 915,389
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments (3,473,126)
Closed swap contracts (1,037,567)
Foreign currency, forward contracts and foreign
currency related transactions (1,361)
------------
Net realized loss (4,512,054)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (7,567,633)
Open swap contracts (124,210)
Foreign currency, forward contracts and foreign
currency related transactions 1,884
------------
Net unrealized loss (7,689,959)
------------
Net realized and unrealized loss (12,202,013)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(11,286,624)
============
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 915,389 $ 1,008,347
Net realized loss (4,512,054) (19,000,561)
Change in net unrealized appreciation (depreciation) (7,689,959) 22,814,983
------------ ------------
Net increase (decrease) in net assets from
operations (11,286,624) 4,822,769
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (749,692) (1,563,464)
------------ ------------
Total distributions from net investment income (749,692) (1,563,464)
------------ ------------
Net share transactions (Note 5):
Class III (487,810) 691,462
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (487,810) 691,462
------------ ------------
Total increase (decrease) in net assets (12,524,126) 3,950,767
NET ASSETS:
Beginning of period 117,877,930 113,927,163
------------ ------------
End of period (including accumulated undistributed
net investment income of $803,288 and $626,791,
respectively) $105,353,804 $117,877,930
============ ============
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- -------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.09 $ 7.87 $ 12.35 $ 7.67 $ 10.44
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income 0.06 0.07 0.09 0.03 0.08(b)
Net realized and unrealized gain
(loss) (0.85) 0.26 (3.32) 5.01 (2.69)
-------- -------- -------- -------- -------
Total from investment operations (0.79) 0.33 (3.23) 5.04 (2.61)
-------- -------- -------- -------- -------
Less distributions to shareholders:
From net investment income (0.05) (0.11) (0.01) (0.02) (0.16)
From net realized gains -- -- (1.24) (0.34) --
-------- -------- -------- -------- -------
Total distributions (0.05) (0.11) (1.25) (0.36) (0.16)
-------- -------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 7.25 $ 8.09 $ 7.87 $ 12.35 $ 7.67
======== ======== ======== ======== =======
TOTAL RETURN(a) (9.82)% 4.41% (27.45)% 65.57% (25.03)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $105,354 $117,878 $113,927 $119,218 $77,404
Net expenses to average daily net
assets 1.35% 1.28% 1.30% 1.25% 1.26%
Net investment income to average
daily net assets 0.80% 1.01% 1.22% 0.22% 1.04%
Portfolio turnover rate 72% 68% 84% 121% 61%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.06% 0.09% 0.07% 0.07% 0.30%
Purchase and redemption fees
consisted of the following per
share amounts:(c) $ 0.00(d) $ 0.00(d) $ 0.03 -- --
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown. Calculation excludes subscription
and redemption fees.
(b) Computed using average shares outstanding throughout the period.
(c) Effective March 1, 2000 the fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares oustanding throughout
the period.
(d) Purchase and redemption fees were less than $0.01 per share.
See accompanying notes to the financial statements. 11
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Asia Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities
traded in the Asian securities markets other than Japan. The Fund's
benchmark is the GMO Asia 7 Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Shares of mutual funds are valued at their net asset value as reported on
each business day. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction. A security's value may be deemed
unreliable if, for example, the Manager becomes aware of information or
events occurring after the close of a foreign market that would materially
affect that security's value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign
12
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. There were no forward foreign currency contracts
outstanding as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are
13
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
28, 2003, there were no outstanding futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed
14
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
securities to increase or decrease its exposure to different underlying
instruments and to gain exposure to markets that may be difficult to
invest in through conventional securities. Indexed securities may be more
volatile than their underlying instruments, but any loss is limited to the
amount of the original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003, there were no open swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the
15
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
investment of the collateral, the risk of delay in recovery or loss of
rights in the collateral should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities. At
February 28, 2003, the Fund did not have any securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distrbutions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid were a follows: ordinary income --
$1,563,464 and $749,692, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $803,288 of undistributed ordinary income.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $6,035,369, $17,265,440 and $9,986,503 expiring in 2009, 2010 and
2011, respectively. The Fund has elected to defer to March 1, 2003 post-
October capital losses of $2,072,583.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This
16
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
reclassification has no impact on net investment income, realized
gain/loss or the net asset value of the Fund and is primarily attributable
to certain differences in the computation of distributable income and
capital gains under U.S. federal tax rules versus U.S. GAAP. The financial
highlights exclude these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss
----------------- ---------------
$10,800 $(10,800)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of the securities adjusted for inflation is recorded as
interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
Effective March 27, 2002, the level of purchase premiums and redemption
fees are each 0.80%. Prior to March 27, 2002 the purchase premium on cash
purchases and redemption fee was 1.20% and 0.40%, respectively, of the
amount invested or redeemed. Shares acquired prior to March 27, 2002, will
continue to be subject to a redemption fee of 0.40%. If the Manager
determines that any portion of a cash purchase or redemption fee is offset
by a corresponding cash redemption or purchase occurring on the same day,
the purchase premium or redemption fee charged by the Fund will be reduced
by 100% with respect to that portion. In addition, the purchase premium or
redemption fee charged by the Fund may be waived if the Manager determines
the Fund is either substantially overweighted or underweighted in cash so
that a redemption or purchase will not
17
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
require a securities transaction. All purchase premiums and redemption
fees are paid to and recorded by the Fund as paid-in capital. For the
years ended February 28, 2002 and February 28, 2003, the Fund received
$366 and $32,558 in purchase premiums and $31 and $25,581 in redemption
fees, respectively. There is no premium for reinvested distributions.
INVESTMENT RISK
Investments in emerging countries present certain risks that are not
inherent in many other securities. Many emerging countries present
elements of political and/or economic instability. The securities markets
of emerging countries are generally smaller and less developed than the
securities markets of the U.S. and developed foreign markets. Further,
countries may impose various types of foreign currency regulations or
controls which may impede the Fund's ability to repatriate amounts it
receives. The Fund may acquire interests in securities in anticipation of
improving conditions in the related countries. These factors may result in
significant volatility in the values of its holdings. The markets for
emerging countries are relatively illiquid. Accordingly, the Fund may not
be able to realize in an actual sale amounts approximating those used to
value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .81% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, custody
fees, fees and expenses of the independent Trustees of the Trust
(including legal 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, interest expense and transfer taxes) exceed the management fee.
The Fund incurred fees and expenses indirectly as a shareholder in GMO
Alpha LIBOR Fund. For the year ended February 28, 2003, indirect operating
expenses (excluding investment-related expenses) were less than .001% of
the Fund's average daily net assets, and indirect investment-related
expenses (including, but not limited to, interest expense, foreign audit
expense, and investment-related legal expense) were .001% of the Fund's
average daily net assets.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
18
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $2,639. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchase and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, were as
follows:
<Table>
<Caption>
Purchases Sales
----------- -----------
U.S. Government securities $ 496,344 $ 1,088,588
Investments (non-U.S. Government securities) 81,471,234 79,335,518
</Table>
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$108,585,533 $15,795,919 $(19,206,367) $(3,410,448)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 69.4% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the
outstanding shares of the Fund. Investment activities of these
shareholders may have a material effect on the Fund.
19
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
--------------------- -----------------
Shares Amount Shares Amount
Class III: -------- ----------- ------- --------
Shares sold 507,393 $ 4,075,321 6,316 $ 44,516
Shares issued to shareholders
in reinvestment of distributions 39,072 330,158 97,208 668,789
Shares repurchased (583,805) (4,893,289) (3,197) (21,843)
-------- ----------- ------- --------
Net increase (decrease) (37,340) $ (487,810) 100,327 $691,462
======== =========== ======= ========
</Table>
20
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO ASIA FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Asia Fund (the "Fund") (a
series of GMO Trust) at February 28, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
21
<Page>
GMO ASIA FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$374,833 and recognized foreign source income of $2,772,710.
22
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Five Overseen Directorships
and Age Held with Fund Time Served Years by Trustee Held by Trustee
------------------------- --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
(1) Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
(2) Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
23
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------- --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
(1) Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
(3) Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
24
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Principal Occupation(s)
Name, Address, Position(s) Term of Office(4) and Length During Past
and Age Held with Fund of Time Served Five Years
------------------------- ------------------------- ---------------------------- -------------------------
Scott Eston President and Chief President and Chief Chief Financial Officer
c/o GMO Trust Executive Officer of the Executive Officer since (1997 - present), Chief
40 Rowes Wharf Trust October 2002; Vice President Operating Officer
Boston, MA 02110 from August 1998 - October (2000 - present) and
Age: 47 2002. Member, Grantham, Mayo,
Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer Chief Financial Officer Member, Grantham, Mayo,
c/o GMO Trust and Treasurer of the Since February 2000; Van Otterloo & Co. LLC.
40 Rowes Wharf Trust Treasurer since February
Boston, MA 02110 1998.
Age: 45
Brent Arvidson Assistant Treasurer of Since September 1998. Senior Fund
c/o GMO Trust the Trust Administrator, Grantham,
40 Rowes Wharf Mayo, Van Otterloo & Co.
Boston, MA 02110 LLC.
Age: 33
William R. Royer, Esq. Vice President and Clerk Vice President since General Counsel, Anti-
c/o GMO Trust 40 of the Trust February 1997; Clerk since Money Laundering
Rowes Wharf March 2001; May 1999 - Reporting Officer (July
Boston, MA 02110 August 1999. 2002 - February 2003) and
Age: 37 Member, Grantham, Mayo,
Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Vice President since August Associate General
c/o GMO Trust Secretary of the Trust 1999; Secretary since March Counsel, Grantham, Mayo,
40 Rowes Wharf 2001. Van Otterloo & Co. LLC
Boston, MA 02110 (June 1999 - present);
Age: 58 Associate/ Junior
Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Since February 2003. Anti-Money Laundering
c/o GMO Trust Money Laundering Reporting Officer
40 Rowes Wharf Compliance Officer (February 2003 - present)
Boston, MA 02110 and Compliance Officer,
Age: 32 Grantham, Mayo, Van
Otterloo & Co. LLC.
</Table>
(4) Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
25
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Core Plus Bond Fund returned +6.5% for the
fiscal year ended February 28, 2003, compared to +9.9% for the Lehman Brothers
U.S. Aggregate Bond Index. The Fund's exposure to various issues is achieved
directly and indirectly through its investment in the GMO Emerging Country Debt
Fund, the GMO Alpha LIBOR Fund (ALF), and the GMO Short-Duration Collateral
Fund.
The Fund underperformed the benchmark during the fiscal year by 3.4%. Bond
market, emerging debt, and currency selection added value during the fiscal
year, while issue selection underperformed. Issue selection dramatically hurt
performance in late 2002. Credit related spread widening in the assets
underlying the Fund's investment in ALF and the default of certain healthcare
receivable asset-backed bonds held by ALF, which were allegedly involved in a
massive fraud, contributed to the underperformance. National Century Financial
Enterprises, the sponsor of $3.35 billion of health care asset-backed
receivables allegedly violated the terms of the bonds' indentures by, among
other things, spending cash collateral, accepting collateral other than
permitted receivables, moving receivables between trusts to meet compliance
tests, and reimbursing healthcare providers for more than the value of
receivables purchases. National Century, its affiliated operations, the trusts,
and many healthcare providers have declared bankruptcy. This event had a
negative effect on the net asset value of ALF, and an indirect effect on GMO
Core Plus Bond Fund of -5.5% (through February 28, 2003).
Overweight positions in Euro-member country bonds and the U.S. bond market as
well as an underweight position in Japanese government bonds added value during
the period. In addition, an underweight position in the U.S. dollar and
overweight positions in the Australian dollar and Swedish krona generated
significant gains.
OUTLOOK
The Fund is structured to benefit from outperformance in the Canadian,
Euro-member country, Swedish, U.S., and emerging bond markets. We expect the
Australian, Japanese government, and Swiss bond markets to underperform. Strong
relative performance is expected from Canadian dollars, Swedish krona, and
British gilt markets. The euro, Japanese yen and Australian and US dollars are
expected to underperform. At the end of the period, 3.9% of the Fund was
invested in Emerging Country Debt Fund.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO CORE PLUS BOND FUND CLASS III SHARES AND THE
LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX
AS OF FEBRUARY 28, 2003
GMO CORE PLUS LEHMAN BROTHERS U.S.
BOND FUND AGGREGATE BOND INDEX
4/30/97 $10,000 $10,000
6/30/97 $10,250 $10,214
9/30/97 $10,770 $10,554
12/31/97 $11,195 $10,864
3/31/98 $11,332 $11,033
6/30/98 $11,470 $11,291
9/30/98 $11,644 $11,769
12/31/98 $11,628 $11,808
3/31/99 $11,353 $11,750
6/30/99 $11,287 $11,646
9/30/99 $11,276 $11,726
12/31/99 $11,352 $11,711
3/31/2000 $11,675 $11,970
6/30/2000 $11,806 $12,178
9/30/2000 $12,176 $12,545
12/31/2000 $12,789 $13,073
3/31/2001 $13,256 $13,470
6/30/2001 $13,321 $13,545
9/30/2001 $13,971 $14,171
12/31/2001 $14,055 $14,176
3/31/2002 $14,055 $14,190
6/30/2002 $14,716 $14,714
9/30/2002 $15,322 $15,388
12/31/2002 $14,872 $15,630
2/28/2003 $15,240 $15,860
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 4/30/97
Class III 6.45% 6.32% 7.49%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 34.5%
ALBANIA -- 1.4%
USD 15,681,227 Republic of Albania Par Bond, Zero Coupon, 0.00%,
due 08/31/25 3,920,307
------------
AUSTRIA -- 2.1%
GBP 500,000 Bank Austria AG Series EMTN, 8.38%, due 11/04/11 972,388
USD 4,175,000 Bank Austria AG, 144A, 7.25%, due 02/15/17 5,082,645
------------
6,055,033
------------
BRAZIL -- 1.1%
USD 10,000,000 Brazil Discount Bond, Principal Strip, Series D1A,
Zero Coupon, 0.00%, due 04/15/24(a) 3,007,294
------------
CAYMAN ISLANDS -- 1.0%
CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 2,991,006
------------
CHILE -- 0.3%
USD 750,000 Banco Santander Series MBIA, 6.50%, due 11/01/05 819,456
------------
LUXEMBOURG -- 2.6%
USD 8,000,000 Tyco International Group SA, 5.80%, due 08/01/06 7,560,000
------------
MEXICO -- 1.2%
USD 3,000,000 Pemex Finance Ltd Series 1A1, AMBAC 144A, 6.30%,
due 05/15/10 3,334,620
------------
UNITED STATES -- 24.8%
U.S. GOVERNMENT -- 13.9%
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/10(a) 7,581,149
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/12(a) 6,714,921
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 08/15/12(a) 6,505,135
USD 16,797,450 U.S. Treasury Inflation Indexed Note, 3.63%, due
01/15/08(b) 18,975,869
------------
39,777,074
------------
</Table>
See accompanying notes to the financial statements.
1
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE/
SHARES DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY -- 10.9%
USD 30,000,000 Fannie Mae, TBA, 6.00%, due 03/01/33 31,209,375
------------
TOTAL UNITED STATES 70,986,449
------------
TOTAL DEBT OBLIGATIONS (COST $91,885,544) 98,674,165
------------
MUTUAL FUNDS -- 72.5%
1,178,327 GMO Emerging Country Debt Fund, Class III 11,217,670
1,645,747 GMO Alpha LIBOR Fund(c) 39,037,123
6,281,038 GMO Short-Duration Collateral Fund 157,088,760
------------
TOTAL MUTUAL FUNDS (COST $209,825,907) 207,343,553
------------
<Caption>
PRINCIPAL
AMOUNT
-------------
CALL OPTIONS PURCHASED -- 0.5%
CROSS CURRENCY OPTIONS -- 0.5%
GBP 18,300,000 GBP Call/JPY Put, Expires 01/23/04, Strike 184.00 762,190
GBP 11,100,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 467,243
USD 8,600,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 207,057
------------
1,436,490
------------
TOTAL CALL OPTIONS PURCHASED (COST $2,010,027) 1,436,490
------------
PUT OPTIONS PURCHASED -- 0.0%
CROSS CURRENCY OPTIONS -- 0.0%
GBP 19,500,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.428 6,143
------------
TOTAL PUT OPTIONS PURCHASED (COST $796,887) 6,143
------------
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
PREFERRED STOCKS -- 2.2%
UNITED STATES -- 2.2%
10,000 Home Ownership Funding 2 Preferred 144A, 133.38% 6,276,149
------------
TOTAL PREFERRED STOCKS (COST $6,387,253) 6,276,149
------------
SHORT-TERM INVESTMENTS -- 0.4%
CASH EQUIVALENTS -- 0.4%
USD 1,255,790 Merrimac Cash Fund 1,255,790
------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,255,790) 1,255,790
------------
TOTAL INVESTMENTS -- 110.1%
(Cost $312,161,408) 314,992,290
Other Assets and Liabilities (net) -- (10.1%) (28,962,276)
------------
TOTAL NET ASSETS -- 100.0% $286,030,014
============
</Table>
See accompanying notes to the financial statements.
3
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of
the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional investors.
AMBAC - Insured as to the payment of principal and interest by
AMBAC Assurance Corporation
EMTN - Euromarket Medium Term Note
MBIA - Insured as to the payment of principal and interest by
MBIA Insurance Corp
TBA - To Be Announced (Note 1)
CURRENCY ABBREVIATIONS:
</Table>
<Table>
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
</Table>
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
(c) All or a portion of this security has been segregated to cover
collateral requirements on TBA obligations (Note 1).
4 See accompanying notes to the financial statements.
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $312,161,408) (Note 1) $314,992,290
Receivable for Fund shares sold 150,000
Interest receivable 373,252
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 3,418,913
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 303,674
Receivable for expenses reimbursed by Manager (Note 2) 16,834
------------
Total assets 319,254,963
------------
LIABILITIES:
Payable for forward commitments (Note 1) 30,970,312
Payable to affiliate for (Note 2):
Management fee 56,061
Shareholder service fee 33,636
Payable for open forward foreign currency contracts
(Notes 1 and 6) 1,992,753
Net payable for open swap contracts (Notes 1 and 6) 126,436
Accrued expenses 45,751
------------
Total liabilities 33,224,949
------------
NET ASSETS $286,030,014
============
NET ASSETS CONSIST OF:
Paid-in capital $278,818,842
Distributions in excess of net investment income (3,041,202)
Accumulated net realized gain 5,610,167
Net unrealized appreciation 4,642,207
------------
$286,030,014
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $286,030,014
============
SHARES OUTSTANDING:
Class III 28,736,061
============
NET ASSET VALUE PER SHARE:
Class III $ 9.95
============
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Interest $ 3,603,481
Dividends from investment company shares 3,169,670
-----------
Total income 6,773,151
-----------
EXPENSES:
Management fee (Note 2) 757,034
Custodian and transfer agent fees 132,029
Audit fees 39,197
Legal fees 20,849
Trustees fees and related expenses (Note 2) 8,927
Registration fees 5,525
Miscellaneous 5,664
Fees reimbursed by Manager (Note 2) (197,493)
-----------
771,732
Indirectly incurred fees reimbursed by Manager (Note 2) (45,346)
-----------
726,386
-----------
Shareholder service fee (Note 2) - Class III 454,221
Shareholder service fee reimbursed (Note 2) - Class III (16,528)
-----------
437,693
-----------
Net expenses 1,164,079
-----------
Net investment income 5,609,072
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (19,597,184)
Realized gains distributions from investment company
shares 901,301
Closed futures contracts 2,141,781
Closed swap contracts 9,672,155
Written options 96,554
Foreign currency, forward contracts and foreign
currency related transactions 9,251,677
-----------
Net realized gain 2,466,284
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 10,081,873
Open futures contracts 199,021
Open swap contracts (29,064)
Foreign currency, forward contracts and foreign
currency related transactions 669,140
-----------
Net unrealized gain 10,920,970
-----------
Net realized and unrealized gain 13,387,254
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $18,996,326
===========
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 5,609,072 $ 15,863,393
Net realized gain 2,466,284 5,916,925
Change in net unrealized appreciation (depreciation) 10,920,970 (9,292,020)
------------ ------------
Net increase in net assets from operations 18,996,326 12,488,298
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (12,462,812) (17,797,440)
------------ ------------
Total distributions from net investment income (12,462,812) (17,797,440)
------------ ------------
Net realized gains
Class III (16,722,852) (130,656)
------------ ------------
Total distributions from net realized gains (16,722,852) (130,656)
------------ ------------
(29,185,664) (17,928,096)
------------ ------------
Net share transactions (Note 5):
Class III (43,819,811) 189,067,102
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (43,819,811) 189,067,102
------------ ------------
Total increase (decrease) in net assets (54,009,149) 183,627,304
NET ASSETS:
Beginning of period 340,039,163 156,411,859
------------ ------------
End of period (including distributions in excess of
net investment income of $3,041,202 and $2,267,971,
respectively) $286,030,014 $340,039,163
============ ============
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------------------------
2003 2002 2001(D) 2000 1999
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.39 $ 10.17 $ 9.64 $ 10.23 $ 10.60
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.19(a)+ 0.77(a)+ 0.62(a)+ 0.62+ 0.64+
Net realized and unrealized gain
(loss) 0.45 0.07 0.73 (0.40) (0.58)
-------- -------- -------- -------- --------
Total from investment operations 0.64 0.84 1.35 0.22 0.06
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.47) (0.62) (0.82) (0.70) (0.12)
From net realized gains (0.61) --(f) -- (0.11) (0.31)
-------- -------- -------- -------- --------
Total distributions (1.08) (0.62) (0.82) (0.81) (0.43)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 10.39 $ 10.17 $ 9.64 $ 10.23
======== ======== ======== ======== ========
TOTAL RETURN(b) 6.45% 8.53% 14.52% 2.26% 0.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $286,030 $340,039 $156,412 $120,276 $143,703
Net operating expenses to average
daily net assets 0.38%(e) 0.38%(e) 0.39%(e) 0.40% 0.40%
Interest expense to average daily net
assets -- -- -- 0.01%(c) --
Total net expenses to average daily
net assets 0.38% 0.38% 0.39% 0.41% --
Net investment income to average
daily net assets 1.85%(a) 7.39%(a) 6.34%(a) 6.19% 5.97%
Portfolio turnover rate 108% 113% 181% 40% 113%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.09% 0.09% 0.12% 0.10% 0.25%
</Table>
(a) Net investment income is affected by the timing of the declaration of
dividends by other Funds of the Trust in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(c) Interest expense incurred as a result of entering into reverse
repurchase agreements is included in the Fund's net expenses. Income
earned on investing proceeds from reverse repurchase agreements is
included in interest income.
(d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
premium and discount on debt securities. The effect of this change for
the year ended February 28, 2001 was to decrease net investment income
per share by $0.04, increase net realized gains and losses per share by
$0.04, and decrease the ratio of net investment income to average net
assets from 6.70% to 6.34%. Per share and ratio/supplemental data for
periods prior to March 1, 2000 have not been restated to reflect this
change.
(e) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
See Note 2.
(f) The distribution from net realized gains was less than $0.01 per share.
+ Calculated using average shares outstanding throughout the period.
8 See accompanying notes to the financial statements.
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Core Plus Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks a high total return relative to its performance benchmark
through direct and indirect investment in U.S. investment grade
securities. The Fund achieves exposure to international bond and currency
markets by investing, directly or through other Funds of the Trust, in a
combination of foreign bond and currency derivatives, effectively adding
to or subtracting from the U.S. bond return the performance of the Fund's
international bond and currency investments. The Fund's benchmark is the
Lehman Brothers U.S. Aggregate Bond Index.
At February 28, 2003, 54.9% of the Fund was invested in the GMO
Short-Duration Collateral Fund and 13.6% of the Fund was invested in the
GMO Alpha LIBOR Fund, separate funds of GMO Trust managed by GMO. Shares
of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are
not publicly available for direct purchase. At February 28, 2003, 3.9% of
the net assets of the Fund was invested in the GMO Emerging Country Debt
Fund, a separate fund of GMO Trust managed by GMO. The financial
statements of the GMO Alpha LIBOR Fund, the GMO Short-Duration Collateral
Fund and the GMO Emerging Country Debt Fund should be read in conjunction
with the Fund's financial statements.
The Fund invested a substantial portion of its assets in GMO Alpha LIBOR
Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In
November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds")
defaulted amid allegations of fraud and significant violations of the
bonds' indentures. Currently, no market exists for the NPF bonds, and they
are being valued at fair value by the trustees of GMO Trust or persons
acting at their direction. The devaluation of the NPF bonds had a negative
impact on the Fund's net asset value per share.
In late November 2002, Alpha LIBOR Fund undertook a reorganization
transaction with a new series of GMO Trust, GMO Short-Duration Collateral
Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR
Fund was transferred to SDCF in exchange for SDCF shares. The
reorganization was treated as a sale of the Alpha LIBOR Fund shares for
financial reporting purposes and a distribution by Alpha LIBOR Fund for
tax purposes. Accordingly, for financial reporting purposes, the Fund
recognized a loss on the sale of the Alpha LIBOR shares of approximately
$17,424,200. In addition, the Fund recognized for tax, but not for
financial reporting
9
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
purposes, ordinary income of $6,635,832 and long-term capital gains of
$1,183,564 from Alpha LIBOR Fund. $25,243,596 was added to the tax cost
basis of the Fund's holdings of Alpha LIBOR Fund.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of other Funds of the Trust are valued at their net asset value as
reported on each business day. Portfolio securities listed on a securities
exchange for which market quotations are readily available are valued at
the last sale price or official closing price on each business day, or if
there is no such reported sale or official closing price, at the most
recent quoted bid price. Unlisted securities for which market quotations
are readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates fair value. Securities for which quotations are not
readily available or whose values the Manager has determined to be
unreliable are valued at fair value as determined in good faith by the
Trustees or other persons acting at their direction. A security's value
may be deemed unreliable if, for example, the Manager becomes aware of
information or events occurring after the close of a foreign market that
would materially affect that security's value.
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
10
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Certain securities held by the Fund, or underlying funds in which it
invests, were valued on the basis of a price provided by a principal
market maker. The prices provided by the principal market makers may
differ from the value that would be realized if the securities were sold
and the differences could be material to the financial statements.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. The value of the currencies the Fund has
committed to buy or sell is shown under Note 6 and represents the currency
exposure the Fund has acquired or hedged through forward currency
contracts as of February 28, 2003.
11
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the
12
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
amounts paid or offset against the proceeds on the underlying future,
security or currency transaction to determine the realized gain or loss.
The risk associated with purchasing put and call options is limited to the
premium paid. See the Schedule of Investments for all open purchased
option contracts as of February 28, 2003.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the "lender") that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into interest rate, total return, forward swap spread lock and
credit default swap agreements to manage its exposure to interest rates
and credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve
13
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
commitments to pay interest in exchange for a market linked return, both
based on notional amounts. To the extent the total return of the security
or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Forward swap spread
lock swap agreements involve commitments to pay or receive a settlement
amount calculated as the difference between the swap spread and a fixed
spread, multiplied by the notional amount times the duration of the swap
rate. The swap spread is the difference between the benchmark swap rate
(market rate) and the specific treasury rate. In a credit default swap,
one party makes a stream of payments to another party in exchange for the
right to receive a specified return in the event of a default by a third
party on its obligation. The Fund may use credit default swaps to provide
a measure of protection against defaults of sovereign or corporate issuers
(i.e., to reduce risk where the Fund owns or has exposure to the issuer)
or to take an active long or short position with respect to the likelihood
of a particular issuer's default. In connection with these agreements,
cash or securities may be set aside as collateral by the Fund's custodian
in accordance with the terms of the swap agreement. The Fund earns
interest on cash set aside as collateral. Swaps are marked to market daily
based upon quotations from market makers and the change in value, if any,
is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Net
payments of interest on interest rate swap agreements are included as part
of interest income. These financial instruments are not actively traded on
financial markets. The values assigned to these instruments are based upon
the best available information and because of the uncertainty of the
valuation, these values may differ significantly from the values that
would have been realized had a ready market for these instruments existed,
and the differences could be material. Entering into these agreements
involves, to varying degrees, elements of credit, legal, market, and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will
be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be
unfavorable changes in interest rates. See Note 6 for a summary of open
swap agreements as of February 28, 2003.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty.
14
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the collateral declines or if the seller enters
insolvency proceedings, recovery of cash by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund has sold may
decline below the price at which it is obligated to repurchase them under
the agreement. For the year ended February 28, 2003, the Fund had not
entered into any reverse repurchase agreements.
DELAYED DELIVERY COMMITMENTS
The Fund may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities
and the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. Collateral consisting of liquid
securities or cash and cash equivalents is maintained in an amount at
least equal to these commitments with the custodian.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
15
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid was as follows: ordinary income --
$17,928,096 and $28,462,809, respectively and long-term capital gains --
$0 and $722,855, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $6,190,213 and $1,184,470 of undistributed ordinary
income and undistributed long-term gains, respectively. The temporary
differences between book and tax bais distributable earnings are primarily
due to foreign currency transactions, losses on wash sales transactions
and differing treatments for amortization of premiums and discounts on
debt securities.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions and the GMO Alpha LIBOR Fund transaction (See Note 1). The
financial highlights exclude these adjustments.
<Table>
<Caption>
Distributions
In Excess of Net Accumulated Net
Investment Income Realized Gain Paid-in Capital
----------------- ---------------- ---------------
$6,080,509 $17,860,497 $(23,941,006)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the amortization of
premium and discount. Dividend income is recorded on the ex-dividend date.
Non cash dividends, if any, are recorded at the fair market value of the
securities received. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
Interest income on U.S. Treasury inflation indexed securities is accrued
daily based upon an inflation adjusted principal. Additionally, any
increase in principal or face amount of these securities is recorded as
interest income.
16
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities 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 securities markets of the U.S. and developed
foreign markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares. The Fund may invest in Class III shares of GMO Emerging Country
Debt Fund ("ECDF"). Like the management fee (as described below), the
Fund's shareholder service fee will be waived (but not below zero) to the
extent of the indirect shareholder service fees paid in connection with
the Fund's investment in ECDF. The Fund does not incur any indirect
shareholder service fees as a result of the Fund's investment in Alpha
LIBOR Fund and SCDF. For the year ended February 28, 2003, shareholder
service fees incurred indirectly by the Fund were 0.005% of the Fund's
average daily net assets.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes ("fund expenses")) and the amount of fees and
operating expenses (excluding shareholder service fees (ECDF only) and
fund expenses, as defined above) incurred indirectly by the Fund through
its investment in the underlying funds (including GMO Alpha LIBOR Fund,
GMO Short-Duration Collateral Fund, and ECDF) exceed the management fee.
17
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
For the year ended February 28, 2003, indirect operating expenses
(excluding shareholder service fees (GMO ECDF only) and investment-related
expenses) and indirect investment-related expenses (including, but not
limited to, interest expense, foreign audit expense, and
investment-related legal expense) incurred by the Fund through its
investment in underlying funds were 0.019% and 0.024% of the Fund's
average daily net assets, respectively.
As of February 28, 2003, a significant portion of the Fund's shares were
held by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $6,796. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 28, 2003, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<Table>
<Caption>
Purchases Sales
------------ ------------
U.S. Government securities $299,830,469 $311,347,461
Investments (non-U.S. Government securities) 55,821,116 106,157,927
</Table>
For the year ended February 28, 2003, the cost of purchases and proceeds
from sale of investments excluded $154,957,650 and $149,757,650,
respectively, from the initial transfer of GMO Alpha LIBOR Fund's
investments in GMO Short-Duration Collateral Fund.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$339,043,245 $5,045,136 $(29,906,091) $(24,050,955)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 85.2% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
18
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------- ------------------------
Shares Amount Shares Amount
Class III: ---------- ------------- ---------- ------------
Shares sold 2,799,171 $ 29,003,553 19,956,747 $216,580,773
Shares issued to shareholders in reinvestment
of distributions 2,938,072 28,757,501 1,654,864 16,728,562
Shares repurchased (9,732,495) (101,580,865) (4,254,015) (44,242,233)
---------- ------------- ---------- ------------
Net increase (decrease) (3,995,252) $ (43,819,811) 17,357,596 $189,067,102
========== ============= ========== ============
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
---------- ---------------- -------------- ----------- --------------
Buys
3/25/03 AUD 57,700,000 $34,948,554 $ 926,514
4/01/03 CAD 47,000,000 31,508,508 778,919
3/04/03 CHF 90,700,000 66,887,906 1,161,203
4/29/03 CHF 55,600,000 41,050,592 47,642
4/15/03 GBP 1,900,000 2,984,569 (72,531)
3/18/03 JPY 2,790,000,000 23,611,156 (73,024)
-----------
$ 2,768,723
===========
</Table>
19
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
---------- ---------------- -------------- ----------- --------------
Sales
3/25/03 AUD 38,100,000 $23,076,948 $ (717,734)
4/01/03 CAD 33,300,000 22,324,113 (477,313)
3/04/03 CHF 90,700,000 66,887,906 (607,571)
4/22/03 EUR 7,800,000 8,392,491 19,029
4/15/03 GBP 7,400,000 11,624,111 216,548
3/18/03 JPY 4,180,000,000 35,374,419 (44,580)
-----------
$(1,611,621)
===========
</Table>
<Table>
<Caption>
FORWARD CROSS CURRENCY CONTRACTS
Settlement Deliver/Units of Receive/In Net Unrealized
Date Currency Exchange For Appreciation
---------- ----------------- ---------------- --------------
3/11/03 CHF 50,471,150 EUR 34,700,000 164,202
4/08/03 EUR 49,700,000 SEK 457,180,360 104,856
-----------
$ 269,058
===========
</Table>
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- ------------------------------------- --------------- ------------ --------------
Buys
117 Canadian Government Bond 10 Yr. June 2003 $ 8,382,723 $ 11,704
29 Euro BOBL March 2003 3,546,328 89,161
25 Euro BOBL June 2003 3,032,121 (432)
16 Euro Bund March 2003 2,011,951 46,683
79 Euro Bund June 2003 9,859,079 (143)
205 U.S. Long Bond June 2003 23,466,094 346,595
259 U.S. Treasury Note 10 Yr. June 2003 29,882,125 150,636
-----------
$ 644,204
===========
</Table>
20
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- ------------------------------------- --------------- ------------ --------------
Sales
38 Australian Government Bond 10 Yr. March 2003 $ 2,472,846 $ (64,614)
79 Australian Government Bond 3 Yr. March 2003 4,999,707 (61,456)
6 Japanese Government Bond 10 Yr. March 2003 7,267,498 (76,262)
18 Japanese Government Bond 10 Yr. June 2003 21,708,099 (25,530)
113 Swiss Government Bond March 2003 10,964,167 (371,869)
2 U.K. Gilt June 2003 382,749 522
143 U.S. Treasury Note 5 Yr. June 2003 16,259,547 (54,447)
-----------
$ (653,656)
===========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
WRITTEN OPTION TRANSACTIONS
<Table>
<Caption>
Puts Calls
---------------------------- --------------------------------
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- ---------- ---------------- --------------
Outstanding, beginning of period -- $ -- -- $ --
Options written -- -- 153,700 6,804,329
Options closed -- -- -- --
Options exercised -- -- (143,100) (6,707,775)
Options expired -- -- (10,600) (96,554)
Options sold -- -- -- --
--------- ---------- ------------ -----------
Outstanding, end of period -- $ -- -- $ --
========= ========== ============ ===========
</Table>
21
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- ---------- -------------------------------------------------- --------------
CREDIT DEFAULT SWAPS
126,425,696 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ 58,698
10/31/01 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount
times the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
76,846,993 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated (19,069)
5/4/01 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount
times the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
5,000,000 USD 4/2/07 Agreement with Lehman Brothers Special Financing (17,412)
Inc. dated 3/27/02 to receive .52% per year times
the notional amount. The Fund makes payment of the
notional amount times the difference between the
par value and the then-market value upon a default
event of General Electric Capital Corporation,
5.875% due 2/15/12.
</Table>
22
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- ---------- -------------------------------------------------- --------------
3,000,000 USD 4/17/07 Agreement with UBS Warburg dated 4/12/02 to $ (18,576)
receive .8% per year times the notional amount.
The Fund makes payment of the notional amount
times the difference between the par value and the
then-market value upon a default event of Equity
Office Properties Trust, 6.75% due 2/15/12.
3,000,000 USD 4/17/07 Agreement with UBS Warburg dated 4/12/02 to (6,548)
receive .47% per year times the notional amount.
The Fund makes payment of the notional amount
times the difference between the par value and the
then-market value upon a default event of Goldman
Sachs Group, Inc., 6.6% due 1/15/12.
3,000,000 USD 4/17/07 Agreement with Bear Stearns dated 4/12/02 to 65,989
receive 1.28% per year times the notional amount.
The Fund makes payment of the notional amount
times the difference between the par value and the
then-market value upon a default event of National
Rural Utilities Cooperative Finance Corp., 7.25%
due 3/1/12.
10,000,000 USD 12/20/07 Agreement with Citibank N.A. dated 12/13/02 to 92,755
receive 2.41% per year times the notional amount.
The Fund makes payment of the notional amount
times the difference between the par value and the
then-market value upon a default event and the
then-market value of AOL Time Warner Inc., 6.75%
due 4/15/11.
</Table>
23
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- ---------- -------------------------------------------------- --------------
INTEREST RATE SWAPS
10,000,000 SEK 9/25/07 Agreement with Citibank N.A. dated 9/24/02 to $ 31,207
receive the notional amount multiplied by 4.79%
and to pay the notional amount multiplied by the 3
month Floating Rate Swedish STIBOR adjusted by a
specific spread.
7,378,267 USD 2/15/10 Agreement with JPMorgan Chase Bank dated 9/3/02 to (366,094)
pay $10,100,000 at expiration date and to receive
at expiration date $7,325,000 plus interest based
upon the 3 month Floating Rate LIBOR (compounded
quarterly) adjusted by a specific spread.
6,607,704 USD 2/15/12 Agreement with JPMorgan Chase Bank dated 9/3/02 to (328,121)
pay $10,100,000 at expiration date and to receive
at expiration date $6,560,000 plus interest based
upon the 3 month Floating Rate LIBOR (compounded
quarterly) adjusted by a specific spread.
6,419,831 USD 8/15/12 Agreement with JPMorgan Chase Bank dated 9/4/02 to (318,828)
pay $10,100,000 at expiration date and to receive
at expiration date $6,374,000 plus interest based
upon the 3 month Floating Rate LIBOR (compounded
quarterly) adjusted by a specific spread.
19,500,000 SEK 9/25/12 Agreement with Citibank NA dated 9/24/02 to 64,291
receive the notional amount multiplied by 5.08%
and to pay the notional amount multiplied by the 3
month Floating Rate Swedish STIBOR adjusted by a
specific spread.
</Table>
24
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- ---------- -------------------------------------------------- --------------
3,148,338 USD 4/15/24 Agreement with JPMorgan Chase Bank dated 9/17/02 $(124,820)
to pay $10,000,000 at expiration date and to
receive at expiration date $3,130,000 plus
interest based upon the 3 month Floating Rate
LIBOR (compounded quarterly) adjusted by a
specific spread.
4,534,087 USD 8/31/25 Agreement with JPMorgan Chase Bank dated 9/5/02 to (215,579)
pay $15,680,000 at expiration date and to receive
at expiration date $4,516,000 plus interest based
upon the 3 month Floating Rate LIBOR (compounded
quarterly) adjusted by a specific spread.
TOTAL RETURN SWAPS
30,000,000 USD 5/30/03 Agreement with Lehman Brothers Special Financing 551,761
Inc. dated 11/26/02 to receive (pay) the notional
amount multiplied by the change in market value
(including accrued interest) of the Lehman
Brothers US Credit Index and to pay initial market
value multiplied by the 1 month LIBOR adjusted by
a specified spread.
28,000,000 USD 8/1/03 Agreement with UBS AG dated 6/28/02 to receive 149,579
(pay) the notional amount multiplied by the return
on the Lehman MBS Fixed Rate Index and to pay the
notional amount multiplied by the 1 month LIBOR
adjusted by a specific spread.
</Table>
25
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- ---------- -------------------------------------------------- --------------
28,000,000 USD 9/1/03 Agreement with Lehman Brothers Special Financing $ 148,949
Inc. dated 7/10/02 to receive (pay) the notional
amount multiplied by the change in market value
(including accrued interest) of the Lehman
Brothers MBS Fixed Rate Index and to pay initial
market value multiplied by the 1 month LIBOR
adjusted by a specified spread.
31,000,000 USD 11/30/03 Agreement with JPMorgan Chase Bank dated 11/22/02 469,491
to receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of the Lehman Brothers U.S. Government
Bond Index and to pay initial market value
multiplied by 1 month LIBOR adjusted by a
specified spread.
32,000,000 USD 12/1/03 Agreement with UBS AG dated 11/22/02 to receive 170,047
(pay) the notional amount multiplied by the change
in market value (including accrued interest) of
the Lehman MBS Fixed Rate Index and to pay initial
market value multiplied by the 1 month LIBOR
adjusted by a specified spread.
---------
$ 387,720
=========
</Table>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
26
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO CORE PLUS BOND FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Core Plus Bond Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
27
<Page>
GMO CORE PLUS BOND FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 2003, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 2.48% of the distributions as net capital gain
dividends.
28
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
29
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
30
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
31
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of GMO Currency Hedged International Bond Fund returned
+4.8% for the fiscal year ended February 28, 2003, compared to +8.4% for the
J.P. Morgan Non-U.S. Government Bond Index (Hedged), the Fund's benchmark. The
Fund's exposure to various issues is achieved directly and indirectly through
its investment in GMO Emerging Country Debt Fund, GMO Alpha LIBOR Fund (ALF) and
GMO Short-Duration Collateral Fund.
Bond market, emerging debt, and currency selection added value during the fiscal
year, while issue selection underperformed. Issue selection dramatically hurt
performance in late 2002. Value was lost due to credit-related spread widening
in the assets underlying the Fund's investment in ALF and the default of certain
healthcare receivable asset-backed bonds held by ALF which were allegedly
involved in a massive fraud. National Century Financial Enterprises, the sponsor
of $3.35 billion of health care asset-backed receivables allegedly violated the
terms of the bonds' indentures by, among other things, spending cash collateral,
accepting collateral other than permitted receivables, moving receivables
between trusts to meet compliance tests, and reimbursing healthcare providers
for more than the value of receivables purchased. National Century, its
affiliated operations, the trusts, and many healthcare providers have declared
bankruptcy. This event had a negative effect on the net asset value of ALF, and
an indirect effect on GMO Currency Hedged International Bond Fund of -6.1%
(through February 28, 2003).
OUTLOOK
The Fund is currently structured to benefit from outperformance in the
Euro-member country, Swedish, U.S., and emerging bond markets. We expect the
Australian, Danish, Japanese, Swiss, and British bond markets to underperform.
Strong relative performance is expected from Canadian dollars, Euros, Swiss
francs, Swedish krona, and British gilt markets. Japanese yen and U.S. dollars
are expected to underperform. At the end of the period, 2.3% of the Fund was
invested in emerging country debt.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO
& CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE.
THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND CLASS III SHARES
AND THE
J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX (HEDGED)
AS OF FEBRUARY 28, 2003
GMO Currency Hedged J.P. Morgan Non-U.S. Gov't.
International Bond Fund Bond Index (Hedged)
9/30/94 $10,000 $10,000
12/31/94 $9,976 $10,162
3/31/95 $10,281 $10,626
6/30/95 $11,154 $11,128
9/30/95 $11,951 $11,548
12/31/95 $12,748 $12,046
3/31/96 $13,044 $12,150
6/30/96 $13,955 $12,482
9/30/96 $14,842 $13,015
12/31/96 $15,790 $13,516
3/31/97 $16,043 $13,696
6/30/97 $16,724 $14,152
9/30/97 $17,808 $14,653
12/31/97 $18,278 $15,047
3/31/98 $18,923 $15,518
6/30/98 $19,080 $15,873
9/30/98 $19,313 $16,723
12/31/98 $19,315 $16,874
3/31/99 $19,517 $17,170
6/30/99 $19,425 $17,046
9/30/99 $19,357 $17,093
12/31/99 $19,828 $17,283
3/31/2000 $20,429 $17,659
6/30/2000 $20,740 $17,974
9/30/2000 $21,224 $18,242
12/31/2000 $22,311 $18,918
3/31/2001 $23,041 $19,452
6/30/2001 $22,971 $19,523
9/30/2001 $23,437 $19,949
12/31/2001 $23,728 $20,058
3/31/2002 $23,701 $20,000
6/30/2002 $24,667 $20,448
9/30/2002 $25,347 $21,132
12/31/2002 $24,441 $21,465
2/28/2003 $25,064 $21,784
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
Since
1 Year 5 Year Inception
9/30/94
Class III 4.81% 6.18% 11.54%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE/
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 6.3%
UNITED STATES -- 6.3%
U.S. GOVERNMENT -- 6.3%
USD 1,103,140 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09(a) 1,269,990
----------
TOTAL DEBT OBLIGATIONS (COST $1,095,898) 1,269,990
----------
MUTUAL FUNDS -- 90.6%
47,769 GMO Emerging Country Debt Fund, Class III 454,761
90,853 GMO Alpha LIBOR Fund 2,155,037
628,054 GMO Short-Duration Collateral Fund 15,707,624
----------
TOTAL MUTUAL FUNDS (COST $18,452,571) 18,317,422
----------
<Caption>
PRINCIPAL
AMOUNT
----------
CALL OPTIONS PURCHASED -- 0.3%
CROSS CURRENCY OPTIONS -- 0.3%
GBP 800,000 GBP Call/JPY Put, Expires 01/23/04, Strike 184.00 33,320
GBP 700,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 29,466
USD 400,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 9,630
----------
72,416
----------
TOTAL CALL OPTIONS PURCHASED (COST $100,380) 72,416
----------
</Table>
See accompanying notes to the financial statements.
1
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
PUT OPTIONS PURCHASED -- 0.0%
CROSS CURRENCY OPTIONS -- 0.0%
GBP 900,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.428 283
----------
TOTAL PUT OPTIONS PURCHASED (COST $36,779) 283
----------
TOTAL INVESTMENTS -- 97.2%
(Cost $19,685,628) 19,660,111
Other Assets and Liabilities (net) -- 2.8% 558,892
----------
TOTAL NET ASSETS -- 100.0% $20,219,003
==========
</Table>
<Table>
NOTES TO SCHEDULE OF INVESTMENTS:
CURRENCY ABBREVIATIONS:
</Table>
<Table>
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
</Table>
(a) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
2 See accompanying notes to the financial statements.
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $19,685,628) (Note 1) $19,660,111
Cash 409,366
Interest receivable 8,789
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 228,327
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 53,532
Net receivable for open swap contracts (Notes 1 and 6) 15,994
Receivable for expenses reimbursed by Manager (Note 2) 5,259
Miscellaneous receivable 4,028
-----------
Total assets 20,385,406
-----------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 3,731
Shareholder service fee 2,239
Payable for open forward foreign currency contracts
(Notes 1 and 6) 120,121
Accrued expenses 40,312
-----------
Total liabilities 166,403
-----------
NET ASSETS $20,219,003
===========
NET ASSETS CONSIST OF:
Paid-in capital $22,701,341
Accumulated undistributed net investment income 1,074,093
Accumulated net realized loss (3,670,484)
Net unrealized appreciation 114,053
-----------
$20,219,003
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $20,219,003
===========
SHARES OUTSTANDING:
Class III 2,284,806
===========
NET ASSET VALUE PER SHARE:
Class III $ 8.85
===========
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends from investment company shares $ 120,241
Interest 85,808
----------
Total income 206,049
----------
EXPENSES:
Management fee (Note 2) 36,221
Audit fees 45,516
Custodian and transfer agent fees 21,762
Registration fees 3,867
Trustees fees and related expenses (Note 2) 1,735
Legal fees 544
Fees reimbursed by Manager (Note 2) (71,048)
----------
38,597
Indirectly incurred fees waived or borne by Manager (Note
2) (1,959)
----------
36,638
----------
Shareholder service fee (Note 2) - Class III 21,733
Shareholder service fee waived (Note 2) - Class III (712)
----------
21,021
----------
Net expenses 57,659
----------
Net investment income 148,390
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (1,021,075)
Realized gains distributions from investment company
shares 40,445
Closed futures contracts 384,553
Closed swap contracts 289,026
Written options 3,644
Foreign currency, forward contracts and foreign
currency related transactions 402,470
----------
Net realized gain 99,063
----------
Change in net unrealized appreciation (depreciation) on:
Investments 298,502
Open futures contracts 122,845
Open swap contracts 40,355
Foreign currency, forward contracts and foreign
currency related transactions 67,041
----------
Net unrealized gain 528,743
----------
Net realized and unrealized gain 627,806
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 776,196
==========
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 148,390 $ 914,257
Net realized gain 99,063 1,488,746
Change in net unrealized appreciation (depreciation) 528,743 (1,686,749)
----------- -----------
Net increase in net assets from operations 776,196 716,254
----------- -----------
Distributions to shareholders from:
Net investment income
Class III (1,285,568) (1,723,251)
----------- -----------
Total distributions from net investment income (1,285,568) (1,723,251)
----------- -----------
Net share transactions: (Note 5)
Class III 2,795,937 837,205
----------- -----------
Increase in net assets resulting from net share
transactions 2,795,937 837,205
----------- -----------
Total increase (decrease) in net assets 2,286,565 (169,792)
NET ASSETS:
Beginning of period 17,932,438 18,102,230
----------- -----------
End of period (including accumulated undistributed
net investment income of $1,074,093 and $1,244,414,
respectively) $20,219,003 $17,932,438
=========== ===========
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------
2003 2002 2001(C) 2000 1999
------- ------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.04 $ 9.72 $ 9.70 $ 10.47 $ 10.66
------- ------- ------- -------- --------
Income from investment operations:
Net investment income(a) 0.09+ 0.50+ 0.59+ 0.65+ 0.74
Net realized and unrealized gain
(loss) 0.32 (0.13) 0.71 (0.17) (0.39)
------- ------- ------- -------- --------
Total from investment operations 0.41 0.37 1.30 0.48 0.35
------- ------- ------- -------- --------
Less distributions to shareholders:
From net investment income (0.60) (1.05) (1.18) (1.11) (0.16)
From net realized gains -- -- (0.10) (0.14) (0.38)
------- ------- ------- -------- --------
Total distributions (0.60) (1.05) (1.28) (1.25) (0.54)
------- ------- ------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.85 $ 9.04 $ 9.72 $ 9.70 $ 10.47
======= ======= ======= ======== ========
TOTAL RETURN(b) 4.81% 4.21% 14.06% 4.95% 3.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $20,219 $17,932 $18,102 $283,340 $323,711
Net expenses to average daily net
assets 0.40%(d) 0.38%(d) 0.40%(d) 0.40% 0.40%
Net investment income to average
daily net assets(a) 1.02% 5.45% 5.96% 6.51% 6.30%
Portfolio turnover rate 66% 44% 120% 65% 116%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.51% 0.54% 0.07% 0.08% 0.33%
</Table>
(a) Net investment income for the years ended February 28, 2003, 2002 and
2001 and February 29, 2000 is affected by the timing of the declaration
of dividends by other Funds of the Trust in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
premium and discount on debt securities. The effect of this change for
the year ended February 28, 2001 was to decrease net investment income
per share by $0.01, increase net realized and unrealized gains and
losses per share by $0.01 and decrease the ratio of net investment
income to average net assets from 6.05% to 5.96%. Per share and
ratio/supplemental data for periods prior to March 1, 2000 have not been
restated to reflect this change.
(d) Net expenses exclude expenses incurred indirectly through investment in
underlying Funds.
(See Note 2)
+ Computed using average shares outstanding throughout the period.
6 See accompanying notes to the financial statements.
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Currency Hedged International Bond Fund (the "Fund") is a series of
GMO Trust (the "Trust"). The Fund is registered under the Investment
Company Act of 1940, as amended, as an open-end, non-diversified
management investment company. The Fund is advised and managed by
Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust
was established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a
series of shares into classes.
The Fund seeks high total return through direct and indirect investment in
foreign bond and currency markets. The Fund's benchmark is the J.P. Morgan
Non-U.S. Government Bond Index (Hedged).
At February 28, 2003, 10.7% of the Fund was invested in GMO Alpha LIBOR
Fund and 77.7% of the Fund was invested in GMO Short-Duration Collateral
Fund, separate funds of GMO Trust managed by GMO. Shares of GMO Alpha
LIBOR Fund and GMO Short-Duration Collateral Fund are not publicly
available for direct purchase. At February 28, 2003, 2.2% of the net
assets of the Fund was invested in GMO Emerging Country Debt Fund, a
separate fund of GMO Trust managed by GMO. The financial statements of GMO
Alpha LIBOR Fund, GMO Short-Duration Collateral Fund and GMO Emerging
Country Debt Fund should be read in conjunction with the Fund's financial
statements.
The Fund invested a substantial portion of its assets in GMO Alpha LIBOR
Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In
November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds")
defaulted amid allegations of fraud and significant violations of the
bonds' indentures. Currently, no market exists for the NPF bonds, and they
are being valued at fair value by the trustees of GMO Trust or persons
acting at their direction. The devaluation of the NPF bonds had a negative
impact on the Fund's net asset value per share.
In late November 2002, Alpha LIBOR Fund undertook a reorganization
transaction with a new series of GMO Trust, GMO Short-Duration Collateral
Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR
Fund was transferred to SDCF in exchange for SDCF shares. The
reorganization was treated as a sale of the Alpha LIBOR Fund shares for
financial reporting purposes and a distribution by Alpha LIBOR Fund for
tax purposes. Accordingly, for financial reporting purposes, the Fund
recognized a loss on the sale of the Alpha LIBOR shares of approximately
$781,738. In addition, the Fund recognized for tax, but not for financial
reporting purposes, ordinary income of $314,232 and long-term capital
gains of $56,046 from Alpha LIBOR Fund. $1,152,016 was added to the tax
cost basis of the Fund's holdings of Alpha LIBOR Fund.
7
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of other Funds of the Trust are valued at their net asset value as
reported on each business day. Portfolio securities listed on a securities
exchange for which market quotations are readily available are valued at
the last sale price or official closing price on each business day, or if
there is no such reported sale or official closing price, at the most
recent quoted bid price. Unlisted securities for which market quotations
are readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates fair value. Securities for which quotations are not
readily available or whose values the Manager has determined to be
unreliable are valued at fair value as determined in good faith by the
Trustees or other persons acting at their direction. A security's value
may be deemed unreliable if, for example, the Manager becomes aware of
information or events occurring after the close of a foreign market that
would materially affect that security's value.
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the underlying funds in which the Fund invests,
were valued on the basis of a price provided by a principal market maker.
The prices provided by the principal market makers may differ from the
value that would be realized if the securities were sold and the
differences could be material to the financial statements.
8
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. The value of the currencies the Fund has
committed to buy or sell is shown under Note 6 and represents the currency
exposure the Fund has acquired or hedged through forward currency
contracts as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In
9
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
addition, the Fund maintains cash or securities in an amount that at least
equals the net amount payable in the event the Fund must deliver the full
amount of the contracts. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts. (See Note 6)
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. See Schedule of Investments for
all open purchased option contracts as of February 28, 2003.
10
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the "lender") that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into interest rate, total return, forward swap spread lock and
credit default swap agreements to manage its exposure to interest rates
and credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return, both based on notional amounts. To the extent the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty,
respectively. Forward swap spread lock swap agreements involve commitments
to pay or receive a settlement amount calculated as the difference between
the swap
11
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
spread and a fixed spread, multiplied by the notional amount times the
duration of the swap rate. The swap spread is the difference between the
benchmark swap rate (market rate) and the specific treasury rate. In a
credit default swap, one party makes a stream of payments to another party
in exchange for the right to receive a specified return in the event of a
default by a third party on its obligation. The Fund may use credit
default swaps to provide a measure of protection against defaults of
sovereign or corporate issuers (i.e., to reduce risk where the Fund owns
or has exposure to the issuer) or to take an active long or short position
with respect to the likelihood of a particular issuer's default. In
connection with these agreements, cash or securities may be set aside as
collateral by the Fund's custodian in accordance with the terms of the
swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily based upon quotations from market makers
and the change in value, if any, is recorded as unrealized gain or loss in
the Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Net payments of interest on interest rate swap agreements
are included as part of interest income. These financial instruments are
not actively traded on financial markets. The values assigned to these
instruments are based upon the best available information and because of
the uncertainty of the valuation, these values may differ significantly
from the values that would have been realized had a ready market for these
instruments existed, and the differences could be material. Entering into
these agreements involves, to varying degrees, elements of credit, legal,
market, and documentation risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform or
disagree as to the meaning of contractual terms in the agreements, or that
there may be unfavorable changes in interest rates. See Note 6 for a
summary of open swap agreements as of February 28, 2003.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
12
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund has sold may
decline below the price at which it is obligated to repurchase them under
the agreement. For the year ended February 28, 2003, the Fund had not
entered into any reverse repurchase agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of collateral, the risk of delay in recovery or
loss of rights in the collateral should the borrower fail financially. The
Fund receives compensation for lending its securities. At February 28,
2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis for distributions paid from ordinary income were $1,723,251
and $1,285,568, respectively.
13
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $1,182,299 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to foreign currency transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $6,885,002 expiring in 2009. However, restrictions on annual
utilization of this carryforward under the Code resulting from significant
shareholder activity are expected to limit maximum utilization to offset
future capital gains prior to expiration to approximately $3,649,323.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions, limitations of capital loss carryovers and the GMO Alpha
LIBOR Fund transaction (See Note 1). The financial highlights exclude
these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss Paid-in Capital
----------------- --------------- ---------------
$966,857 $3,413,749 $(4,380,606)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the amortization of
premium and discounts. Dividend income is recorded on the ex-dividend
date. Non-cash dividends, if any, are recorded at the fair market value of
the securities received. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
Interest income on inflation indexed securities is accrued daily based
upon an inflation adjusted principal. Additionally, any increase in the
principal or face amount of the securities is recorded as interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
14
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities 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 securities markets of the U.S. and developed
foreign markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares. The Fund may invest in Class III shares of GMO Emerging Country
Debt Fund ("ECDF"). Like the management fee (as described below), the
Fund's shareholder service fee will be waived (but not below zero) to the
extent of the indirect shareholder service fees paid in connection with
the Fund's investment in ECDF. The Fund does not incur any indirect
shareholder service fees as a result of the Fund's investment in Alpha
LIBOR Fund or SDCF. For the year ended February 28, 2003, shareholder
service fees incurred indirectly by the Fund were 0.005% of the Fund's
average daily net assets.
GMO has entered into a binding agreement effective until at least
June 30, 2003, to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, and the
following expenses: fees and expenses of the independent Trustees of the
Trust (including legal 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, interest expense and transfer taxes
(collectively, "fund expenses")) and the amount of fees and operating
expenses (excluding shareholder service fees and fund expenses, as defined
above) incurred indirectly by the Fund through its investment in the
underlying funds exceed the management fee.
For the year ended February 28, 2003, indirect operating expenses
(excluding shareholder service fees and investment-related expenses) and
indirect investment-related expenses (including, but not limited to
interest expense, foreign audit expense, and investment-related legal
expense) incurred by
15
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
the Fund through its investment in underlying funds (including GMO Alpha
LIBOR Fund, GMO Short-Duration Collateral Fund and ECDF) were 0.018% and
0.027% of the Fund's average daily net assets, respectively.
As of February 28, 2003, substantially all of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during year ended February 28, 2003 was $1,657. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$11,867,090 and $9,373,965, respectively.
For the year ended February 28 , 2003, the cost of purchases and proceeds
from sales of investments excluded $7,491,600 and $7,091,600,
respectively, from the initial transfer of GMO Alpha LIBOR Fund's
investments in GMO Short-Duration Collateral Fund. (See Note 1)
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$20,851,733 $204,189 $(1,395,811) $(1,191,622)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 92.4% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
shares outstanding. One of the shareholders is another fund of GMO Trust.
Investment activities of these shareholders may have a material effect on
the Fund.
16
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ---------------------
Shares Amount Shares Amount
Class III: ---------- ------------ -------- -----------
Shares sold 1,433,219 $ 12,587,730 562,588 $ 4,992,607
Shares issued to shareholders in reinvestment
of distributions 143,796 1,219,389 194,941 1,694,032
Shares repurchased (1,275,960) (11,011,182) (636,716) (5,849,434)
---------- ------------ -------- -----------
Net increase 301,055 $ 2,795,937 120,813 $ 837,205
========== ============ ======== ===========
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Buys
3/25/03 AUD 3,200,000 $1,938,221 $ 48,537
4/01/03 CAD 2,600,000 1,743,024 40,956
3/04/03 CHF 7,300,000 5,383,481 99,386
4/29/03 CHF 4,400,000 3,248,608 3,770
4/15/03 GBP 300,000 471,248 (11,452)
3/18/03 JPY 130,000,000 1,100,161 (3,479)
--------
$177,718
========
</Table>
17
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Sales
3/25/03 AUD 1,800,000 $1,090,249 $(33,647)
4/01/03 CAD 1,300,000 871,512 (20,154)
3/04/03 CHF 7,300,000 5,383,481 (36,804)
4/22/03 EUR 900,000 968,364 2,196
4/15/03 GBP 400,000 628,330 13,059
3/18/03 JPY 270,000,000 2,284,951 (14,585)
--------
$(89,935)
========
</Table>
FORWARD CROSS CURRENCY CONTRACTS
<Table>
<Caption>
Settlement Deliver/Units of Receive/In Net Unrealized
Date Currency Exchange For Appreciation
---------- ---------------- --------------- --------------
3/11/03 CHF 4,072,600 EUR 2,800,000 $13,250
4/08/03 EUR 3,400,000 SEK 31,275,920 7,173
-------
$20,423
=======
</Table>
See Notes for the Schedule of Investments for definitions of currency
abbreviations.
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- ------------------------------------- --------------- ----------- --------------
Buys
14 Canadian Government Bond 10 Yr. June 2003 $1,003,061 $ 1,459
14 Euro BOBL March 2003 1,712,021 23,040
12 Euro BOBL June 2003 1,455,418 (192)
7 Euro Bund March 2003 880,228 10,863
37 Euro Bund June 2003 4,617,543 (178)
2 Japanese Government Bond 10 Yr. June 2003 2,412,011 2,589
2 U.S. Long Bond June 2003 228,937 3,410
5 UK Gilt Long Bond June 2003 956,873 (1,245)
--------
$ 39,746
========
</Table>
18
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- -------------------------------------- --------------- ----------- --------------
Sales
1 Australian Government Bond 10 Yr. March 2003 $ 65,075 $ (1,988)
3 Australian Government Bond 3 Yr. March 2003 189,862 (2,344)
5 Swiss Government Bond March 2003 485,140 (15,615)
9 U.S. Treasury Note 5 Yr. June 2003 1,023,328 (3,427)
--------
$(23,374)
========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
WRITTEN OPTION TRANSACTIONS
<Table>
<Caption>
Puts Calls
-------------------------- -----------------------------
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- -------- ---------------- -----------
Outstanding, beginning of period -- $ -- -- $ --
Options written -- -- 7,500,000 337,427
Options closed -- -- (7,100,000) (333,783)
Options exercised -- -- (400,000) (3,644)
----------- ------- ------------- ---------
Outstanding, end of period -- $ -- -- $ --
=========== ======= ============= =========
</Table>
19
<Page>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<Table>
<Caption>
Notional Expiration Net Unrealized
Amount Date Description Appreciation
-------------- ---------- -------------------------------------------------- --------------
INTEREST RATE SWAPS
800,000 SEK 9/25/07 Agreement with Citibank N.A. dated 9/24/02 to $ 2,287
receive the notional amount multiplied by 4.79%
and to pay the notional amount multiplied by the 3
month Floating Rate Swedish STIBOR adjusted by a
specific spread.
1,000,000 SEK 9/25/12 Agreement with Citibank N.A. dated 9/24/02 to 2,967
receive the notional amount multiplied by 5.08%
and to pay the notional amount multiplied by the 3
month Floating Rate Swedish STIBOR adjusted by a
specific spread.
TOTAL RETURN SWAPS
5,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust Company dated 10,740
7/18/01 to receive (pay) the notional amount
multiplied by the return on the JP Morgan Hedged
Non-U.S. Traded Total Return Government Bond Index
and to pay the notional amount multiplied by the 1
month LIBOR adjusted by a specified spread.
-------
$15,994
=======
</Table>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
20
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Currency Hedged International
Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
21
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
22
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
23
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------------------ -------------- -------------- --------------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present), Chief
c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member,
40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer of the Officer since
Age: 47 Trust October 2002;
Vice President
from August
1998 -
October 2002.
Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Financial Financial
40 Rowes Wharf Officer and Officer Since
Boston, MA 02110 Treasurer of February 2000;
Age: 45 the Trust Treasurer
since February
1998.
Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust Treasurer of September Otterloo & Co. LLC.
40 Rowes Wharf the Trust 1998.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting
c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 since March
Age: 37 2001; May
1999 - August
1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP
Boston, MA 02110 Secretary (1991 - 1999).
Age: 58 since March
2001.
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Laundering
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
24
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
Class III shares of GMO Currency Hedged International Equity Fund returned
- -19.5% for the fiscal year ended February 28, 2003. This is +11.9% ahead of the
MSCI EAFE Hedged Index (Hedged), which returned -31.4% over the same period.
International stocks, like the U.S. market, suffered their third straight year
of negative returns in 2002. World equity markets were hit by the continued
global economic slowdown, which came on top of valuation levels that remained
high by historical standards. With the addition of corporate governance scandals
and a perilous geopolitical situation, this combined to produce the worst bear
market since 1974.
Currency hedging hurt returns over the fiscal year, as the long period of post
1995 dollar strength came to a close. The unhedged EAFE index returned -17.5%
(outperforming the S&P 500) on the back of strengthening foreign currencies.
Foreign investors have been slowing their inflows as confidence declines in the
U.S. economy. In addition, the continued large U.S. trade deficit and lower U.S.
interest rates undermine support for the U.S. dollar.
But in local currency, or hedged terms, European markets fell even further than
the U.S. Germany led the way down, with that country's DAX index falling a
Nasdaq-like -44% in calendar year 2002. Europe continued to suffer from the
unraveling of the "TMT" bubble in the technology, media, and telecommunications
sectors. Faith has all but vanished that third generation mobile phone
technology will deliver pots of gold to these sectors. The insurance sector
suffered from a brutal combination of rising liabilities for natural (and
unnatural) disasters with deteriorating asset values as equity holdings declined
in value. There were questions about the viability of the Eurozone as a single
currency region and the appropriateness of its stability pact, which limits
government deficits. Adhering to this pact means, for example, that Germany has
neither fiscal policy nor monetary policy (now ceded to the ECB) available to
stimulate its economy.
In Japan, frustration continued to mount over the lack of reform. GDP growth is
stagnant and some economic indicators forecast a return to recession in 2003.
The solvency of the financial sector remains a concern, and several big banks
have been forced to raise additional capital at the expense of current
shareholders. Prime Minister Koizumi appeared to practice business as usual with
the appointment of an establishment candidate to head the central bank. And the
strength of the yen against the dollar poses problems for exporters. Despite the
fact that the Nikkei 225 index hit a 20 year low, Japan was the best performing
major market. The MSCI Japan index fell "only" by 10%, as the bad news there was
at least somewhat anticipated in the prices.
Within this difficult environment, GMO's disciplined investment approach
produced strong relative performance. This portfolio holds shares in the GMO
International Intrinsic Value Fund (currently 60%) and
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
the GMO International Growth Fund (currently 40%). Those portfolios returned
- -4.1% and -11.4%, respectively, to outperform both EAFE and their respective
style benchmarks. The lower return to the GMO Currency Hedged International
Equity Fund is due to the adverse effect of hedging the currency exposure back
to the U.S. dollar.
Within the underlying portfolios, the focus on higher quality, reasonably valued
stocks helped ease the pain. GMO's stock selection process, which involves the
application of quantitative techniques to forecast returns based upon an
evaluation of stock valuation, dividend yield, price momentum, and other
factors, performed well in the fiscal year.
Sector allocation was a modest benefit to the portfolio, predominantly from an
overweight position in electric utilities and an underweight in technology.
Generally, the most defensive sectors performed strongest in these times of
uncertainty, and utility stocks led the way. Telecommunications stocks and
consumer staples also outperformed the benchmark (though all sectors fell in
absolute terms). Energy stocks outperformed only slightly despite a run up in
oil prices to nearly $40/barrel. The outperformance of the telecommunications
sector came after two dismal years, as share prices have fallen enough that the
basic revenue from the traditional business is providing some valuation support
even as hopes of future growth dissipate. Technology stocks performed the worst
of the major sectors.
Country allocation was also a positive, as the portfolio benefited from
overweights in some of the smaller markets that performed relatively well.
Austria was the most notable of these, as overweighting that market, which
managed positive absolute return, added close to a percentage point of relative
return. Allocations to Canada and the Pacific region outside Japan were also
positive as those regions enjoyed relatively strong economic growth. Currency
allocation was also positive as the portfolio benefited not just in absolute
terms from not holding the U.S. dollar, but also in relative terms from
overweighting the euro and other continental currencies at the expense of the
pound and yen.
OUTLOOK
The silver lining to the pain of a tough bear market is that the bad news is now
out in the open. With lower stock prices, dividend yields are now meaningful and
there is a lower hurdle on earnings growth required to deliver capital gains.
Also, many CEOs have been replaced by a more prudent generation focused on
reducing debt and other more conservative means of enhancing shareholder value.
Lower valuations position international equities both to enjoy positive returns
and to outperform the U.S. market. Within the portfolio, GMO is maintaining its
strategic moderate value bias (60% versus 40%), down from a more aggressive
allocation towards value. The recent outperformance of value stocks relative to
growth has collapsed the wide valuation disparity between the two styles that
existed at the peak of the bubble.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND CLASS III SHARES AND THE
MSCI EAFE (HEDGED) INDEX
AS OF FEBRUARY 28, 2003
<Table>
<Caption>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND MSCI EAFE (HEDGED) INDEX MSCI EAFE INDEX
6/30/95 $10,000 $10,000 $10,000
9/30/95 $10,730 $11,175 $10,417
12/31/95 $11,302 $11,992 $10,839
3/31/96 $11,838 $12,716 $11,152
6/30/96 $12,303 $13,194 $11,328
9/30/96 $12,400 $13,289 $11,314
12/31/96 $13,030 $13,648 $11,494
3/31/97 $13,480 $14,309 $11,314
6/30/97 $14,616 $16,075 $12,782
9/30/97 $15,440 $16,539 $12,692
12/31/97 $14,710 $15,758 $11,699
3/31/98 $17,267 $18,411 $13,419
6/30/98 $17,173 $18,740 $13,562
9/30/98 $13,860 $15,346 $11,634
12/31/98 $15,782 $17,916 $14,038
3/31/99 $16,223 $19,287 $14,233
6/30/99 $18,192 $20,500 $14,595
9/30/99 $18,149 $20,365 $15,235
12/31/99 $19,082 $24,450 $17,823
3/31/2000 $18,718 $25,242 $17,804
6/30/2000 $19,936 $24,892 $17,099
9/30/2000 $20,108 $24,303 $15,720
12/31/2000 $20,969 $23,380 $15,298
3/31/2001 $20,531 $21,706 $13,201
6/30/2001 $21,787 $22,007 $13,063
9/30/2001 $18,675 $17,850 $11,234
12/31/2001 $19,864 $19,668 $12,018
3/31/2002 $20,993 $20,032 $12,079
6/30/2002 $19,841 $17,638 $11,823
9/30/2002 $16,739 $14,043 $9,490
12/31/2002 $17,032 $14,273 $10,102
2/28/2003 $16,212 $13,164 $9,458
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 6/30/95
Class III -19.53% 0.21% 6.51%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
MUTUAL FUNDS -- 100.1%
UNITED STATES -- 100.1%
683,693 GMO International Growth Fund, Class III 11,506,555
1,082,980 GMO International Intrinsic Value Fund, Class IV 17,457,641
-------------
28,964,196
-------------
TOTAL MUTUAL FUNDS (COST $31,607,932) 28,964,196
-------------
COMMON STOCKS -- 0.0%
HONG KONG -- 0.0%
796 China Digicontent Co Ltd*(a) 1
-------------
UNITED KINGDOM -- 0.0%
19,018 British Energy Plc (Deferred Shares)*(a) --
-------------
TOTAL COMMON STOCKS (COST $19) 1
-------------
SHORT-TERM INVESTMENTS -- 5.9%
CASH EQUIVALENTS -- 5.9%
$ 1,700,000 Societe Generale GC Time Deposit, 1.34%, due 3/03/03 1,700,000
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,700,000) 1,700,000
-------------
TOTAL INVESTMENTS -- 106.0%
(Cost $33,307,951) 30,664,197
Other Assets and Liabilities (net) -- (6.0%) (1,741,432)
-------------
TOTAL NET ASSETS -- 100.0% $ 28,922,765
=============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
See accompanying notes to the financial statements. 1
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $33,307,951) (Note 1) $30,664,197
Cash 71,108
Foreign currency, at value (cost $12,462) (Note 1) 13,413
Receivable for Fund shares sold 190,000
Interest receivable 64
Foreign taxes receivable 13,102
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 22,066,884
Receivable for expenses reimbursed by Manager (Note 2) 28,702
-----------
Total assets 53,047,470
-----------
LIABILITIES:
Payable for Fund shares repurchased 971,483
Payable to affiliate for (Note 2):
Management fee 11,752
Shareholder service fee 3,265
Payable for open forward foreign currency contracts
(Notes 1 and 6) 23,088,653
Accrued expenses 49,552
-----------
Total liabilities 24,124,705
-----------
NET ASSETS $28,922,765
===========
NET ASSETS CONSIST OF:
Paid-in capital $37,506,744
Accumulated undistributed net investment income 272,397
Accumulated net realized loss (5,197,885)
Net unrealized depreciation (3,658,491)
-----------
$28,922,765
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $28,922,765
===========
SHARES OUTSTANDING:
Class III 5,218,365
===========
NET ASSET VALUE PER SHARE:
Class III $ 5.54
===========
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $1,212) $ 71,543
Interest 19,257
Dividends from investment company shares 638,779
-----------
Total income 729,579
-----------
EXPENSES:
Management fee (Note 2) 116,529
Custodian fees 67,338
Audit fees 46,498
Transfer agent fees 25,567
Registration fees 3,956
Trustees fees and related expenses (Note 2) 1,292
Legal fees 826
Miscellaneous 2,567
Fees reimbursed by Manager (Note 2) (146,632)
-----------
117,941
Indirectly incurred fees waived or borne by Manager (Note
2) (115,200)
-----------
2,741
-----------
Shareholder service fee (Note 2) - Class III 32,369
Shareholder service fee waived (Note 2) - Class III (22,623)
-----------
9,746
-----------
Net expenses 12,487
-----------
Net investment income 717,092
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments (1,087,546)
Foreign currency, forward contracts and foreign
currency related transactions (2,871,526)
-----------
Net realized loss (3,959,072)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 990,215
Foreign currency, forward contracts and foreign
currency related transactions (701,059)
-----------
Net unrealized gain 289,156
-----------
Net realized and unrealized loss (3,669,916)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,952,824)
===========
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 717,092 $ 3,187,114
Net realized loss (3,959,072) (3,898,941)
Change in net unrealized appreciation (depreciation) 289,156 (154,340)
----------- ------------
Net decrease in net assets from operations (2,952,824) (866,167)
----------- ------------
Distributions to shareholders from:
Net investment income
Class III (1,412,055) (6,827,386)
Class IV -- (325,033)
----------- ------------
Total distributions from net investment income (1,412,055) (7,152,419)
----------- ------------
Net realized gains
Class III -- (187,380)
Class IV -- (247,025)
----------- ------------
Total distributions from net realized gains -- (434,405)
----------- ------------
(1,412,055) (7,586,824)
----------- ------------
Net share transactions (Note 5):
Class III (4,293,820) (2,273,739)
Class IV -- (61,034,872)
----------- ------------
Decrease in net assets resulting from net share
transactions (4,293,820) (63,308,611)
----------- ------------
Total decrease in net assets (8,658,699) (71,761,602)
NET ASSETS:
Beginning of period 37,581,464 109,343,066
----------- ------------
End of period (including accumulated undistributed
net investment income of $272,397 and $1,571,902,
respectively) $28,922,765 $ 37,581,464
=========== ============
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.14 $ 9.25 $ 10.04 $ 9.28 $ 11.92
------- ------- ------- ------- -------
Income from investment operations:
Net investment income(e) 0.22(d) 0.46(d) 0.23 0.23 0.23
Net realized and unrealized gain
(loss) (1.55) (1.00) 1.34 1.26 (0.36)(b)
------- ------- ------- ------- -------
Total from investment operations (1.33) (0.54) 1.57 1.49 (0.13)
------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.27) (1.53) (0.21) (0.42) (0.29)
From net realized gains -- (0.04) (2.15) (0.31) (2.22)
------- ------- ------- ------- -------
Total distributions (0.27) (1.57) (2.36) (0.73) (2.51)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 5.54 $ 7.14 $ 9.25 $ 10.04 $ 9.28
======= ======= ======= ======= =======
TOTAL RETURN(a) (19.53)% (5.38)% 16.69% 15.86% (1.84)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $28,923 $37,581 $49,332 $75,054 $97,450
Net expenses to average daily net
assets 0.06%(c) 0.31%(c) 0.69% 0.69% 0.69%
Net investment income to average
daily net assets 3.32%(d) 5.33%(d) 2.23% 2.25% 2.07%
Portfolio turnover rate 90% 120% 39% 68% 68%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 1.32% 0.79% 0.38% 0.33% 0.42%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investmensts for
the year ended February 28, 1999 due to timing purchases and redemptions
of Fund shares in relation to fluctuating market values of the
investments of the Fund.
(c) On July 3, 2001, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its reimbursement. Net
expenses exclude expenses incurred indirectly through investment in
underlying funds.
See Note 2.
(d) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
(e) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 5
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Currency Hedged International Equity Fund (the "Fund") is a series of
GMO Trust (the "Trust"). The Fund is registered under the Investment
Company Act of 1940, as amended, as an open-end, non-diversified
management investment company. The Fund is advised and managed by
Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust
was established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a
series of shares into classes.
The Fund seeks high total return through direct and indirect investment in
equity securities of non-U.S. issuers and through management of the Fund's
foreign currency positions. On July 3, 2001, the Fund began to invest a
substantial portion of its assets in other Funds of the Trust ("underlying
funds"). The Fund's benchmark is the MSCI EAFE Index (Hedged).
At February 28, 2003, 60.3% of the Fund was invested in GMO International
Intrinsic Value Fund and 39.8% of the Fund was invested in GMO
International Growth Fund, separate funds of GMO Trust managed by GMO. GMO
International Intrinsic Value Fund and GMO International Growth Fund
invest primarily in equity securities of developed countries in Asia and
Europe. The financial statements of GMO International Intrinsic Value Fund
and GMO International Growth Fund should be read in conjunction with the
Fund's financial statements.
Until July 19, 2001, the Fund had two classes of shares outstanding: Class
III and Class IV. Effective July 19, 2001, Class IV shares ceased
operations. The principal economic difference between the classes of
shares was the level of shareholder service fees borne by the classes.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of underlying funds and other mutual funds are valued at their net
asset value as reported on each business day. Portfolio securities listed
on a securities exchange for which market quotations are readily available
are valued at the last sale price or official closing price on each
business day, or if there is no such reported sale or official closing
price, at the most recent quoted bid price. Unlisted securities for which
market quotations are readily available are valued at the most recent
6
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
quoted bid price. Securities which are primarily traded on foreign
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, and those values are then
translated into U.S. dollars at the current exchange rate. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Securities for which
quotations are not readily available, or whose values the Manager has
determined to be unreliable, are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction. A
security's value may be deemed unreliable if, for example, the Manager
becomes aware of information or events occurring after the close of a
foreign market that would materially affect that security's value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign
7
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
currency values that are unfavorable to the Fund. The value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
28, 2003, there were no outstanding futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's
8
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
exposure to the underlying instrument. The Fund pays a premium which is
included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. Premiums paid for purchasing options which expire are
treated as realized losses. Premiums paid for purchasing options which are
exercised or closed are added to the amounts paid or offset against the
proceeds on the underlying future, security or currency transaction to
determine the realized gain or loss. The risk associated with purchasing
put and call options is limited to the premium paid. At February 28, 2003,
there were no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the
9
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. At February 28, 2003, there were no open swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund did not have any securities on
loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid were as follows: ordinary income --
$7,586,824 and $1,412,055, respectively.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $3,271,105 and $1,682,281 expiring in 2010 and 2011, respectively.
The Fund has elected to defer to March 1, 2003 post-October capital losses
of $724,869.
10
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions and the net operating loss. The financial highlights exclude
these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss Paid-in Capital
----------------- ----------------- ---------------
$(604,542) $2,871,525 $(2,266,983)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder
11
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets at the annual rate
of .15% for Class III shares. As described in Note 1, the Fund invests in
certain underlying funds of the Trust. Like the management fee (as
described below), the Fund's shareholder service fee will be waived (but
not below zero) to the extent of the indirect shareholder service fees
paid in connection with the Fund's investment in shares of the underlying
funds. For the year ended February 28, 2003, shareholder service fees
incurred indirectly by the Class III shares of the Fund were .105% of
Class III's average daily net assets.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees and the
following expenses: fees and expenses of the independent Trustees of the
Trust (including legal 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, interest expense and transfer taxes
(collectively, "fund expenses")) and the amount of fees and expenses
(excluding shareholder service fees and fund expenses, as defined above)
incurred indirectly by the Fund through its investment in the underlying
funds exceed the management fee. Because GMO will not reimburse expenses
incurred indirectly by the Fund to the extent they exceed .54%, and
because the amount of fees and expenses incurred indirectly by the Fund
will vary, the operating expenses (excluding shareholder service fees and
fund expenses, as defined above) incurred indirectly by the Fund through
its investment in the underlying funds may exceed .54% of the Fund's
average daily net assets. For the year ended February 28, 2003, indirect
operating expenses (excluding shareholder service fees and investment-
related expense) and indirect investment-related expenses (including, but
not limited to, interest expense, foreign audit expense, and
investment-related legal expense) incurred by the Fund were .534% and less
than .001% of Class III's average daily net assets, respectively.
As of February 28, 2003, a significant portion of the Fund's shares were
held by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $1,172. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$20,438,779 and $28,301,603, respectively.
12
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$33,529,638 $ -- $(2,865,441) $(2,865,441)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 71.6% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the outstanding
shares of the Fund. One of the shareholders is another fund of GMO Trust.
Investment activities of these shareholders may have a material effect on
the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ---------- ------------
Shares sold 2,882,019 $ 16,484,193 159,897 $ 1,303,095
Shares issued to shareholders in reinvestment
of distributions 189,880 1,365,235 961,330 6,731,351
Shares repurchased (3,118,860) (22,143,248) (1,190,266) (10,308,185)
---------- ------------ ---------- ------------
Net decrease (46,961) $ (4,293,820) (69,039) $ (2,273,739)
========== ============ ========== ============
</Table>
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ------------------------
Shares Amount Shares Amount
Class IV: ---------- ------------ ---------- ------------
Shares sold -- $ -- -- $ --
Shares issued to shareholders in reinvestment
of distributions -- -- 26,251 247,025
Shares repurchased -- -- (6,526,919) (61,281,897)
---------- ------------ ---------- ------------
Net decrease -- $ -- (6,500,668) $(61,034,872)
========== ============ ========== ============
</Table>
13
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------- --------------
Buys
4/28/03 AUD 11,543,278 $ 6,967,667 $ 677,404
4/28/03 CAD 12,032,126 8,054,239 411,449
3/28/03 CHF 16,702,071 12,323,209 1,053,918
3/28/03 DKK 44,667,035 6,473,934 616,699
3/28/03 EUR 101,733,910 109,547,694 10,355,411
3/28/03 GBP 27,823,537 43,754,635 894,342
4/28/03 HKD 175,102,510 22,447,984 35,847
4/28/03 JPY 5,251,228,904 44,510,364 1,977,090
3/28/03 NOK 193,797,164 26,969,252 1,611,094
4/28/03 NZD 16,025,052 8,858,635 1,265,324
3/28/03 SEK 294,522,783 34,555,212 3,132,593
4/28/03 SGD 2,900,480 1,669,173 35,713
------------
$ 22,066,884
============
Sales
4/28/03 AUD 13,077,129 $ 7,893,518 $ (731,389)
4/28/03 CAD 12,549,009 8,400,238 (450,089)
3/28/03 CHF 19,772,771 14,588,849 (1,173,912)
3/28/03 DKK 49,045,118 7,108,483 (649,855)
3/28/03 EUR 109,997,214 118,445,670 (10,774,593)
3/28/03 GBP 32,202,899 50,641,516 (884,570)
4/28/03 HKD 177,351,266 22,736,273 (35,476)
4/28/03 JPY 5,892,148,255 49,942,912 (2,371,586)
3/28/03 NOK 196,357,686 27,325,580 (1,729,794)
4/28/03 NZD 16,295,117 9,007,927 (1,239,856)
3/28/03 SEK 297,066,194 34,853,620 (3,011,507)
4/28/03 SGD 2,867,814 1,650,374 (36,026)
------------
$(23,088,653)
============
</Table>
14
<Page>
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
CURRENCY ABBREVIATIONS:
<Table>
AUD - Australian Dollar
CAD -Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krona
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
</Table>
15
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Currency Hedged International
Equity Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
16
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
17
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
18
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
19
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Domestic Bond Fund returned +11.4% for the
fiscal year ended February 28, 2003, as compared with the +11.3% return of the
Lehman Brothers U.S. Government Bond Index.
The Fund outperformed the benchmark, though issue selection hurt performance in
the latter part of 2002. Value was lost due to credit related spread widening in
the assets underlying the Fund's investment in the GMO Alpha LIBOR Fund, and the
default of certain healthcare receivable asset-backed bonds held by GMO Alpha
LIBOR Fund, which cost the Fund 23 basis points.
In November of 2002, the Federal Reserve cut short-term interest rates from
1.75% to 1.25% in response to growing signs that U.S. economic growth had
slowed. The yield curve steepened significantly over the period, as 3-month
rates fell by more than 50 basis points and 10-year interest rates fell by more
than 100 basis points. While 10-year swap spreads narrowed from 67 to 42 basis
points, credit quality deteriorated on many of the high quality, but less liquid
sectors of the U.S. bond market as economic activity slowed.
As of February 28, 2002, approximately 54% of the Fund was invested in U.S.
government agency issues and U.S. Treasury securities. Approximately 29% of the
Fund was invested in highly-rated asset-backed securities. These included issues
backed by auto, truck, credit card, and healthcare receivables. The remainder of
the Fund was split between corporates (7%), collateralized bond obligations
(9%), and cash (1%). The Fund's exposure to these assets is achieved both
directly and indirectly through its investment in the GMO Alpha LIBOR Fund and
GMO Short-Duration Collateral Fund.
OUTLOOK
The Fund will continue to focus on high credit quality, but less liquid sectors
of the U.S. bond market that offer attractive returns relative to the index.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO DOMESTIC BOND FUND CLASS III SHARES AND THE
LEHMAN BROTHERS U.S. GOVERNMENT BOND INDEX
AS OF FEBRUARY 28, 2003
GMO DOMESTIC LEHMAN BROTHERS
BOND FUND U.S. GOV'T. BOND INDEX
8/18/94 $10,000 $10,000
9/30/94 $9,890 $9,927
12/31/94 $9,939 $9,962
3/31/95 $10,377 $10,431
6/30/95 $11,036 $11,078
9/30/95 $11,272 $11,275
12/31/95 $11,785 $11,790
3/31/96 $11,506 $11,523
6/30/96 $11,560 $11,578
9/30/96 $11,785 $11,773
12/31/96 $12,143 $12,116
3/31/97 $12,035 $12,018
6/30/97 $12,472 $12,435
9/30/97 $12,876 $12,852
12/31/97 $13,352 $13,278
3/31/98 $13,510 $13,478
6/30/98 $13,899 $13,834
9/30/98 $14,662 $14,599
12/31/98 $14,427 $14,586
3/31/99 $14,192 $14,378
6/30/99 $14,191 $14,255
9/30/99 $14,185 $14,350
12/31/99 $14,168 $14,260
3/31/2000 $14,701 $14,738
6/30/2000 $14,913 $14,969
9/30/2000 $15,386 $15,381
12/31/2000 $16,189 $16,149
3/31/2001 $16,638 $16,555
6/30/2001 $16,669 $16,516
9/30/2001 $17,562 $17,420
12/31/2001 $17,393 $17,317
3/31/2002 $17,320 $17,207
6/30/2002 $18,123 $17,971
9/30/2002 $19,321 $19,169
12/31/2002 $19,453 $19,307
2/28/2003 $19,727 $19,570
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 8/18/94
Class III 11.43% 7.91% 8.28%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. Past performance is
not indicative of future performance. Information is unaudited.
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($)/
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 41.5%
CORPORATE DEBT -- 2.7%
2,500,000 Bank Austria AG, 144A, 7.25%, due 02/15/17 3,043,500
-------------
FOREIGN GOVERNMENT OBLIGATIONS -- 6.3%
24,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 7,114,337
-------------
U.S. GOVERNMENT -- 2.4%
1,075,300 U.S. Treasury Inflation Indexed Note, 4.25%, due
01/15/10 1,271,038
1,213,454 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09(b) 1,396,989
-------------
2,668,027
-------------
U.S. GOVERNMENT AGENCY -- 30.1%
10,000,000 Agency for International Development Floater (Support
of India), Variable Rate, 3 mo. LIBOR + .10%, 1.48%,
due 02/01/27 9,880,000
6,000,000 Agency for International Development Floater (Support
of Jamaica), Variable Rate, 6 mo. LIBOR + .30%,
1.64%, due 12/01/14 6,007,500
5,188,152 Agency for International Development Floater (Support
of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill
+ .75%, 1.95%, due 03/30/19 5,158,943
6,602,500 Agency for International Development Floater (Support
of Sri Lanka), Variable Rate, 6 mo. LIBOR + .20%,
1.54%, due 06/15/12 6,585,994
6,600,003 Agency for International Development Floater (Support
of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill
x 115%, 2.60%, due 01/01/12 6,517,502
-------------
34,149,939
-------------
TOTAL DEBT OBLIGATIONS (COST $44,578,050) 46,975,803
-------------
MUTUAL FUNDS -- 51.0%
24,511 GMO Alpha LIBOR Fund 581,397
2,286,601 GMO Short-Duration Collateral Fund 57,187,888
-------------
TOTAL MUTUAL FUNDS (COST $57,788,818) 57,769,285
-------------
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
PREFERRED STOCKS -- 5.6%
BANKING AND FINANCIAL SERVICES -- 5.6%
10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 6,276,150
-------------
TOTAL PREFERRED STOCKS (COST $6,824,587) 6,276,150
-------------
TOTAL INVESTMENTS -- 98.1%
(Cost $109,191,455) 111,021,238
Other Assets and Liabilities (net) -- 1.9% 2,201,673
-------------
TOTAL NET ASSETS -- 100.0% $ 113,222,911
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
144A - Securities exempt from registration under rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional investors.
Variable rates - The rates shown on variable rate notes are the current
interest rates at February 28, 2003, which are subject to change based on the
terms of the security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
2 See accompanying notes to the financial statements.
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $109,191,455) (Note 1) $111,021,238
Cash 879,358
Receivable for investments sold 22,509,951
Receivable for Fund shares sold 125,000
Interest receivable 350,451
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 89,561
Net receivable for open swap contracts (Notes 1 and 6) 35,397
Receivable for expenses reimbursed by Manager (Note 2) 2,800
------------
Total assets 135,013,756
------------
LIABILITIES:
Payable for investments purchased 20,000,000
Payable for Fund shares repurchased 1,741,867
Payable to affiliate for (Note 2):
Management fee 8,518
Shareholder service fee 12,778
Accrued expenses 27,682
------------
Total liabilities 21,790,845
------------
NET ASSETS $113,222,911
============
NET ASSETS CONSIST OF:
Paid-in capital $107,597,330
Accumulated undistributed net investment income 325,715
Accumulated net realized gain 3,093,452
Net unrealized appreciation 2,206,414
------------
$113,222,911
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $113,222,911
============
SHARES OUTSTANDING:
Class III 11,233,425
============
NET ASSET VALUE PER SHARE:
Class III $ 10.08
============
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Interest $ 2,699,728
Dividends 599,899
-----------
Total income 3,299,627
-----------
EXPENSES:
Management fee (Note 2) 116,826
Audit fees 25,957
Custodian and transfer agent fees 21,793
Legal fees 8,330
Registration fees 3,870
Trustees fees and related expenses (Note 2) 3,518
Miscellaneous 2,565
Fees reimbursed by Manager (Note 2) (60,331)
-----------
122,528
Shareholder service fee (Note 2) - Class III 175,240
-----------
Net expenses 297,768
-----------
Net investment income 3,001,859
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (492,656)
Realized gains distributions from investment company
shares 53,332
Closed futures contracts 2,206,273
Closed swap contracts 6,365,796
-----------
Net realized gain 8,132,745
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 2,229,955
Open futures contracts 131,334
Open swap contracts (1,297,073)
-----------
Net unrealized gain 1,064,216
-----------
Net realized and unrealized gain 9,196,961
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,198,820
===========
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,001,859 $ 7,133,724
Net realized gain 8,132,745 5,373,329
Change in net unrealized appreciation (depreciation) 1,064,216 (1,886,101)
------------ ------------
Net increase in net assets from operations 12,198,820 10,620,952
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (3,105,892) (8,152,095)
------------ ------------
Total distributions from net investment income (3,105,892) (8,152,095)
------------ ------------
Net realized gains
Class III (4,216,075) (6,876,138)
------------ ------------
Total distributions from net realized gains (4,216,075) (6,876,138)
------------ ------------
(7,321,967) (15,028,233)
------------ ------------
Net share transactions (Note 5):
Class III (46,654,360) (11,126,261)
------------ ------------
Decrease in net assets resulting from net share
transactions (46,654,360) (11,126,261)
------------ ------------
Total decrease in net assets (41,777,507) (15,533,542)
NET ASSETS:
Beginning of period 155,000,418 170,533,960
------------ ------------
End of period (including accumulated undistributed
net investment income of $325,715 and $409,323,
respectively) $113,222,911 $155,000,418
============ ============
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2003 2002 2001(C) 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.68 $ 9.98 $ 9.23 $ 9.65 $ 10.26
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(d) 0.25+ 0.43+ 0.61+ 0.60 0.68
Net realized and unrealized gain
(loss) 0.83 0.20 0.72 (0.42) (0.15)
-------- -------- -------- -------- --------
Total from investment operations 1.08 0.63 1.33 0.18 0.53
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.27) (0.50) (0.58) (0.58) (0.68)
From net realized gains (0.41) (0.43) -- (0.02) (0.46)
-------- -------- -------- -------- --------
Total distributions (0.68) (0.93) (0.58) (0.60) (1.14)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.08 $ 9.68 $ 9.98 $ 9.23 $ 9.65
======== ======== ======== ======== ========
TOTAL RETURN(a) 11.43% 6.62% 14.91% 2.03% 5.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $113,223 $155,000 $170,534 $164,457 $175,071
Net operating expenses to average
daily net assets 0.25% 0.25% 0.25% 0.25% 0.25%
Interest expense to average daily net
assets -- -- 0.07% 0.19% 0.02%
Total net expenses to average daily
net assets(e) 0.25% 0.25% 0.32%(b) 0.44%(b) 0.27%(b)
Net investment income to average
daily net assets(d) 2.57% 4.35% 6.41% 5.85% 6.21%
Portfolio turnover rate 71% 19% 65% 20% 17%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.05% 0.05% 0.05% 0.05% 0.19%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Interest expense incurred as a result of entering into reverse
repurchase agreements is included in the Fund's net expenses. Income
earned on investing proceeds from reverse repurchase agreements is
included in interest income.
(c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
premium and discount on debt securities. The effect of this change for
the year ended February 28, 2001 was to increase net investment income
per share by $0.001, decrease net realized and unrealized gains and
losses per share by $0.001 and increase the ratio of net investment
income to average net assets from 6.40% to 6.41%. Per share data and
ratios/suppplemental data for periods prior to March 1, 2000 have not
been restated to reflect this change.
(d) Net investment income is affected by timing of the declaration of
dividends by other GMO Funds in which the Fund invests.
(e) Net expenses exclude expenses incurred indirectly through investment in
other GMO Funds in which the Fund invests.
+ Computed using average shares outstanding throughout the period.
6 See accompanying notes to the financial statements.
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in U.S. investment
grade securities. The Fund's benchmark is the Lehman Brothers U.S.
Government Bond Index.
At February 28, 2003, 0.5% of the Fund was invested in the GMO Alpha LIBOR
Fund and 50.5% of the Fund was invested in the GMO Short-Duration
Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the
GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not
publicly available for direct purchase. The financial statements of the
GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund should be
read in conjunction with the Fund's financial statements.
The Fund invested a substantial portion of its assets in GMO Alpha LIBOR
Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In
November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds")
defaulted amid allegations of fraud and significant violations of the
bonds' indentures. Currently, no market exists for the NPF bonds, and they
are being valued at fair value by the trustees of GMO Trust or persons
acting at their direction. The devaluation of the NPF bonds had a negative
impact on the Fund's net asset value per share.
In late November 2002, Alpha LIBOR Fund undertook a reorganization
transaction with a new series of GMO Trust, GMO Short-Duration Collateral
Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR
Fund was transferred to SDCF in exchange for SDCF shares. The
reorganization was treated as a sale of the Alpha LIBOR Fund shares for
financial reporting purposes and a distribution by Alpha LIBOR Fund for
tax purposes. Accordingly, for financial reporting purposes, the Fund
recognized a loss on the sale of the Alpha LIBOR shares of approximately
$173,371. In addition, the Fund recognized for tax, but not for financial
reporting purposes, ordinary income of $93,879 and long-term capital gains
of $16,744 from Alpha LIBOR Fund. $283,994 was added to the tax cost basis
of the Fund's holdings of Alpha LIBOR Fund.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The
7
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
closing values of such securities on their respective exchanges, and those
values are then translated into U.S. dollars at the current exchange rate.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates fair value. Shares of other
GMO Funds are valued at their net asset value as reported on each business
day. Securities for which quotations are not readily available or whose
values the Manager has determined to be unreliable are valued at fair
value as determined in good faith by the Trustees or other persons acting
at their direction. A security's value may be deemed unreliable if, for
example, the Manager becomes aware of information or events occurring
after the close of a foreign market that would materially affect that
security's value.
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund, or underlying funds in which it
invests, were valued on the basis of a price provided by a principal
market maker. The prices provided by the principal market makers may
differ from the value that would be realized if the securities were sold
and the differences could be material to the financial statements. At
February 28, 2003, the total value of these securities represented 26% of
net assets, all of which are U.S. Government backed securities.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures
8
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
tends to decrease the Fund's exposure to the underlying instrument or
hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. In addition, the Fund maintains cash or securities
in an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures or securities it owns
or in which it may invest. Writing put options tends to increase the
Fund's exposure to the underlying instrument. Writing call options tends
to decrease the Fund's exposure to the underlying instrument. When the
Fund writes a call or put option, an amount equal to the premium received
is recorded as a liability and subsequently marked to market to reflect
the current value of the option written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or closed are added to the proceeds or
offset against the amounts paid on the underlying future or security
transaction to determine the realized gain or loss. The Fund as a writer
of an option has no control over whether the underlying future or security
may be sold (call) or purchased (put) and as a result bears the market
risk of an unfavorable change in the price of the future or security
underlying the written option. There is the risk the Fund may not be able
to enter into a closing transaction because of an illiquid market. At
February 28, 2003, there were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future or security transaction to determine the realized gain
or loss. The risk associated with purchasing put and call options is
limited to the premium paid. At February 28, 2003, there were no open
purchased option contracts.
9
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the "lender") that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into interest rate, total return and forward swap spread lock
swap agreements to manage its exposure to interest rates. Interest rate
swap agreements involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments with respect to a
notional amount of principal. Total return swap agreements involve
commitments to pay interest in exchange for a market linked return, both
based on notional amounts. To the extent the total return of the security
or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Forward swap spread
lock swap agreements involve commitments to pay or receive a settlement
amount calculated as the difference between the swap spread and a fixed
spread,
10
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
multiplied by the notional amount times the duration of the swap rate. The
swap spread is the difference between the benchmark swap rate (market
rate) and the specific treasury rate. In connection with these agreements,
cash or securities may be set aside as collateral by the Fund's custodian
in accordance with the terms of the swap agreement. The Fund earns
interest on cash set aside as collateral. Swaps are marked to market daily
based upon quotations from market makers and the change in value, if any,
is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Net
payments of interest on interest rate swap agreements are included as part
of interest income. These financial instruments are not actively traded on
financial markets. The values assigned to these instruments are based upon
the best available information and because of the uncertainty of the
valuation, these values may differ significantly from the values that
would have been realized had a ready market for these instruments existed,
and the differences could be material. Entering into these agreements
involves, to varying degrees, elements of credit, legal, market and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will
be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be
unfavorable changes in interest rates. See Note 6 for a summary of open
swap agreements as of February 28, 2003.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements
11
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
involve the risk that the market value of the securities the Fund has sold
may decline below the price at which it is obligated to repurchase them
under the agreement. During the year ended February 28, 2003, the Fund did
not enter into any reverse repurchase agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, there were no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States of America.
During the years ended February 28, 2002 and February 28, 2003, the tax
basis of distributions paid from ordinary income were $12,483,179 and
$7,321,967, respectively. During the year ended February 28, 2002, the tax
basis of distributions paid from long-term capital gains were $2,545,054.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $1,156,560 and $2,435,138 of undistributed ordinary
income and undistributed long-term capital gains, respectively. The
temporary difference between book and tax basis distributable earnings are
primarily due to futures transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This
12
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
reclassification has no impact on net investment income, realized
gain/loss or the net asset value of the Fund and is primarily attributable
to amortization of premium and discount on debt securities and the GMO
Alpha LIBOR Fund transaction (See Note 1). The financial highlights
exclude these adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
$20,425 $263,570 $(283,995)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the amortization of
premiums and discounts. Dividend income is recorded on the ex-dividend
date. Non cash dividends, if any, are recorded at the fair market value of
the securities received. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
Interest income on U.S. Treasury inflation indexed securities is accrued
daily based upon an inflation adjusted principal. Additionally, any
increase in the principal or face amount of the securities adjusted for
inflation is recorded as interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .10% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal fees),
brokerage
13
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
commissions and other investment-related costs, hedging transaction fees,
extraordinary, non-recurring and certain other unusual expenses (including
taxes), securities lending fees and expenses, interest expense and
transfer taxes) exceed the management fee.
The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha
LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended
February 28, 2003, indirect operating expenses (excluding
investment-related expenses) were 0.001% of the Fund's average daily net
assets, and indirect investment-related expenses (including, but not
limited to, interest expense, foreign audit expense, and
investment-related legal expense) were 0.005% of the Fund's average daily
net assets.
As of February 28, 2003, a significant portion of the Fund's shares were
held by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $2,669. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 28, 2003, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<Table>
<Caption>
Purchases Sales
----------- -----------
U.S. Government securities $ 1,207,678 $45,436,516
Investments (non-U.S. Government securities) 81,378,377 79,639,625
</Table>
For the year ended February 28, 2003, the cost of purchases and proceeds
from sales of investments exclude the initial transfer of GMO Alpha LIBOR
Fund's investments in GMO Short-Duration Collateral Fund of $2,118,653.
(See Note 1)
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
$109,496,391 $2,440,702 $(915,855) $1,524,847
</Table>
14
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 49.5% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. One of the shareholders is another fund of GMO Trust.
Investment activities of these shareholders may have a material effect on
the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ---------- ------------
Shares sold 3,707,607 $ 36,658,798 1,276,400 $ 12,796,444
Shares issued to shareholders in reinvestment
of distributions 715,346 7,060,380 1,401,556 13,523,066
Shares repurchased (9,196,332) (90,373,538) (3,761,625) (37,445,771)
---------- ------------ ---------- ------------
Net decrease (4,773,379) $(46,654,360) (1,083,669) $(11,126,261)
========== ============ ========== ============
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FUTURES CONTRACTS
<Table>
<Caption>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Appreciation
--------- ---------------------------- --------------- ------------ --------------
Buys
67 U.S. Long Bond June 2003 $7,669,407 $113,154
43 U.S. Treasury Note 10 Yr. June 2003 4,961,125 27,909
--------
$141,063
========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments of margin requirements of the relevant broker or
exchange.
15
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation /
Amount Date Description (Depreciation)
--------------- ---------- -------------------------------------------------- --------------
INTEREST RATE SWAPS
9,400,000 USD 12/23/04 Agreement with UBS AG dated 12/19/02 to receive $ 63,590
the notional amount multiplied by 2.088% and to
pay the notional amount multiplied by the 3 month
Floating Rate LIBOR adjusted by a specific spread.
23,000,000 USD 12/23/07 Agreement with UBS AG dated 12/19/02 to pay the (569,811)
notional amount multiplied by 3.38% and to receive
the notional amount multiplied by the 3 month
Floating Rate LIBOR adjusted by a specific spread.
13,100,000 USD 12/23/12 Agreement with UBS AG dated 12/19/02 to receive 372,223
the notional amount multiplied by 4.425% and to
pay the notional amount multiplied by the 3 month
Floating Rate LIBOR adjusted by a specific spread.
7,033,560 USD 7/28/24 Agreement with JPMorgan Chase Bank dated 8/28/02 (692,299)
to pay $24,000,000 at expiration date and to
receive at expiration date $6,980,000 plus
interest based upon the 3 month Floating Rate
LIBOR (compounded quarterly) adjusted by a
specified spread.
</Table>
16
<Page>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation /
Amount Date Description (Depreciation)
--------------- ---------- -------------------------------------------------- --------------
TOTAL RETURN SWAPS
50,000,000 USD 7/1/03 Agreement with Lehman Brothers Special Financing $ 758,967
Inc. dated 6/29/01 to receive (pay) the notional
amount multiplied by the return on the Lehman
Brothers US Government Index and to pay the
notional amount multiplied by the 1 month LIBOR
adjusted by a specified spread.
10,000,000 USD 9/2/03 Agreement with Deutsche Bank AG dated 2/27/03 to --
receive (pay) the notional amount multiplied by
the return on the Lehman Brothers CMBS Index and
to pay the notional amount multiplied by the 1
month LIBOR adjusted by a specified spread.
20,000,000 USD 8/31/04 Agreement with JPMorgan Chase Bank dated 8/28/02 302,898
to receive (pay) the notional amount multiplied by
the return on the Lehman Brothers US Government
Index and to pay the notional amount multiplied by
the 1 month LIBOR adjusted by a specified spread.
---------
$ 235,568
=========
</Table>
17
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO DOMESTIC BOND FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Domestic Bond Fund (the "Fund")
(a series of GMO Trust) at February 28, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
18
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
19
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
20
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------------------ -------------- -------------- --------------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present), Chief
c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member,
40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer of the Officer since
Age: 47 Trust October 2002;
Vice President
from August
1998 -
October 2002.
Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Financial Financial
40 Rowes Wharf Officer and Officer Since
Boston, MA 02110 Treasurer of February 2000;
Age: 45 the Trust Treasurer
since February
1998.
Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust Treasurer of September Otterloo & Co. LLC.
40 Rowes Wharf the Trust 1998.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting
c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 since March
Age: 37 2001; May 1999
- August 1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP
Boston, MA 02110 Secretary (1991 - 1999).
Age: 58 since March
2001.
</Table>
21
<Page>
PRINCIPAL OFFICERS: (CONTINUED)
<Table>
<Caption>
Term of
Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------------------ -------------- -------------- --------------------------------------------------
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Laundering
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
22
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Emerging Country Debt Fund returned +15.9% for the
fiscal year ended February 28, 2003, as compared with +12.3% for the J.P. Morgan
Emerging Markets Bond Index Global (EMBIG).
The Fund outperformed the benchmark during the fiscal year by 3.6%. EMBIG
spreads over U.S Treasuries widened from 615 basis points to 659 basis points
during the 12-month period. The EMBIG return of +12.3% for the fiscal year was
driven by carry (the yield on the index averaged over 10%) and a 1.2% drop in
U.S. interest rates.
The biggest gainers of the fiscal year were Russia (+31.6%), Lebanon (+25.6%),
and South Africa (+22.6%). Russia benefited from strong oil and other commodity
prices and prudent macro-economic policies, including ongoing fiscal surpluses,
which have significantly eased its debt service burden. Lebanon rebounded from a
relatively low level after a French-led group of donor countries pledged support
in return for promising to tackle its huge fiscal and current account deficits.
South Africa took advantage of gold and other commodity prices, as well as
relative isolation from problems in Latin America and the Middle East. Countries
outside Latin America (48% of the index) outperformed Latins, +19.5% to +6.5%.
The worst performing countries for the year were Uruguay (-35.5%), Ivory Coast
(-23.7%), and Argentina (-12.2%). The Uruguayan economy suffered from the
problems in neighboring Argentina and Brazil, with which most of its trade is
conducted. It is now trying to convince private investors to participate in a
debt exchange to improve its amortization profile. Ivory Coast was making good
progress toward reforming its economy in cooperation with the IMF, and
restructuring its defaulted bonds with its private creditors when Muslim rebels
from the north took up arms against the southern Christian government, a
conflict that still has not been completely resolved. Argentina continues to
suffer from a lack of political leadership, although its economy seems to have
bottomed out. A new president is to be elected in April, and will be responsible
for dealing with holders of defaulted Argentine bonds. These three countries
were the only ones in the index to generate losses over the period, and Uruguay
and Ivory Coast are each less than 0.1% of the EMBIG.
Market selection added value, primarily from the Russia and Bulgaria overweights
and the underweight in Brazil. However, overweighting Ivory Coast and
underweighting Lebanon cost some alpha, though. Security selection added 290
basis points of positive alpha in total, mostly from positions in Russia, where
2030 Eurobonds outperformed and the first phase of the foreign trade debt
exchange was completed, and Bulgaria, where we overweighted the Brady bonds.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
Entering March 2003, the Fund has meaningful overweightings in the debt of
Algeria and Russia. The Fund has meaningful underweights in the debt of Mexico,
Malaysia, and Turkey. The Fund continues to emphasize less liquid debt and
obtain default protection when cheaply priced.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING COUNTRY DEBT FUND CLASS III SHARES AND THE
J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL
AS OF FEBRUARY 28, 2003
GMO EMERGING COUNTRY J.P. MORGAN EMERGING
DEBT FUND MARKETS BOND INDEX GLOBAL
4/19/94 $9,950 $10,000
6/30/94 $9,741 $10,196
9/30/94 $10,587 $11,490
12/31/94 $9,535 $10,501
3/31/95 $8,770 $9,388
6/30/95 $11,064 $11,396
9/30/95 $12,128 $12,130
12/31/95 $13,835 $13,272
3/31/96 $14,753 $13,881
6/30/96 $17,312 $15,204
9/30/96 $20,528 $16,783
12/31/96 $22,925 $17,947
3/31/97 $23,816 $18,168
6/30/97 $27,307 $19,759
9/30/97 $31,392 $21,044
12/31/97 $30,034 $20,091
3/31/98 $31,799 $21,192
6/30/98 $28,321 $20,078
9/30/98 $18,434 $15,941
12/31/98 $20,863 $17,772
3/31/99 $21,758 $18,701
6/30/99 $23,072 $19,549
9/30/99 $23,371 $19,840
12/31/99 $27,600 $22,069
3/31/2000 $31,572 $23,519
6/30/2000 $31,606 $23,603
9/30/2000 $34,152 $24,781
12/31/2000 $34,258 $25,248
3/31/2001 $35,379 $25,821
6/30/2001 $37,340 $26,717
9/30/2001 $35,993 $25,602
12/31/2001 $39,121 $25,590
3/31/2002 $42,731 $27,071
6/30/2002 $41,131 $25,824
9/30/2002 $41,330 $25,726
12/31/2002 $46,688 $28,947
2/28/2003 $49,156 $30,365
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING COUNTRY DEBT FUND CLASS III SHARES AND THE
J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL
AS OF FEBRUARY 28, 2003
J.P. MORGAN EMERGING
MARKETS BOND INDEX GLOBAL +*
4/19/94 $10,000
6/30/94 $9,906
9/30/94 $10,982
12/31/94 $10,062
3/31/95 $8,948
6/30/95 $10,991
9/30/95 $11,741
12/31/95 $12,800
3/31/96 $13,309
6/30/96 $14,781
9/30/96 $16,652
12/31/96 $17,831
3/31/97 $17,971
6/30/97 $19,663
9/30/97 $21,020
12/31/97 $20,153
3/31/98 $21,202
6/30/98 $19,936
9/30/98 $15,703
12/31/98 $17,261
3/31/99 $18,134
6/30/99 $19,086
9/30/99 $19,314
12/31/99 $21,744
3/31/2000 $23,173
6/30/2000 $23,255
9/30/2000 $24,416
12/31/2000 $24,877
3/31/2001 $25,441
6/30/2001 $26,324
9/30/2001 $25,226
12/31/2001 $25,214
3/31/2002 $26,673
6/30/2002 $25,444
9/30/2002 $25,347
12/31/2002 $28,521
2/28/2003 $29,918
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
1 YEAR 5 YEAR INCEPTION
4/19/94
Class III 0.1508 0.0979 19.67%
1/9/98
Class IV 15.38% 9.91% 10.85%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each perfomance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 25 bp on the redemption.
Transaction fees are retained by the Fund to cover trading costs. Performance
for Class IV shares may vary due to different shareholder serving fees. Past
performance is not indicative of future performance. Information is unaudited.
*J.P. Morgan EMBI Global + represents the J.P. EMBI prior to 8/95, J.P. Morgan
EMBI+ through 12/31/99 and the J.P. Morgan EMBI Global thereafter. The manager
changed the benchmark due to the belief that the EMBIG is more diversified and
representative of the universe of emerging country debt.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 75.8%
ARGENTINA -- 3.6%
USD 32,201 Argentina Corrientes Coupon Payment Certificate,
0.00%, due 12/28/49(a)(b) --
USD 500,000 Argentina Government International Bond, 11.75%,
due 04/07/09(a) 120,000
USD 15,000,000 Argentina Government International Bond, 7.13%,
due 04/06/04(a) 2,700,000
DEM 20,000,000 Argentina Government International Bond, 5.87%,
due 03/31/23(a) 4,794,312
ARS 113,873 Lecop Letras de Cancelacion Coupon Payment
Certificates, 0.00%, due 04/01/09(a)(b) 27,769
ARS 20,260,256 Prestamos Garantizados, Step Up, 2.25%, due
04/01/10(a) 804,332
ARS 6,400,000 Provincia Corrientes Series 1, PIK,
Variable Rate, 1 mo. Peso Deposit Rate,
3.21%, due 04/01/09(a) 239,360
ARS 2,500,000 Provincia Corrientes Series 2, PIK,
Variable Rate, 1 mo. Peso Deposit Rate, 3.21%,
due 04/01/09(a) 93,500
USD 32,000,000 Republic of Argentina Discount Bond Series L-GL,
Variable Rate, 6 mo. LIBOR + .81%, 2.94%,
due 03/31/23(a) 15,040,000
DEM 3,830,000 Republic of Argentina Discount Bond,
Variable Rate, 6 mo. DEM LIBOR + .81%, 3.82%,
due 03/31/23(a) 886,452
USD 15,637,900 Republic of Argentina Global Bond, 12.25%, due
06/19/18(a) 3,033,753
USD 26,545,000 Republic of Argentina Global Bond, 12.13%, due
02/25/19(a) 6,238,075
USD 8,000,000 Republic of Argentina Global Bond, 9.75%, due
09/19/27(a) 1,600,000
DEM 5,000,000 Republic of Argentina Global Bond, 9.00%, due
11/19/08(a)(b) 502,852
USD 4,040,000 Republic of Argentina Global Bond, 8.88%, due
03/01/29(a) 603,495
EUR 3,500,000 Republic of Argentina Global Bond, 8.00%, due
02/26/08(a) 829,906
USD 198,230 Republic of Argentina Global Bond, 7.00%, due
12/19/08(a) 44,106
USD 162,000 Republic of Argentina Global Bond, 6.00%, due
03/31/23(a) 70,470
ARS 27,436,201 Republic of Argentina INDER Certificates, 6.00%,
due 04/15/06(a)(b) 682,705
USD 2,000,000 Republic of Argentina Pro 4, 2.00%, due
12/28/10(a) 193,000
USD 64,401 Republic of Argentina Pro 4 Coupon Certificates,
0.00%, due 12/28/49(a)(b) --
EUR 2,500,000 Republic of Argentina Series EMTN,
Variable Rate, 3 mo. EURIBOR +5.10%, 8.57%,
due 12/22/04(a)(b) 464,801
USD 63,210,000 Republic of Argentina, 12% Capitalization Bond,
PIK, due 06/19/31(a) 12,009,900
-------------
50,978,788
-------------
</Table>
See accompanying notes to the financial statements.
1
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
BOSNIA & HERZEGOVINA -- 0.5%
DEM 25,244,000 Bosnia & Herzegovina Series A, Step Up, 3.00%, due
12/11/17 7,512,059
-------------
BRAZIL -- 17.0%
USD 307,853 Brazil Capitalization Bond Series L, PIK, 8.00%,
due 04/15/14 229,735
USD 125,000,000 Brazil DCB (Bearer),
Variable Rate, 6 mo. LIBOR + .88%, 2.63%,
due 04/15/12 77,500,000
USD 74,500,000 Brazil DCB (Registered) Series RG,
Variable Rate, 6 mo. LIBOR + .88%, 2.63%,
due 04/15/12 46,190,000
USD 54,525,000 Brazil Discount ZL Bond,
Variable Rate, 6 mo. LIBOR + .81%, 2.56%,
due 04/15/24 35,304,937
USD 52,320,000 Brazil FLIRB (Registered),
Variable Rate, Step Up, 2.56%, due 04/15/09 36,624,000
USD 16,387,154 Brazil MYDFA Trust Certificates Reg S,
Variable Rate, 6 mo. LIBOR + .81%, 2.69%,
due 09/15/07 12,065,042
USD 39,587,312 Brazil New Money Bond Series L,
Variable Rate, 6 mo. LIBOR + .88%, 2.63%,
due 04/15/09 28,997,706
USD 8,971,532 Brazil New Money Bond Series L,
Variable Rate, 6 mo. LIBOR + .88%, 2.63%,
due 04/15/09 6,571,647
USD 916,700 Brazilian Government International Bond, 6.00%,
due 09/15/13 568,354
USD 725,028 Brazilian Government International Bond, Odd Lot,
6.00%, due 09/15/13 435,016
-------------
244,486,437
-------------
BULGARIA -- 2.8%
USD 5,000,000 Bulgaria Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 2.19%,
due 07/28/24 4,862,500
USD 42,000,000 Bulgaria Discount Bond, Interest Strips, Series
62, 0.00%, due 01/28/10 10,164,420
USD 42,000,000 Bulgaria Discount Bond, Interest Strips, Series
63, 0.00%, due 01/28/17 7,525,560
USD 15,822,000 Republic of Bulgaria Reg S, 8.25%, due 01/15/15 18,037,080
-------------
40,589,560
-------------
COLOMBIA -- 1.2%
USD 2,000,000 Republic of Colombia, 11.85%, due 03/09/28 1,560,000
GBP 6,825,000 Republic of Colombia, 9.75%, due 02/11/08 9,567,551
USD 8,000,000 Republic of Colombia, 8.70%, due 02/15/16 6,560,000
-------------
17,687,551
-------------
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
COSTA RICA -- 0.0%
USD 750,000 Central Bank of Costa Rica Principal Bond Series
A, 6.25%, due 05/21/10 770,625
-------------
DOMINICAN REPUBLIC -- 2.6%
USD 39,807,000 Dominican Republic Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 2.31%,
due 08/30/24 31,049,460
USD 6,000,000 Dominican Republic International Bond 144A, 9.04%,
due 01/23/13 5,745,000
-------------
36,794,460
-------------
ECUADOR -- 0.8%
USD 2,900,628 Republic of Ecuador PDI (Global Bearer
Capitalization Bond), PIK, Variable Rate, 6 mo.
LIBOR + .81%, 2.19%, due 02/27/15(b) 1,071,621
USD 20,587,000 Republic of Ecuador Reg S,
Variable Rate, Step Up, 6.00%, due 08/15/30 9,984,695
-------------
11,056,316
-------------
EGYPT -- 0.2%
USD 2,000,000 Arab Republic of Egypt, 8.75%, due 07/11/11(c) 2,260,000
-------------
EL SALVADOR -- 0.4%
USD 6,000,000 Republic Of El Salvador 144A, 8.50%, due 07/25/11 6,540,000
-------------
IVORY COAST -- 1.4%
FRF 37,500,000 Ivory Coast Discount Bond,
Variable Rate, Step Up, 3.50%, due 03/31/28(a) 1,848,482
USD 79,600,000 Ivory Coast FLIRB Series YR20,
Variable Rate, Step Up, 2.00%, due 03/29/18(a) 11,343,000
FRF 34,905,000 Ivory Coast FLIRB,
Variable Rate, Step Up, 2.00%, due 03/29/18(a) 839,924
FRF 256,889,500 Ivory Coast PDI,
Variable Rate, Step Up, 1.90%, due 03/29/18(a) 6,647,980
-------------
20,679,386
-------------
JAMAICA -- 0.1%
USD 2,000,000 Jamaica Government International Bond, 10.63%, due
06/20/17 1,800,000
-------------
</Table>
See accompanying notes to the financial statements.
3
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
JORDAN -- 1.0%
USD 2,131,578 Hashemite Kingdom of Jordan IAB,
Variable Rate, 6 mo. LIBOR + .81%, 2.25%,
due 12/23/05 2,078,289
USD 14,750,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 6.00%, due 12/23/23 12,390,000
-------------
14,468,289
-------------
KAZAKHSTAN -- 0.3%
USD 4,000,000 Kaztransoil Reg S, 8.50%, due 07/06/06 4,140,000
-------------
MACEDONIA -- 1.0%
USD 19,044,838 Macedonia Capitalization Bond, PIK,
Variable Rate, 6 mo. LIBOR + .81%, 2.21%,
due 07/13/12 14,093,180
-------------
MALAYSIA -- 0.6%
USD 8,000,000 Malaysia Global Bond, 7.50%, due 07/15/11 9,342,173
-------------
MEXICO -- 1.9%
USD 18,500,000 Mexico Global Bond Series MTN, 8.30%, due 08/15/31 19,628,500
ITL 7,000,000,000 Mexico Government International Bond, 11.00%, due
05/08/17 4,997,211
DEM 5,000,000 Mexico Par Bond, 5.01%, due 12/31/19 2,562,477
USD 159,000 Mexico Par Bond, Series B Odd Lot, 6.25%, due
12/31/19(b) 150,454
-------------
27,338,642
-------------
NIGERIA -- 1.4%
USD 27,000,000 Central Bank of Nigeria Par Bond Series WW, Step
Up, 6.25%, due 11/15/20 20,520,000
-------------
PANAMA -- 2.2%
USD 15,000,000 Republic of Panama, 9.63%, due 02/08/11 16,275,000
USD 5,000,000 Republic of Panama, 9.38%, due 07/23/12 5,262,500
USD 4,000,000 Republic of Panama, 9.38%, due 01/16/23 4,080,000
USD 8,000,000 Republic of Panama Par Bond,
Variable Rate, Step Up, 4.75%, due 07/17/26 6,080,000
-------------
31,697,500
-------------
PERU -- 1.8%
USD 7,236,000 Peru Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 2.56%,
due 03/07/27 5,933,520
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
PERU -- CONTINUED
USD 12,925,000 Peru FLIRB,
Variable Rate, Step Up, 4.00%, due 03/07/17 9,774,532
USD 19,000,000 Peru Par Bond,
Variable Rate, Step Up, 3.00%, due 03/07/27 9,690,000
-------------
25,398,052
-------------
PHILIPPINES -- 4.0%
USD 4,310,000 Central Bank of the Philippines Par Bond Series B,
Variable Rate, Step Up, 6.50%, due 12/01/17 4,051,400
USD 48,567,000 Central Bank of the Philippines Series A, 8.60%,
due 06/15/27 40,310,610
EUR 12,000,000 Philippine Government International Bond 144A,
9.13%, due 02/22/10 12,836,598
-------------
57,198,608
-------------
POLAND -- 0.5%
USD 6,000,000 Poland Government International Bond, 6.25%, due
07/03/12 6,765,000
-------------
QATAR -- 0.7%
USD 7,500,000 Qatar Government International Bond, 9.75%, due
06/15/30 9,562,500
-------------
RUSSIA -- 11.6%
USD 10,000,000 OAO Gazprom 144A, 9.63%, due 03/01/13 10,262,500
RUB 82,710,346 Russia Federal Loan Bond Series 26003, 10.00%, due
03/15/05(b) 2,368,952
USD 179,694,799 Russia Federation Reg S,
Variable Rate, Step Up, 5.00%, due 03/31/30 153,639,053
-------------
166,270,505
-------------
SINGAPORE -- 4.4%
SGD 100,000,000 Singapore Government International Bond, 3.50%,
due 07/01/12(c) 63,580,957
-------------
SOUTH KOREA -- 0.5%
USD 6,000,000 Export Import Bank of Korea, 7.10%, due 03/15/07 6,776,458
-------------
TRINIDAD & TOBAGO -- 0.2%
USD 3,000,000 Republic of Trinidad & Tobago, 144A , 9.88%, due
10/01/09 3,600,000
-------------
TUNISIA -- 0.1%
JPY 200,000,000 Banque Centrale De Tunisie Series 6RG, 4.35%, due
08/15/17 1,700,148
-------------
</Table>
See accompanying notes to the financial statements.
5
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
TURKEY -- 0.3%
USD 4,000,000 Republic of Turkey Global Bond, 12.00%, due
12/15/08 4,322,292
-------------
UKRAINE -- 0.1%
USD 1,680,000 Ukraine Government International Bond Series Reg$,
11.00%, due 03/15/07 1,824,900
-------------
UNITED STATES -- 5.6%
ASSET-BACKED SECURITIES -- 4.4%
USD 30,518,803 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due
06/15/10 21,057,974
USD 4,228,400 California Infrastructure PG&E Series 97-1 Class
A7, 6.42%, due 09/25/08 4,599,376
USD 14,173,071 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due
01/15/10 9,212,496
USD 4,800,000 Meridian Funding Co LLC, MBIA, 144A,
Variable Rate, 1 mo. LIBOR + .38%, 1.71%,
due 06/22/11 4,758,000
USD 2,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2,
144A, Step Up, 6.33%, due 09/15/09 2,060,880
USD 27,525,872 SHYPPCO Finance Company Series 1I Class A-2B,
6.64%, due 06/15/10 21,470,180
-------------
63,158,906
-------------
CORPORATE DEBT -- 0.9%
USD 12,000,000 Pemex Master Trust, 8.63%, due 02/01/22 12,438,000
-------------
U.S. GOVERNMENT -- 0.3%
USD 4,479,320 U.S. Treasury Inflation Indexed Note, 3.63%, due
01/15/08(d) 5,060,232
-------------
TOTAL UNITED STATES 80,657,138
-------------
URUGUAY -- 0.2%
USD 5,250,000 Banco Central Del Uruguay Series B, 6.75%, due
03/21/21 3,570,000
-------------
VENEZUELA -- 5.2%
DEM 610,000 Banco Central Venezuela New Money Bond Series B,
Variable Rate, DEM 6 mo. LIBOR + .88%, 3.81%,
due 12/18/05 188,666
USD 1,031,431 Republic of Venezuela DCB DL Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 2.31%,
due 12/18/07(b) 661,405
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
VENEZUELA -- CONTINUED
USD 8,608,696 Republic of Venezuela DCB IL,
Variable Rate, 6 mo. LIBOR + .88%, 2.31%,
due 2/18/08 5,606,413
USD 19,107,000 Republic of Venezuela Discount Bond Series W-A,
Variable Rate, 6 mo. LIBOR + .81%, 2.69%,
due 03/31/20 13,279,365
USD 5,225,000 Republic of Venezuela Discount Bond Series W-B,
Variable Rate, 6 mo. LIBOR + .81%, 2.31%,
due 03/31/20 3,631,375
DEM 34,500,000 Republic Of Venezuela Discount Bond,
Variable Rate, DEM 6mo. LIBOR + .81%, 4.00%,
due 03/31/20 12,215,164
USD 109,286 Republic of Venezuela FLIRB Series A Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 2.69%,
due 03/31/07(b) 72,402
USD 2,142,800 Republic of Venezuela FLIRB Series A,
Variable Rate, 6 mo. LIBOR + .88%, 2.69%,
due 03/31/07 1,526,745
USD 313,714 Republic of Venezuela FLIRB Series B Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 2.69%,
due 03/31/07(b) 207,835
CHF 17,142,783 Republic of Venezuela FLIRB Series Sfr,
Variable Rate, CHF 6 mo. LIBOR + .88%, 1.69%,
due 03/31/07 7,853,948
USD 4,383,725 Republic of Venezuela New Money Bond Series A Odd
Lot,
Variable Rate, 6 mo. LIBOR + 1%, 2.44%,
due 12/18/05(b) 2,898,737
USD 3,070,588 Republic of Venezuela New Money Bond Series A,
Variable Rate, 6 mo. LIBOR + 1%, 2.44%,
due 12/18/05 2,183,955
USD 919,061 Republic of Venezuela New Money Bond Series B Odd
Lot,
Variable Rate, 6 mo. LIBOR + .88%, 3.81%,
due 12/18/05(b) 607,730
USD 352,941 Republic of Venezuela New Money Bond Series B,
Variable Rate, 6 mo. LIBOR + .88%, 2.31%,
due 12/18/05 251,030
DEM 24,500,000 Republic of Venezuela Par Bond , 6.66%, due
03/31/20 9,619,623
FRF 54,175,000 Republic of Venezuela Par Bond Series WOIL, 7.71%,
due 03/31/20 6,965,400
DEM 20,490,000 Republic of Venezuela, Step Down, 7.38%, due
10/29/08 6,661,945
-------------
74,431,738
-------------
VIETNAM -- 1.5%
USD 19,750,000 Vietnam Par Bond,
Variable Rate, Step Up, 3.50%, due 03/12/28 12,689,375
USD 4,000,000 Vietnam Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 2.63%,
due 03/13/28 3,160,000
USD 6,000,000 Vietnam PDI,
Variable Rate, Step Up, 4.00%, due 03/14/16 5,160,000
-------------
21,009,375
-------------
</Table>
See accompanying notes to the financial statements.
7
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
YUGOSLAVIA -- 0.1%
USD 4,000,000 Second Emerging Markets Series EMTN, 0.00%, due
07/15/06 1,110,001
-------------
TOTAL DEBT OBLIGATIONS (COST $1,114,931,988) 1,090,532,638
-------------
LOAN ASSIGNMENTS -- 8.1%
ALGERIA -- 2.9%
JPY 304,880,052 Algeria Tranche 1 Loan Agreement, JPY LIBOR +
.8125%, (0.9375%), due 09/04/06 2,424,083
JPY 4,547,020,950 Algeria Tranche 3 Loan Agreement, JPY LIBOR +
.8125%, (0.9375%), due 03/04/10 34,230,058
JPY 703,125,000 Algeria Tranche 3 Loan Agreement, JPY Long Term
Prime +.8125% (2.3875%), due 03/04/10 5,293,138
-------------
41,947,279
-------------
CAMEROON -- 0.1%
NLG 23,084,718 Cameroon Loan Agreement, (No Tranche specified,
dated January 31, 1981)* 1,354,845
FRF 18,396,841 Republic of Cameroon Tranche B, (dated January 30,
1979)* 362,733
-------------
1,717,578
-------------
CONGO REPUBLIC (BRAZZAVILLE) -- 0.3%
FRF 102,097,963 Republic of Congo Loan Agreement* 2,013,080
USD 8,496,466 Republic of Congo Loan Agreement* 977,094
EUR 14,565,609 Republic of Congo Loan Agreement* 1,883,858
-------------
4,874,032
-------------
INDONESIA -- 1.8%
JPY 260,280,000 Republic of Indonesia Loan Agreement, dated
January 1, 1994 (1.00417%), due 03/28/13 1,453,033
USD 5,302,000 Republic of Indonesia Loan Agreement, dated
January 1, 1994 (3.3125%), due 03/28/13 3,181,200
USD 3,900,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625% (2.75%), due 12/14/19 1,794,000
USD 3,900,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625%, (2.6875%), due 12/14/19 1,794,000
USD 5,200,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625%, (2.8125%), due 12/14/19 2,392,000
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
INDONESIA -- CONTINUED
USD 3,800,000 Republic of Indonesia Loan Agreement, dated March
25, 1997 LIBOR + .625%, (2.0625%), due 01/25/06 2,014,000
USD 2,850,000 Republic of Indonesia Loan Agreement, dated March
25, 1997 LIBOR + .625%, (2.0625%), due 01/25/06 1,510,500
USD 2,850,000 Republic of Indonesia Loan Agreement, dated March
25, 1997 LIBOR + .625%, (2.0625%), due 01/25/06 1,510,500
USD 6,090,000 Republic of Indonesia Loan Agreement, dated May
21, 1996 LIBOR + .625%, (2.75%), due 03/21/05 3,105,900
USD 8,120,000 Republic of Indonesia Loan Agreement, dated May
21, 1996 LIBOR + .625%, (2.8125%), due 03/21/05 4,141,200
USD 6,090,000 Republic of Indonesia Loan Agreement, dated May
21, 1996 LIBOR + .625%, (3.0625%), due 03/21/05 3,105,900
-------------
26,002,233
-------------
JAMAICA -- 0.0%
USD 135,225 Jamaica Refinancing Agreement Tranche B, LIBOR +
.8125%, (2.1875%), due 11/15/04 121,703
-------------
MOROCCO -- 0.6%
USD 9,000,000 Morocco Restructuring and Consolidating Agreement
Tranche A, 6 mo. LIBOR + .8125% (2.1875), due
01/01/09 8,325,000
-------------
RUSSIA -- 2.3%
DEM 15,000,000 International Bank for Economic Cooperation Loan
Agreement* 7,821,756
EUR 5,000,000 International Bank for Economic Cooperation Loan
Agreement* 5,099,341
USD 5,000,000 International Investment Bank Loan Agreement* 4,362,500
USD 19,002,375 Russia Foreign Trade Obligations*(b) 15,049,881
-------------
32,333,478
-------------
YUGOSLAVIA -- 0.1%
USD 1,400,368 Yugoslavia New Financing Agreement Tranche A* 658,173
USD 1,499,572 Yugoslavia New Financing Agreement Tranche C* 704,799
-------------
1,362,972
-------------
TOTAL LOAN ASSIGNMENTS (COST $88,432,789) 116,684,275
-------------
</Table>
See accompanying notes to the financial statements.
9
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
LOAN PARTICIPATIONS -- 7.1%
ALGERIA -- 0.7%
JPY 187,500,000 Algeria Tranche 3 Loan Agreement, JPY Long Term
Prime +.8125% (2.3875%), (Participation with
Salomon),
due 03/04/10 1,411,504
JPY 1,261,184,212 Algeria Tranche S1, JPY Long Term Prime + .8125%,
(3.0125%), (Participation with Merrill Lynch),
due 03/04/10 9,067,512
-------------
10,479,016
-------------
CAMEROON -- 0.0%
NLG 4,968,184 Cameroon Loan Agreement, (No Tranche specified,
dated January 31, 1981), (Participation with
Salomon)* 291,583
-------------
INDONESIA -- 0.3%
USD 1,431,316 Republic of Indonesia Loan Agreement, 6 mo. LIBOR
+.70%, (2.3875%), (Participation with Deutsche
Bank), due 12/14/19 1,245,244
USD 480,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625% (2.75%), (Participation
with Salomon), due 12/14/19 220,800
USD 480,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625%, (2.6875%),
(Participation with Salomon), due 12/14/19 220,800
USD 640,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625%, (2.8125%),
(Participation with Salomon), due 12/14/19 294,400
USD 558,000 Republic of Indonesia Loan Agreement, dated March
25, 1997 LIBOR + .625%, (2.0625%),
(Participation with Salomon), due 01/25/06 295,740
USD 558,000 Republic of Indonesia Loan Agreement, dated March
25, 1997 LIBOR + .625%, (2.0625%),
(Participation with Salomon), due 01/25/06 295,740
USD 744,000 Republic of Indonesia Loan Agreement, dated March
25, 1997 LIBOR + .625%, (2.0625%),
(Participation with Salomon), due 01/25/06 394,320
USD 570,000 Republic of Indonesia Loan Agreement, dated May
21, 1996 LIBOR + .625%, (2.75%), (Participation
with Salomon), due 03/21/05 290,700
USD 760,000 Republic of Indonesia Loan Agreement, dated May
21, 1996 LIBOR + .625%, (2.8125%),
(Participation with Salomon), due 03/21/05 387,600
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
INDONESIA -- CONTINUED
USD 570,000 Republic of Indonesia Loan Agreement, dated May
21, 1996 LIBOR + .625%, (3.0625%),
(Participation with Salomon), due 03/21/05 290,700
-------------
3,936,044
-------------
JAMAICA -- 0.1%
USD 218,750 Jamaica Refinancing Agreement Tranche B, LIBOR +
.8125%, (2.1875%), (Participation with JP Morgan
Chase), due 11/15/04 196,875
USD 1,093,750 Jamaica Refinancing Agreement Tranche B, LIBOR +
.8125%, (2.1875%), (Participation with Salomon),
due 11/15/04 984,375
-------------
1,181,250
-------------
RUSSIA -- 5.7%
DEM 3,500,000 International Bank for Economic Cooperation Loan
Agreement, (Participation with Salomon)* 1,825,076
USD 2,000,000 International Bank for Economic Cooperation Loan
Agreement, (Participation with UBS)* 1,892,500
JPY 900,000,000 International Investment Bank Loan Agreement,
(Participation with Bank of America)* 6,765,701
DEM 7,500,000 International Investment Bank Loan Agreement,
(Participation with Mizuho)* 3,688,727
EUR 11,537,362 Russia Paris Club Debt,
Variable Rate, (6.45%), (Participation with
Deutsche Bank),
due 08/20/20 8,729,348
EUR 16,801,518 Russia Paris Club Debt,
Variable Rate, (6.45%), (Participation with
Deutsche Bank),
due 08/20/20 13,009,273
EUR 11,861,993 Russia Paris Club Debt,
Variable Rate, (6.45%), (Participation with
Deutsche Bank),
due 08/20/20 8,974,969
EUR 48,589,983 Russia Paris Club Debt,
Variable Rate, (6.70%), (Participation with
Deutsche Bank),
due 08/20/20 37,748,500
-------------
82,634,094
-------------
SERBIA -- 0.2%
USD 3,000,000 Serbia New Financing Agreement (Participation with
JP Morgan Chase)* 1,530,000
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($)/
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
SERBIA -- CONTINUED
USD 3,000,000 Serbia Trade & Deposit Facility Agreement
(Participation with JP Morgan Chase)* 780,000
-------------
2,310,000
-------------
YUGOSLAVIA -- 0.1%
USD 2,100,416 Yugoslavia New Financing Agreement Tranche B,
(Participation with JP Morgan Chase)* 987,195
USD 352,445 Yugoslavia New Financing Agreement Tranche C,
(Participation with JP Morgan Chase)* 165,649
-------------
1,152,844
-------------
TOTAL LOAN PARTICIPATIONS (COST $73,668,829) 101,984,831
-------------
PROMISSORY NOTES -- 0.1%
NIGERIA -- 0.1%
USD 3,000,000 Central Bank of Nigeria Promissory Notes Series
RC, 5.09%, due 1/5/10* 990,000
-------------
TOTAL PROMISSORY NOTES (COST $1,466,442) 990,000
-------------
MUTUAL FUNDS -- 2.7%
353,939 GMO Alpha LIBOR Fund 8,395,431
1,222,269 GMO Short-Duration Collateral Fund 30,568,955
-------------
TOTAL MUTUAL FUNDS (COST $39,675,604) 38,964,386
-------------
<Caption>
PRINCIPAL
AMOUNT
--------------
CALL OPTIONS PURCHASED -- 0.5%
OPTIONS ON BONDS -- 0.5%
USD 30,000,000 Mexico Global Bond, 11.50%, due 5/15/26, Expires
03/10/03, Strike 134.80 834,207
USD 10,000,000 Mexico Global Bond, 11.50%, due 5/15/26, Expires
3/10/03, Strike 134.80 282,784
USD 20,000,000 Mexico Global Bond, 11.50%, due 5/15/26, Expires
3/12/03, Strike 134.40 611,094
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
OPTIONS ON BONDS -- CONTINUED
USD 10,000,000 Qatar Government International Bond, 9.758%, due
6/15/30, Expires 05/12/03, Strike 122 52,351
USD 60,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires
3/05/03, Strike 82.25 1,993,566
USD 30,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires
3/10/03, Strike 81.8750 1,101,180
USD 20,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires
3/10/03, Strike 82.3750 637,934
USD 20,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires
3/17/03, Strike 83.6250 405,446
USD 20,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires
3/21/03, Strike 84.5625 289,922
USD 25,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires
3/26/03, Strike 85.750 218,857
USD 25,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires
3/27/03, Strike 85.875 173,743
-------------
6,601,084
-------------
TOTAL CALL OPTIONS PURCHASED (COST $2,964,500) 6,601,084
-------------
PUT OPTIONS PURCHASED -- 0.5%
OPTIONS ON INTEREST RATE SWAPS -- 0.5%
USD 50,000,000 KRW Swaption, Expires 06/01/05, Strike 7.5% 3,096,638
USD 75,000,000 KRW Swaption, Expires 06/07/05, Strike 7.42% 4,479,646
-------------
7,576,284
-------------
TOTAL PUT OPTIONS PURCHASED (COST $4,025,000) 7,576,284
-------------
<Caption>
SHARES
--------------
RIGHTS AND WARRANTS -- 0.1%
MEXICO -- 0.1%
33,077,000 Mexico Par Bond Series B Warrants, Expires
6/30/04** 330,770
33,077,000 Mexico Par Bond Series C Warrants, Expires
6/30/05** 66,154
33,077,000 Mexico Par Bond Series D Warrants, Expires
6/30/06** 19,846
29,000 United Mexican States Recovery Warrants Odd Lot,
Expires 6/30/03** 186
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
MEXICO -- CONTINUED
54,324,000 United Mexican States Warrants, Expires 12/31/09** 108,648
192,813,000 United Mexican States Warrants, Expires 6/30/03** 1,234,003
-------------
1,759,607
-------------
NIGERIA -- 0.0%
25,000 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
-------------
URUGUAY -- 0.0%
4,000,000 Banco Central Del Uruguay Warrants, Expires
1/2/21**(b) --
-------------
VENEZUELA -- 0.0%
195,865 Republic of Venezuela Bond Warrants, Expires
4/18/20** --
277,160 Republic of Venezuela Recovery Warrants, Expires
4/15/20** --
-------------
--
-------------
TOTAL RIGHTS AND WARRANTS (COST $20,880) 1,759,607
-------------
SHORT-TERM INVESTMENTS -- 4.8%
CASH EQUIVALENTS -- 4.8%
USD 69,497,181 Merrimac Cash Fund 69,497,181
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $69,497,181) 69,497,181
-------------
TOTAL INVESTMENTS -- 99.7%
(Cost $1,394,683,213) 1,434,590,286
Other Assets and Liabilities (net) -- 0.3% 3,663,735
-------------
TOTAL NET ASSETS -- 100.0% $1,438,254,021
=============
</Table>
See accompanying notes to the financial statements.
14
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of
the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional investors.
DCB - Debt Conversion Bond
EMTN - Euromarket Medium Term Note
FLIRB - Front Loaded Interest Reduction Bond
IAB - Interest Arrears Bond
MBIA - Insured as to the payment of principal and interest by
MBIA Insurance Corp
MYDFA - Multi-Year Deposit Facility Agreement
PDI - Past Due Interest
PIK - Payment In Kind
Variable and step up rates - The rates shown on variable and
step up rate notes are the current interest rates at February
28, 2003, which are subject to change based on the terms of
the security, including varying reset dates.
CURRENCY ABBREVIATIONS:
</Table>
<Table>
ARS - Argentine Peso
CHF - Swiss Franc
DEM - German Mark
EUR - Euro
FRF - French Franc
GBP - British Pound
HKD - Hong Kong Dollar
ITL - Italian Lira
JPY - Japanese Yen
KRW - South Korean Won
NLG - Netherlands Guilder
RUB - Russian Ruble
SGD - Singapore Dollar
USD - United States Dollar
</Table>
(a) Security is in default.
(b) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(c) All or a portion of this security has been segregated to cover
collateral requirements on reverse repurchase agreements (Note 6).
(d) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
* Non-performing. Borrower not currently paying interest.
** Non-income producing security.
See accompanying notes to the financial statements. 15
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $1,394,683,213) (Note 1) $1,434,590,286
Cash 7,258,774
Foreign currency, at value (cost $12,971,784) (Note 1) 12,953,807
Receivable for investments sold 9,708,807
Receivable for Fund shares sold 44,313,436
Interest receivable 19,885,379
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 680,177
Net receivable for open swap contracts (Notes 1 and 6) 17,308,163
--------------
Total assets 1,546,698,829
--------------
LIABILITIES:
Payable for investments purchased 42,783,764
Payable for Fund shares repurchased 265,551
Payable to affiliate for (Note 2):
Management fee 364,036
Shareholder service fee 133,065
Payable for open forward foreign currency contracts
(Notes 1 and 6) 299,449
Payable for variation margin on open futures contracts
(Notes 1 and 6) 358
Payable for reverse repurchase agreements (Notes 1 and 6) 64,319,904
Accrued expenses 278,681
--------------
Total liabilities 108,444,808
--------------
NET ASSETS $1,438,254,021
==============
NET ASSETS CONSIST OF:
Paid-in capital $1,371,717,462
Distributions in excess of net investment income (18,023,246)
Accumulated net realized gain 31,895,613
Net unrealized appreciation 52,664,192
--------------
$1,438,254,021
==============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $ 822,080,069
==============
Class IV shares $ 616,173,952
==============
SHARES OUTSTANDING:
Class III 86,402,970
==============
Class IV 64,746,490
==============
NET ASSET VALUE PER SHARE:
Class III $ 9.51
==============
Class IV $ 9.52
==============
</Table>
16 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Interest $125,565,864
Dividends from investment company shares 302,044
------------
Total income 125,867,908
------------
EXPENSES:
Management fee (Note 2) 4,047,684
Interest expense (Notes 1 and 6) 902,128
Custodian fees 628,875
Audit fees 95,450
Legal fees 47,655
Transfer agent fees 35,040
Trustees fees and related expenses (Note 2) 27,357
Registration fees 10,618
Miscellaneous 14,880
Fees reimbursed by Manager (Note 2) (60,430)
------------
5,749,257
Shareholder service fee (Note 2) - Class III 966,667
Shareholder service fee (Note 2) - Class IV 512,037
------------
Net expenses 7,227,961
------------
Net investment income 118,639,947
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 74,288,796
Realized gains distributions from investment company
shares 124,651
Closed futures contracts (307,892)
Closed swap contracts 1,990,648
Written options 911,250
Foreign currency, forward contracts and foreign
currency related transactions (21,365,668)
------------
Net realized gain 55,641,785
------------
Change in net unrealized appreciation (depreciation) on:
Investments 15,833,476
Open futures contracts 42,972
Open swap contracts 5,319,552
Written options (768,963)
Foreign currency, forward contracts and foreign
currency related transactions (3,910,299)
------------
Net unrealized gain 16,516,738
------------
Net realized and unrealized gain 72,158,523
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $190,798,470
============
</Table>
See accompanying notes to the financial statements. 17
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 118,639,947 $ 110,823,631
Net realized gain 55,641,785 49,361,236
Change in net unrealized appreciation (depreciation) 16,516,738 7,066,008
-------------- --------------
Net increase in net assets from operations 190,798,470 167,250,875
-------------- --------------
Distributions to shareholders from:
Net investment income
Class III (69,910,377) (58,047,624)
Class IV (55,714,018) (65,295,506)
-------------- --------------
Total distributions from net investment income (125,624,395) (123,343,130)
-------------- --------------
Net realized gains
Class III (12,966,279) --
Class IV (10,131,853) --
-------------- --------------
Total distributions from net realized gains (23,098,132) --
-------------- --------------
(148,722,527) (123,343,130)
-------------- --------------
Net share transactions (Note 5):
Class III 229,203,802 115,721,050
Class IV 106,900,799 (109,470,121)
-------------- --------------
Increase in net assets resulting from net share
transactions 336,104,601 6,250,929
-------------- --------------
Total increase in net assets 378,180,544 50,158,674
NET ASSETS:
Beginning of period 1,060,073,477 1,009,914,803
-------------- --------------
End of period (including distributions in excess of
net investment income of $18,023,246 and
$11,215,278, respectively) $1,438,254,021 $1,060,073,477
============== ==============
</Table>
18 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------------
2003 2002 2001(B) 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.30 $ 8.96 $ 8.74 $ 6.89 $ 11.64
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.94+ 1.01+ 1.13+ 0.84+ 0.92+
Net realized and unrealized gain
(loss) 0.45 0.52 0.41 2.20 (4.41)
-------- -------- -------- -------- --------
Total from investment operations 1.39 1.53 1.54 3.04 (3.49)
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.99) (1.19) (1.32) (1.07) (0.23)
From net realized gains (0.19) -- -- (0.12) (1.03)
-------- -------- -------- -------- --------
Total distributions (1.18) (1.19) (1.32) (1.19) (1.26)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.51 $ 9.30 $ 8.96 $ 8.74 $ 6.89
======== ======== ======== ======== ========
TOTAL RETURN(a) 15.94% 18.53% 18.78% 46.81% (32.94)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $822,080 $570,459 $430,003 $378,593 $450,336
Net operating expenses to average
daily net assets 0.57%(f) 0.57%(f) 0.56% 0.56% 0.56%
Interest expense to average daily net
assets 0.08%(d) 0.14%(d) -- -- --
Total net expenses to average daily
net assets 0.65% 0.71% 0.56% 0.56% 0.56%
Net investment income to average
daily net assets 10.21% 11.17% 12.57% 10.82% 10.99%
Portfolio turnover rate 121% 130% 139% 123% 272%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.01%(g) 0.02% 0.03% 0.03% 0.18%
Purchase and redemption fees
consisted of the following per
share amounts:(c) $ 0.01 --(e) $ 0.01 N/A N/A
</Table>
+ Computed using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown. Calculation excludes purchase
premiums and redemption fees.
(b) Effective March 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
premium and discount on debt securities. The effect of this change for
the year ended February 28, 2001 was to decrease net investment income
per share by $0.04, increase net realized and unrealized gains and
losses per share by $0.04 and decrease the ratio of net investment
income to average net assets from 13.06% to 12.57%. Per share data and
ratios/supplemental data for periods prior to March 1, 2000 have not
been restated to reflect this change.
(c) Effective March 1, 2000, the Fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
(d) Interest expense incurred as a result of entering into reverse
repurchase agreements is included in the Fund's net expenses. Income
earned on investing proceeds from reverse repurchase agreements is
included in interest income.
(e) Purchase and redemption fees were less than $0.01 per share.
(f) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 2.
(g) Effective June 30, 2002, the Fund ceased reimbursing any Fund fees or
expenses. See Note 2.
See accompanying notes to the financial statements. 19
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------------------------------
2003 2002 2001(B) 2000 1999**
--------- --------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.29 $ 8.95 $ 8.74 $ 6.90 $ 11.63
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.95+ 1.01+ 1.14+ 0.84+ 0.91+
Net realized and unrealized gain
(loss) 0.46 0.52 0.40 2.20 (4.37)
-------- -------- -------- -------- --------
Total from investment operations 1.41 1.53 1.54 3.04 (3.46)
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.99) (1.19) (1.33) (1.08) (0.24)
From net realized gains (0.19) -- -- (0.12) (1.03)
-------- -------- -------- -------- --------
Total distributions (1.18) (1.19) (1.33) (1.20) (1.27)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.52 $ 9.29 $ 8.95 $ 8.74 $ 6.90
======== ======== ======== ======== ========
TOTAL RETURN(a) 16.25% 18.60% 18.71% 47.00% (32.82)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $616,174 $489,615 $579,912 $545,869 $323,285
Net operating expenses to average
daily net assets 0.52%(f) 0.52%(f) 0.51% 0.51% 0.51%
Interest expense to average daily net
assets 0.08%(d) 0.14%(d) -- -- --
Total net expenses to average daily
net assets 0.60% 0.66% 0.51% 0.51% 0.51%
Net investment income to average
daily net assets 10.32% 11.22% 12.62% 10.87% 10.87%
Portfolio turnover rate 121% 130% 139% 123% 272%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.01%(g) 0.02% 0.03% 0.03% 0.18%
Purchase and redemption fees
consisted of the following per
share amounts:(c) $ 0.01 --(e) $ 0.01 N/A N/A
</Table>
+ Computed using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown. Calculation excludes purchase
premiums and redemption fees.
(b) Effective March 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
premium and discount on debt securities. The effect of this change for
the year ended February 28, 2001 was to decrease net investment income
per share by $0.04, increase net realized and unrealized gains and
losses per share by $0.04 and decrease the ratio of net investment
income to average net assets from 13.11% to 12.62%. Per share data and
ratios/supplemental data for periods prior to March 1, 2000 have not
been restated to reflect this change.
(c) Effective March 1, 2000, the Fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
(d) Interest expense incurred as a result of entering into reverse
repurchase agreements is included in the Fund's net expenses. Income
earned on investing proceeds from reverse repurchase agreements is
included in interest income.
(e) Purchase and redemption fees were less than $0.01 per share.
(f) Net expenses exclude expenses incurred indirectly through invesment in
underlying funds. See Note 2.
(g) Effective June 30, 2002, the Fund ceased reimbursing any Fund fees or
expenses. See Note 2.
20 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks to earn high total return through direct and indirect
investment in sovereign debt of developing countries in Asia, Latin
America, the Middle East, Africa and Europe. The Fund's benchmark is the
J.P. Morgan Emerging Markets Bond Index Global.
Throughout the year ended February 28, 2003, the Fund had two classes of
shares outstanding: Class III and Class IV. The principal economic
difference between the classes of shares is the level of shareholder
service fees borne by the classes. Eligibility for and automatic
conversion among the various classes of shares is generally based on the
total amount of assets invested in a particular fund or with GMO, as more
fully outlined in the Trust's prospectus.
At February 28, 2003, 2.1% of the Fund was invested in GMO Short-Duration
Collateral Fund and 0.6% of the Fund was invested in GMO Alpha LIBOR Fund,
each a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha
LIBOR Fund and GMO Short-Duration Collateral Fund are not publicly
available for direct purchase. The financial statements of GMO Alpha LIBOR
Fund and GMO Short-Duration Collateral Fund should be read in conjunction
with the Fund's financial statements.
The Fund invested a substantial portion of its assets in GMO Alpha LIBOR
Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In
November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds")
defaulted amid allegations of fraud and significant violations of the
bonds' indentures. Currently, no market exists for the NPF bonds, and they
are being valued at fair value by the trustees of GMO Trust or persons
acting at their direction. The devaluation of the NPF bonds had a negative
impact on the Fund's net asset value per share.
In late November 2002, Alpha LIBOR Fund undertook a reorganization
transaction with a new series of GMO Trust, GMO Short-Duration Collateral
Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR
Fund was transferred to SDCF in exchange for SDCF shares. The
reorganization was treated as a sale of the Alpha LIBOR Fund shares for
financial reporting purposes and a distribution by Alpha LIBOR Fund for
tax purposes. Accordingly, for financial reporting purposes, the Fund
recognized a loss on the sale of the Alpha LIBOR shares of
21
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
approximately $2,638,586. In addition, the Fund recognized for tax, but
not for financial reporting purposes, ordinary income of $1,355,616 and
long-term capital gains of $241,787 from Alpha LIBOR Fund. $4,235,989 was
added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Shares of other GMO Funds are valued at their net asset value as reported
on each business day. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction. A security's value may be deemed
unreliable if, for example, the Manager becomes aware of information or
events occurring after the close of a foreign market that would materially
affect that security's value.
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics. At February 28, 2003, the total value of these securities
represented 15% of net assets.
22
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Certain securities held by the Fund, or underlying Funds in which it
invests, were valued on the basis of a price provided by a principal
market maker. The prices provided by the principal market makers may
differ from the value that would be realized if the securities were sold
and the differences could be material to the financial statements.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if there are movements in
foreign currency values that are unfavorable to the Fund. The value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
forward currency contracts as of February 28, 2003.
23
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the
24
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
amounts paid or offset against the proceeds on the underlying future,
security or currency transaction to determine the realized gain or loss.
The risk associated with purchasing put and call options is limited to the
premium paid. See the Schedule of Investments for all open purchased
option contracts as of February 28, 2003.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into interest rate, total return, forward swap spread lock and
credit default swap agreements to manage its exposure to interest rates
and credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve
25
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
commitments to pay interest in exchange for a market linked return, both
based on notional amounts. To the extent the total return of the security
or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Forward swap spread
lock swap agreements involve commitments to pay or receive a settlement
amount calculated as the difference between the swap spread and a fixed
spread, multiplied by the notional amount times the duration of the swap
rate. The swap spread is the difference between the benchmark swap rate
(market rate) and the specific treasury rate. In a credit default swap,
one party makes a stream of payments to another party in exchange for the
right to receive a specified return in the event of a default by a third
party on its obligation. The Fund may use credit default swaps to provide
a measure of protection against defaults of sovereign or corporate issuers
(i.e., to reduce risk where the Fund owns or has exposure to the issuer)
or to take an active long or short position with respect to the likelihood
of a particular issuer's default. In connection with these agreements,
cash or securities may be set aside as collateral by the Fund's custodian
in accordance with the terms of the swap agreement. The Fund earns
interest on cash set aside as collateral. Swaps are marked to market daily
based upon quotations from market makers and the change in value, if any,
is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Net
payments of interest on interest rate swap agreements are included as part
of interest income. These financial instruments are not actively traded on
financial markets. The values assigned to these instruments are based upon
the best available information and because of the uncertainty of the
valuation, these values may differ significantly from the values that
would have been realized had a ready market for these instruments existed,
and the differences could be material. Entering into these agreements
involves, to varying degrees, elements of credit, legal, market, and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will
be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be
unfavorable changes in interest rates. See Note 6 for a summary of open
swap agreements as of February 28, 2003.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty.
26
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the collateral declines or if the seller enters
insolvency proceedings, recovery of cash by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund has sold may
decline below the price at which it is obligated to repurchase them under
the agreement. At February 28, 2003, the Fund had entered into reverse
repurchase agreements having a market value of $64,319,904, collateralized
by securities with a market value of $65,840,957. See Note 6 for a summary
of open reverse repurchase agreements as of February 28, 2003.
DELAYED DELIVERY COMMITMENTS
The Fund may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities
and the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. Collateral consisting of liquid
securities or cash and cash equivalents is maintained with the custodian
in an amount at least equal to these commitments.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax
27
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
purposes. Therefore, no provision for U.S. federal income or excise tax is
necessary. Taxes on foreign interest and dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002, and February 28,
2003, the tax basis of distributions paid was as follows: ordinary
income -- $123,343,130 and $139,039,496, respectively and long-term
capital gains -- $0 and $9,683,031, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $61,300,823 and $683,936 of undistributed ordinary
income and undistributed long-term capital gains, respectively. The
temporary differences between book and tax basis distributable earnings
are primarily due to differing treatments for amortization of premiums and
discounts on debt securities and losses on wash sales transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions, swap transactions, differing treatments for amortization of
premiums and discounts on debt securities and the GMO Alpha LIBOR Fund
transaction (See Note 1). The financial highlights exclude these
adjustments.
<Table>
<Caption>
Distributions
In Excess of Accumulated Net
Investment Income Realized Gain Paid-in Capital
----------------- --------------- ---------------
$176,480 $3,905,179 $(4,081,659)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the amortization of
premium and discounts. Income is not recognized, nor are premium and
discount amortized on securities for which collection is not expected.
Dividend
28
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
income, net of applicable withholding taxes, is recorded on the
ex-dividend date or non-cash dividends, if any, are recorded at the fair
market value of the securities received. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis. Interest income on inflation indexed securities is
accrued daily based upon an inflation adjusted principal. Additionally,
any increase in the principal or face amount of these securities is
recorded as interest income.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .50% of the amount
invested. In the case of cash redemptions, the fee is .25% of the amount
redeemed. If the Manager determines that any portion of a cash purchase
fee is offset by a corresponding cash redemption occurring on the same
day, the purchase premium or redemption fee charged by the Fund will be
reduced by 100% with respect to that portion. In addition, the purchase
premium or redemption fee charged by the Fund may be waived if the Manager
determines the Fund is substantially underweighted/overweighted in cash so
that a purchase or redemption will not require a securities transaction.
All purchase premuims and redemption fees are paid to and recorded by the
Fund as paid-in-capital. For the years ending February 28, 2002 and 2003,
the Fund received $142,331 and $1,199,731 in purchase premiums and
$365,848 and $85,527 in redemption fees, respectively. There is no premium
for reinvested distributions.
INVESTMENT RISK
Investments in emerging country debt present certain risks that are not
inherent in many other securities. Many emerging countries present
elements of political and/or economic instability, which may result in the
Fund's inability to collect on a timely basis, or in full, principal and
interest payments. Further, countries may impose various types of foreign
currency regulations or controls which may impede the Fund's ability to
repatriate amounts it receives. The Fund may acquire interests in
securities or bank loans which are in default at the time of acquisition
in anticipation of improving conditions in the related countries. These
factors may result in significant volatility in the values of its
holdings. The markets for emerging country debt are relatively illiquid.
Accordingly, the Fund may not be able to realize in an actual sale amounts
approximating those used to value its holdings.
29
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
GMO Emerging Country Debt Fund owns loans and bonds representing
significant exposure to the risk of default in many countries, but has the
most sizable of such positions relating to Russia and Brazil. The Fund's
financial position would be substantially adversely affected in the case
of a default by either of these countries on obligations held by the Fund,
or on obligations issued by those countries generally. The Fund has
purchased default protection in the form of credit default swap agreements
with respect to both countries, which may offset some of the losses that
the Fund might experience in the case of a default on bonds issued by such
countries. However, it is important to note that (i) such protection would
not cover losses due to defaults on loan assignments or participations,
(ii) such protection will generally not be sufficient to cover all of the
Fund's losses in the case of default, and (iii) due to the privately
negotiated nature of such instruments, under some circumstances, the
protection offered by such instruments may not be realized, even if the
Fund incurs substantial losses due to weakening of the credit or virtual
default by the countries.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .35% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .10% for Class IV shares.
Effective June 30, 2002, the Manager no longer reimburses any Fund fees or
expenses. Prior to June 30, 2002, GMO had an agreement to reimburse the
Fund to the extent that the Fund's total annual operating expenses
(excluding shareholder service fees, custody fees, fees and expenses of
the independent Trustees of the Trust (including legal 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, interest expense and
transfer taxes) exceeded the management fee.
The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha
LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended
February 28, 2003, indirect operating expenses (excluding
investment-related expenses) were less than 0.001% of the Fund's average
daily net assets, and indirect investment-related expenses (including, but
not limited to, interest expense, foreign audit expense, and
investment-related legal expense) were 0.001% of the Fund's average daily
net assets.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
30
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $19,637. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$1,547,907,264 and $1,436,259,888, respectively.
For the year ended February 28, 2003, the cost of purchases and proceeds
from sales of investments exclude the initial transfer of GMO Alpha LIBOR
Fund's investments in GMO Short-Duration Collateral Fund of $30,593,581.
(See Note 1)
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
$1,410,413,188 $155,285,779 $(131,108,681) $24,177,098
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 29.4% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
shares outstanding. Investment activities of these shareholders may have a
material effect on the Fund.
31
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ----------- -------------
Shares sold 29,282,626 $ 269,640,084 18,610,565 $ 166,106,864
Shares issued to shareholders in reinvestment
of distributions 7,513,503 67,172,341 5,226,345 44,398,759
Shares repurchased (11,754,805) (107,608,623) (10,466,626) (94,784,573)
----------- ------------- ----------- -------------
Net increase 25,041,324 $ 229,203,802 13,370,284 $ 115,721,050
=========== ============= =========== =============
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class IV: ----------- ------------- ----------- -------------
Shares sold 9,603,263 $ 86,925,003 3,577,633 $ 31,523,144
Shares issued to shareholders in reinvestment
of distributions 7,164,059 64,094,884 7,423,129 63,116,014
Shares repurchased (4,705,391) (44,119,088) (23,086,937) (204,109,279)
----------- ------------- ----------- -------------
Net increase (decrease) 12,061,931 $ 106,900,799 (12,086,175) $(109,470,121)
=========== ============= =========== =============
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Buys
3/04/03 CHF 2,800,000 $ 2,064,897 $ 2,327
3/05/03 KRW 9,200,000,000 7,706,801 (17,800)
---------
$ (15,473)
=========
</Table>
32
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Sales
3/04/03 CHF 2,800,000 $ 2,064,897 $ (62,781)
4/29/03 CHF 2,800,000 2,067,296 (2,399)
4/22/03 EUR 101,300,000 108,994,782 247,138
4/15/03 GBP 5,500,000 8,639,542 207,098
5/27/03 HKD 194,972,500 24,992,640 7,360
3/18/03 JPY 6,100,000,000 51,622,956 203,722
3/05/03 KRW 9,200,000,000 7,706,801 (216,469)
6/05/03 KRW 8,700,000,000 7,232,940 12,532
---------
$ 396,201
=========
</Table>
FUTURES CONTRACTS
<Table>
<Caption>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Depreciation
--------- ----------------------------------- --------------- ----------- --------------
Sales
2 Japanese Government Bond 10 Yr. March 2003 $2,421,823 $(28,381)
4 Japanese Government Bond 10 Yr. June 2003 4,839,636 (5,674)
--------
$(34,055)
========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
33
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
WRITTEN OPTION TRANSACTIONS
<Table>
<Caption>
Puts Calls
------------------------------ ----------------------------
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- ------------ ---------------- ----------
Outstanding, beginning of period 27,000 $ 911,250 -- $ --
Options expired (27,000) (911,250) -- --
------------ --------- ---------- ----------
Outstanding, end of period -- $ -- -- $ --
============ ========= ========== ==========
</Table>
REVERSE REPURCHASE AGREEMENTS
<Table>
<Caption>
Face Value Description Market Value
-------------- -------------------------------------------------- ------------
SGD 108,009,669 Deutsche Bank., 0.77%, dated 1/2/03, to be $62,180,598
repurchased on 4/2/03 at face value plus accrued
interest.
USD 2,139,306 J.P Morgan Chase & Co., 0.00%, dated 11/13/02, to 2,139,306
be repurchased on demand at face value plus
accrued interest.
------------
$64,319,904
============
Average balance outstanding $ 74,950,665
Average interest rate 1.33%
Maximum balance outstanding $144,519,110
Average shares outstanding 125,622,994
Average balance per share outstanding .58
</Table>
34
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
CREDIT DEFAULT SWAPS
10,000,000 USD 4/07/03 Agreement with JPMorgan Chase Bank dated 2/06/03 $ (155,260)
to pay 325,000 USD on the effective date. The fund
receives payment only upon a default event in
Venezuela, the notional amount times the
difference between the par value and the
then-market value of Republic of Venezuela, 6
month LIBOR + .88%, due 12/18/07.
5,000,000 USD 4/18/03 Agreement with Deutsche Bank AG dated 4/12/01 to (22,363)
pay 2.75% per year times the notional amount. The
fund receives payment only upon a default event in
the Philippines, the notional amount times the
difference between the par value and the
then-market value of Republic of the Philippines,
8.875% due 04/15/08.
5,000,000 USD 4/21/03 Agreement with UBS AG dated 10/16/01 to pay 7.30% (129,814)
per year times the notional amount. The fund
receives payment only upon a default event in
Brazil, the notional amount times the difference
between the par value and the then-market value of
the Republic of Brazil, 11.625% due 4/15/04.
8,000,000 USD 4/25/03 Agreement with Goldman Sachs International dated (1,043,186)
10/03/02 to pay 1,120,000 USD on the effective
date. The fund receives payment only upon a
default event in Brazil, the notional amount times
the difference between the par value and the
then-market value of the Republic of Brazil, 14.0%
due 10/15/09.
</Table>
35
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
10,000,000 USD 6/20/03 Agreement with UBS AG dated 12/19/02 to pay 16.50% $ (599,423)
per year times the notional amount. The fund
receives payment only upon a default event in
Brazil, the notional amount times the difference
between the par value and the then-market value of
the Republic of Brazil, 8.0% due 4/15/14.
15,000,000 USD 6/20/03 Agreement with Goldman Sachs International dated 665,815
1/14/99 to receive 11.60% per year times the
notional amount. The fund makes payment only upon
a default event in Colombia, the notional amount
times the difference between the par value and the
then-market value of Republic of Colombia, 7.625%
due 2/15/07.
5,000,000 USD 6/30/03 Agreement with Deutsche Bank AG dated 2/06/03 to 72,267
pay 17.25% per year times the notional amount. The
fund receives payment only upon a default event in
Venezuela, the notional amount times the
difference between the par value and the
then-market value of Republic of Venezuela, 9.25%
due 9/15/27.
7,500,000 USD 7/23/03 Agreement with Goldman Sachs International dated (77,951)
7/18/01 to pay 4.80% per year times the notional
amount. The fund receives payment only upon a
default event in Colombia, the notional amount
times the difference between the par value and the
then-market value of Republic of Colombia, 9.75%
due 4/23/09.
</Table>
36
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
5,000,000 USD 10/15/03 Agreement with Deutsche Bank AG dated 1/21/03 to $ (118,476)
pay 11.20% per year times the notional amount. The
fund receives payment only upon a default event in
Brazil, the notional amount times the difference
between the par value and the then-market value of
Republic of Brazil, 12.25% due 3/06/30.
5,000,000 USD 10/16/03 Agreement with Deutsche Bank AG dated 10/11/00 to (46,800)
pay 2.83% per year times the notional amount. The
fund receives payment only upon a default event in
the Philippines, the notional amount times the
difference between the par value and the
then-market value of Republic of Philippines,
8.875% due 4/15/08.
15,000,000 USD 12/18/03 Agreement with Deutsche Bank AG dated 2/06/03 to 71,374
receive 5.50% per year times the notional amount.
The fund makes payment only upon a default event
on the Gazprom Loan Facility, due 12/17/04. The
payment the fund makes is equal to the notional
amount times the difference between the par value
and the then-market value of Gazprom Loan
Facility, due 12/17/04.
5,000,000 USD 4/13/04 Agreement with Goldman Sachs International dated (410,962)
4/04/01 to pay 11.50% per year times the notional
amount. The fund receives payment only upon a
default event in Turkey, the notional amount times
the difference between the par value and the
then-market value of Republic of Turkey, 11.75%
due 6/15/10.
</Table>
37
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
8,000,000 USD 4/15/04 Agreement with Morgan Guaranty Trust Company dated $ 49,634
3/13/02 to pay 5.75% per year times the notional
amount. The fund receives payment only upon a
default event in Brazil, the notional amount times
the difference between the par value and the
then-market value of the Federative Republic of
Brazil, 8.00% due 4/15/14
5,000,000 USD 4/15/04 Agreement with Bank of America N.A. dated 11/28/01 (109,231)
to pay 7.95% per year times the notional amount.
The fund receives payment only upon a default
event in Brazil, the notional amount times the
difference between the par value and the
then-market value of the Republic of Brazil, 8.00%
due 4/15/14.
5,000,000 USD 6/18/05 Agreement with Deutsche Bank AG dated 6/18/02 to 115,901
pay 2.35% per year times the notional amount. The
fund receives payment only upon a default event in
the Philippines, the notional amount times the
difference between the par value and the
then-market value of Republic of the Philippines,
8.875% due 04/15/08.
5,000,000 USD 7/15/05 Agreement with Banque Paribas dated 10/18/02 to 487,531
pay 10.0% per year times the notional amount. The
fund receives payment only upon a default event on
the Banco Latinoamericano de Exportaciones SA Euro
Medium Term Notes, 7.71%, due 9/22/05. The payment
the fund receives is equal to the notional amount
times the difference between the par value and the
then-market value of Banco Latinoamericano de
Exportaciones SA Euro Medium Term Notes, 7.71%,
due 9/22/05.
</Table>
38
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
7,000,000 USD 8/05/05 Agreement with Deutsche Bank AG dated 7/31/02 to $ 75,610
pay 3.35% per year times the notional amount. The
fund receives payment only upon a default event in
the Philippines, the notional amount times the
difference between the par value and the
then-market value of Republic of Philippines,
8.875%, due 4/15/08.
10,000,000 USD 11/06/05 Agreement with JPMorgan Chase Bank dated 11/05/02 (925,017)
to pay 9.30% per year times the notional amount.
The fund receives payment only upon a default
event in Colombia, the notional amount times the
difference between the par value and the
then-market value of Republic of Colombia, 10.0%
due 1/23/12.
15,000,000 USD 4/03/06 Agreement Morgan Guaranty Trust Company dated 48,185
3/29/01 to pay 0.25% per year times the notional
amount. The fund receives payment only upon a
default event on the Banco Santander Senior Bonds
or Loans. The payment the fund receives is equal
to the notional amount times the difference
between the par value and the then-market value of
any series of Banco Santander Senior Bonds or
Loans.
</Table>
39
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
15,000,000 USD 4/06/06 Agreement with Morgan Guaranty Trust Company dated $ 44,647
04/03/01 to pay 0.26% per year times the notional
amount. The fund receives payment only upon a
default event on the Banco Santander Senior Bonds
or Loans. The payment the fund receives is equal
to the notional amount times the difference
between and the par value and the then-market
value of any series of Banco Santander Senior
Bonds or Loans.
30,000,000 USD 4/10/06 Agreement with Morgan Guaranty Trust Company dated 78,540
4/05/01 to pay 0.275% per year times the notional
amount. The fund receives payment only upon a
default event on the Banco Santander Senior Bonds
or Loans. The payment the fund receives is equal
to the notional amount times the difference
between the par value and the then-market value of
any series of Banco Santander Senior Bonds or
Loans.
10,000,000 USD 4/10/06 Agreement with Morgan Guaranty Trust Company dated 30,096
4/04/01 to pay 0.26% per year times the notional
amount. The fund receives payment only upon a
default event on the Banco Santander Senior Bonds
or Loans. The payment the fund receives is equal
to the notional amount times the difference
between the par value and the then-market value of
any series of Banco Santander Bonds or Loans.
</Table>
40
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
25,000,000 USD 4/30/06 Agreement with Morgan Guaranty Trust Company dated $ (44,147)
4/25/01 to pay 0.27% per year times the notional
amount. The fund receives payment only upon a
default event on the Banco Bilbao Vizcaya Senior
Bonds or Loans. The payment the fund receives is
equal to the notional amount times the difference
between the par value and the then-market value of
Banco Bilbao Vizcaya Senior Bonds or Loans.
15,000,000 USD 6/08/06 Agreement with Morgan Guaranty Trust Company dated 300,067
6/05/01 to receive 2.95% per year times the
notional amount. The fund makes payment only upon
a default event in Mexico, the notional amount
times the difference between the par value and the
then-market value of United Mexican States, 8.375%
due 1/14/11.
20,000,000 USD 8/09/06 Agreement with JPMorgan Chase Bank dated 8/06/02 (73,770)
to pay 0.420% per year times the notional amount.
The fund receives payment only upon a default
event on the Banco Bilbao Vizcaya Argentaria SA,
5.0% due 6/24/08. The payment the fund receives is
equal to the notional amount times the difference
between the par value and the then-market value of
Banco Bilbao Vizcaya Argentaria SA, 5.0% due
6/24/08.
</Table>
41
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
5,000,000 USD 9/27/06 Agreement with Merrill Lynch International dated $ (22,857)
11/01/02 to receive 5.70% per year times the
notional amount. The fund makes payment only upon
a default event in the Dominican Republic, the
notional amount times the difference between the
par value and the then-market value of the
Government of Dominican Republic, 9.50% due
9/27/06.
10,000,000 USD 2/18/07 Agreement with Morgan Guaranty Trust Company dated (494,636)
2/13/02 to pay 4.6% per year times the notional
amount. The fund receives payment only upon a
default event in Russia, the notional amount times
the difference between the par value and the
then-market value of Russia Eurobond, 5.0% due
3/31/30.
10,000,000 USD 2/26/07 Agreement with Salomon Brothers International (160,406)
Limited dated 2/21/02 to pay 2.15% per year times
the notional amount. The fund receives payment
only upon a default event in South Africa, the
notional amount times the difference between the
par value and the then-market value of the
Republic of South Africa, 9.125% due 05/19/09.
10,000,000 USD 6/27/07 Agreement with JPMorgan Chase Bank dated 06/24/02 (33,745)
to pay 0.330% per year times the notional amount.
The fund receives payment only upon a default
event on the Banco Bilbao Vizcaya of Spain. The
payment the fund receives is equal to the notional
amount times the difference between the par value
and the then-market value of Banco Bilbao Vizcaya
of Spain.
</Table>
42
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
10,000,000 USD 7/02/07 Agreement with Citibank N.A. dated 6/27/02 to pay $ (38,781)
0.640% per year times the notional amount. The
fund receives payment only upon a default event on
the Bank of China bonds or loans. The payment the
fund receives is equal to the notional amount
times the difference between the par value and the
then-market value of the Bank of China bonds or
loans.
3,000,000 USD 7/02/07 Agreement with Deutsche Bank AG dated 6/27/02 to (11,950)
pay 0.640% per year times the notional amount. The
fund receives payment only upon a default event in
China, the notional amount times the difference
between the par value and the then-market value of
the Bank of China, 8.25% due 03/15/14.
15,000,000 USD 9/27/07 Agreement with JPMorgan Chase Bank dated 9/26/02 (24,746)
to pay 0.330% per year times the notional amount.
The fund receives payment only upon a default
event on the HSBC Bank Plc, 3 month LIBOR + .05%,
due 4/12/06. The payment the fund receives is
equal to the notional amount times the difference
between the par value and the then-market value of
HSBC Bank Plc, 3 month LIBOR + .05%, due 4/12/06.
</Table>
43
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
10,000,000 USD 10/10/07 Agreement with JPMorgan Chase Bank dated 10/09/02 $ (186,360)
to pay 0.70% per year times the notional amount.
The fund receives payment only upon a default
event on the Banco Bilbao Vizcaya Argentaria SA,
5.0% due 6/24/08. The payment the fund receives is
equal to the notional amount times the difference
between the par value and the then-market value of
Banco Bilbao Vizcaya Argentaria SA, 5.0% due
6/24/08.
8,000,000 USD 10/19/07 Agreement with Deutsche Bank AG dated 10/18/02 to 457,103
pay 15.0% per year times the notional amount. The
fund receives payment only upon a default event in
Venezuela, the notional amount times the
difference between the par value and the
then-market value of the Republic of Venezuela,
9.25% due 9/15/27.
5,000,000 USD 10/22/07 Agreement with JPMorgan Chase Bank dated 10/21/02 (59,704)
to pay 0.540% per year times the notional amount.
The fund receives payment only upon a default
event on the Banco Bilbao Vizcaya Argentaria SA,
5.0% due 6/24/08. The payment the fund receives is
equal to the notional amount times the difference
between the par value and the then-market value of
Banco Bilbao Vizcaya Argentaria SA, 5.0% due
6/24/08.
</Table>
44
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
5,000,000 USD 10/23/07 Agreement with JPMorgan Chase Bank dated 10/22/02 $ (47,338)
to pay 0.480% per year times the notional amount.
The fund receives payment only upon a default
event on the Banco Bilbao Vizcaya Argentaria SA,
5.0% due 6/24/08. The payment the fund receives is
equal to the notional amount times the difference
between the par value and the then-market value of
Banco Bilbao Vizcaya Argentaria SA, 5.0% due
6/24/08.
5,000,000 USD 10/30/07 Agreement with Deutsche Bank AG dated 10/29/02 to (38,843)
pay 0.440% per year times the notional amount. The
fund receives payment only upon a default event on
the Banco Bilbao Vizcaya Argentaria SA, 5.0% due
6/24/08. The payment the fund receives is equal to
the notional amount times the difference between
the par value and the then-market value of Banco
Bilbao Vizcaya Argentaria SA, 5.0%
due 6/24/08.
10,000,000 USD 11/25/07 Agreement with Deutsche Bank AG dated 11/22/02 to (1,232)
pay 1.150% per year times the notional amount. The
fund receives payment only upon a default event on
the Endesa SA of Spain, 4.375% due 6/18/09. The
payment the fund receives is equal to the notional
amount times the difference between the par value
and the then-market value of Endesa SA of Spain,
4.375%
due 6/18/09.
</Table>
45
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
15,000,000 USD 11/27/07 Agreement with JPMorgan Chase Bank dated 11/26/02 $ 26,553
to pay 1.10% per year times the notional amount.
The fund receives payment only upon a default
event on the Endesa SA of Spain, 5.25% due
2/22/06. The payment the fund receives is equal to
the notional amount times the difference between
the par value and the then-market value of Endesa
SA of Spain, 5.25% due 2/22/06.
5,000,000 USD 7/30/12 Agreement with JPMorgan Chase Bank dated 7/25/02 388,401
to receive 3.05% per year times the notional
amount. The fund makes payment only upon a default
event in Chile, the notional amount times the
difference between the par value and the
tnen-market value of Republic of Chile, 7.125% due
1/11/12.
10,000,000 USD 8/12/12 Agreement with JPMorgan Chase Bank dated 8/07/02 863,760
to receive 4.42% per year times the notional
amount. The fund makes payment only upon a default
event in Mexico, the notional amount times the
difference between the par value and the
then-market value of United Mexican States, 7.5%
due 1/14/12.
15,000,000 USD 9/19/12 Agreement with Bank of America N.A. dated 9/18/02 1,218,112
to receive 4.07% per year times the notional
amount. The fund makes payment only upon a default
event in Mexico, the notional amount times the
difference between the par value and the
then-market value of United Mexican States,
11.375% due 9/15/16.
</Table>
46
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
10,000,000 USD 10/03/12 Agreement with JPMorgan Chase Bank dated 10/02/02 $ 830,871
to receive 4.12% per year times the notional
amount. The fund makes payment only upon a default
event in Mexico, the notional amount times the
difference between the par value and the
then-market value of United Mexican States, 7.5%
due 1/14/12.
10,000,000 USD 10/04/12 Agreement with JPMorgan Chase Bank dated 10/03/02 821,881
to receive 2.95% per year times the notional
amount. The fund makes payment only upon a default
event in Chile, the notional amount times the
difference between the par value and the
then-market value of Republic of Chile, 7.125% due
1/11/12.
5,000,000 USD 11/05/12 Agreement with Deutsche Bank AG dated 11/04/02 to (895,351)
receive 6.50% per year times the notional amount.
The fund makes payment only upon a default event
in Jamaica, the notional amount times the
difference between the par value and the
then-market value of the Government of Jamaica,
11.625% due 1/15/22.
10,000,000 USD 1/08/13 Agreement with Deutsche Bank AG dated 1/07/03 to (212,865)
receive 7.15% per year times the notional amount.
The fund makes payment only upon a default event
in Colombia, the notional amount times the
difference between the par value and the
then-market value of Republic of Colombia, 11.75%
due 2/25/20.
</Table>
47
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
10,000,000 USD 1/09/13 Agreement with Deutsche Bank AG dated 1/08/03 to $ 86,756
receive 8.25% per year times the notional amount.
The fund makes payment only upon a default event
in Turkey, the notional amount times the
difference between the par value and the
then-market value of Republic of Turkey, 11.875%
due 1/15/30.
7,000,000 USD 1/10/13 Agreement with JPMorgan Chase Bank dated 1/09/03 (28,657)
to receive 7.50% per year times the notional
amount. The fund makes payment only upon a default
event in Colombia, the notional amount times the
difference between the par value and the
then-market value of Republic of Colombia, 10.0%
due 1/23/12.
10,000,000 USD 2/07/13 Agreement with JPMorgan Chase Bank dated 2/06/03 312,155
to receive 8.30% per year times the notional
amount. The fund makes payment only upon a default
event in Colombia, the notional amount times the
difference between the par value and the
then-market value of Republic of Colombia, 11.75%
due 2/25/20.
15,000,000 USD 2/11/13 Agreement with JPMorgan Chase Bank dated 2/10/03 3,513
to receive 3.05% per year times the notional
amount. The fund makes payment only upon a default
event in Mexico, the notional amount times the
difference between the par value and the
then-market value of United Mexican States, 11.5%
due 5/15/26.
</Table>
48
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
10,000,000 USD 10/05/17 Agreement with JPMorgan Chase Bank dated 10/04/02 $ 943,986
to receive 4.20% per year times the notional
amount. The fund makes payment only upon a default
event in Mexico, the notional amount times the
difference between the par value and the
then-market value of United Mexican States, 11.5%
due 5/15/26.
INTEREST RATE SWAPS
1,000,000,000 HKD 4/03/03 Agreement with Morgan Guaranty Trust Company dated (693,704)
3/30/00 to pay the notional amount multiplied by
7.12% and to receive the notional amount
multiplied by the 3 month Floating Rate Hong Kong
HIBOR adjusted by a specified spread.
129,500,000 USD 4/03/03 Agreement with Morgan Guaranty Trust Company dated 721,450
3/30/00 to receive the notional amount multiplied
by 7.23% and to pay the notional amount multiplied
by the 3 month LIBOR adjusted by a specified
spread.
1,000,000,000 HKD 8/07/04 Agreement with Morgan Guaranty Trust Company dated (5,359,291)
8/03/01 to pay the notional amount multiplied by
4.75% and to receive the notional amount
multiplied by 3 month Floating Rate Hong Kong
HIBOR adjusted by a specified spread.
130,600,000 USD 8/07/04 Agreement with Morgan Guaranty Trust Company dated 6,105,324
8/03/01 to receive the notional amount multiplied
by 4.835% and to pay the notional amount
multiplied by the 3 month LIBOR adjusted by a
specified spread.
</Table>
49
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
15,000,000 EUR 2/22/07 Agreement with UBS AG dated 2/18/00 to pay the $(1,665,994)
notional amount multiplied by 5.76% and to receive
the notional amount multiplied by the 6 month
EURIBOR.
7,000,000,000 JPY 1/16/08 Agreement with UBS AG dated 1/14/03 to pay the (210,567)
notional amount multiplied by 0.355% and to
receive the notional amount multiplied by the 6
month Japanese LIBOR adjusted by a specified
spread.
137,500,000,000 KRW 6/01/08 Agreement with Deutsche Bank AG dated 11/12/02 to (867,245)
pay the notional amount multiplied by 5.36% and to
receive the notional amount multiplied by the 3
month Korean CD rate.
6,000,000,000 JPY 12/17/09 Agreement with Citibank N.A. dated 12/13/02 to pay (387,955)
the notional amount multiplied by 0.5475% and to
receive the notional amount multiplied by the 6
month Japanese LIBOR adjusted by a specified
spread.
26,000,000 USD 3/31/10 Agreement with UBS AG dated 3/29/00 to receive the 6,255,533
notional amount multiplied by 7.406% and to pay
the notional amount multiplied by the 3 month
LIBOR adjusted by a specified spread.
35,000,000 USD 9/13/10 Agreement with Bear Stearns Bank Plc dated 9/08/00 7,772,010
to receive the notional amount multiplied by 7.01%
and to pay the notional amount multiplied by the 3
month LIBOR adjusted by a specified spread.
</Table>
50
<Page>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
20,000,000 USD 1/24/11 Agreement with UBS AG dated 1/22/01 to receive the $ 3,265,006
notional amount multiplied by 6.12% and to pay the
notional amount multiplied by the 3 month LIBOR
adjusted by a specified spread.
30,000,000 USD 1/25/11 Agreement with Bear Stearns Bank Plc dated 1/23/01 5,078,545
to receive the notional amount multiplied by
6.201% and to pay the notional amount multiplied
by the 3 month LIBOR adjusted by a specified
spread.
20,000,000 SGD 7/01/12 Agreement with Deutsche Bank AG dated 9/20/02 to (1,234,693)
pay the notional amount multiplied by 3.50% and to
receive the notional amount multiplied by the 3
month SOR adjusted by a specified spread.
30,000,000 SGD 7/01/12 Agreement with Deutsche Bank AG dated 9/19/02 to (1,850,347)
pay the notional amount multiplied by 3.50% and to
receive the notional amount multiplied by the 3
month SOR adjusted by a specified spread.
50,000,000 SGD 7/01/12 Agreement with Deutsche Bank AG dated 9/19/02 to (3,043,796)
pay the notional amount multiplied by 3.50% and to
receive the notional amount multiplied by the 3
month SOR adjusted by a specified spread.
-----------
$15,863,163
===========
</Table>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
51
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO EMERGING COUNTRY DEBT FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Country Debt Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
52
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
53
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- ------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of September Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the 1985.
Boston, MA 02110 Trust President
Age: 64 from February
2002 -
October 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
54
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
55
<Page>
GMO EMERGING COUNTRIES FUND
(FORMERLY GMO EVOLVING COUNTRIES FUND)
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
Emerging Markets Quantitative Division at Grantham, Mayo, Van Otterloo & Co.
LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Emerging Countries Fund returned -10.2% for the
fiscal year ended February 28, 2003. The Fund's benchmark, the S&P/IFC
Investable Composite, returned -11.6% during the same period.
We normally expect to obtain approximately 70% of our value added from country
selection and the rest from stock selection. During the fiscal year we were on
target with 1.0% added value coming from country selection and 0.5% coming from
security selection.
Like the previous three years, our largest overweight for 2002 came in the TIP
(Thailand, Indonesia, Philippines) region. While Philippines disappointed this
year (falling over 30%), Thailand and Indonesia were two of the top performing
markets on the back of strengthening economies and political reforms. Both
markets were approximately flat over the past 12 months, outperforming the
global emerging markets by 12%. Our overweight of this region added 1.25% to
performance.
The biggest driver outside of Asia was the weakening U.S. dollar (on the back of
economic uncertainty and the looming war in Iraq). A weak dollar meant a strong
euro, strong gold price, and strong commodity prices in general. South Africa
and Russia (up 34% and 35%, respectively) were the biggest beneficiaries of this
move because of their high concentration in mining and oil. Our 5.2% underweight
of South Africa cost the Fund 2.4%. This was partially balanced by the 4%
overweight in Russia, which added 1.6%.
Eastern Europe, with Czech Republic, Poland, and Hungary set to enter the
Eurozone in 2004, also benefited from the weak dollar. We are overweight the
Czech Republic and Poland, and building weight in all three markets. Our
combined 3% bet on the region added 1.5% to performance.
Mexico found itself on the other side of the dollar trade. Having risen in
sympathy with the strong dollar in the late 1990s, the Mexican peso fell rapidly
even against the already weak dollar over the past 12 months. We have been
underweight this market for 3 years on the back of an overvalued market and
currency. Our 7.7% underweight added 1.1% to performance.
Value stocks strung together their third straight year of strong returns. The
cheapest third of stocks outperformed by 4%, while their expensive counterparts
lagged by over 8%. Our bet on these two groups added over 1% to performance.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
For the second year, emerging equities significantly outperformed their global
counterparts in a difficult environment. The S&P 500 and MSCI EAFE fell 22.7%
and 17.5%, respectively, over the year ended February 28, 2003, further
supporting the case for emerging markets as a diversifying asset class.
Nevertheless, there is even more hope for the future. A couple of secular trends
fuel this optimism. First there is a realization among emerging market
policymakers that they need to reduce their dependence on export-led growth and
boost their domestic economy. This has led to low interest rates, driving up
consumption in most of our investable markets. Second, as western economies
struggle to recover from the overhang of the bubble, cost control through
outsourcing has become a mainstream strategy. Production and services are being
moved aggressively to lower-cost destinations, primarily in emerging markets.
As always, short-term (absolute) performance of the asset class will likely be
driven by global equity moves, global growth, and any developments in the
conflict with Iraq. But, trading at 10 times price to earnings, with strong
growth prospects, emerging markets have a safety net that the rest of global
equities do not. We expect the asset class to continue to outperform global
equities.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO
& CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE.
THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING COUNTRIES FUND CLASS III SHARES
AND THE S&P/IFC INVESTABLE COMPOSITE INDEX
AS OF FEBRUARY 28, 2003
GMO Emerging Countries Fund S&P/IFC Investable Composite Index
8/29/97 $10,000 $10,000
9/30/97 $10,060 $10,327
12/31/97 $8,130 $8,333
3/31/98 $8,970 $8,918
6/30/98 $6,380 $7,025
9/30/98 $4,975 $5,500
12/31/98 $6,176 $6,497
3/31/99 $6,648 $7,207
6/30/99 $10,690 $8,919
9/30/99 $9,346 $8,640
12/31/99 $12,025 $10,860
3/31/2000 $12,117 $11,006
6/30/2000 $10,567 $9,879
9/30/2000 $9,612 $8,596
12/31/2000 $8,596 $7,411
3/31/2001 $8,314 $7,050
6/30/2001 $9,005 $7,561
9/30/2001 $7,341 $5,869
12/31/2001 $9,115 $7,542
3/31/2002 $11,143 $8,517
6/30/2002 $10,287 $7,845
9/30/2002 $8,493 $6,617
12/31/2002 $9,104 $7,246
2/28/2003 $9,158 $7,037
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
Since
1 Year 5 Year Inception
8/29/97
Class III -10.15% 1.24% -1.59%
7/9/2002
Class M n/a n/a -13.60%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
COMMON STOCKS -- 88.6%
ARGENTINA -- 2.4%
30,500 BBVA Banco Frances SA ADR* 145,790
18,000 Grupo Financiero Galicia SA ADR* 45,720
21,900 IRSA Inversiones y Representaciones SA GDR* 166,221
75,800 Perez Companc SA ADR* 552,582
126,000 Telecom Argentina SA ADR* 506,520
30,893 Tenaris SA ADR* 691,694
-----------
2,108,527
-----------
BRAZIL -- 3.4%
162,360,000 Banco do Brasil SA 436,721
4,524,000 Cia Saneamento Basico SAO PA 97,464
47,440,000 Companhia Siderurgica Nacional SA 824,119
52,722,000 Electrobras 248,173
15,000 Petroleo Brasileiro SA (Petrobras) 200,939
26,500 Petroleo Brasileiro SA (Petrobras) ADR 354,305
69,923 Souza Cruz (Registered) 390,464
13,070,000 Tele Norte Leste Participacoes SA 62,256
6,700 Unibanco SA GDR 76,045
12,648 Vale Do Rio Doce 368,560
-----------
3,059,046
-----------
CHINA -- 9.4%
227,000 Bengang Steel Plates Co Ltd Class B 91,975
2,482,000 Brilliance China Automotive Holdings Ltd 579,200
432,000 China Everbright Ltd 130,169
191,950 China International Marine Containers Co Ltd Class B 210,677
528,000 China Mobile Ltd* 1,137,362
9,600 China Mobile Ltd ADR* 105,024
2,388,000 China Petroleum & Chemical Corp Class H 450,098
101,000 China Resources Enterprise Ltd 90,651
468,000 China Unicom* 283,533
34,000 China Unicom ADR* 209,780
463,000 Chongqing Changan Automobile Co Ltd Class B 234,495
336,000 CNOOC Ltd 471,747
7,500 CNOOC Ltd ADR 209,025
392,000 Cosco Pacific Ltd 354,349
155,000 CSG Technology Holding Co Ltd Class B 78,701
1,704,000 Denway Motors Ltd 655,460
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
CHINA -- CONTINUED
3,938,000 Guangdong Investments Ltd* 595,817
3,600 Huaneng Power International Inc ADR 130,536
88,000 Huaneng Power International Inc Class H 78,419
1,074,000 Maanshan Iron & Steel Co Ltd Class H 95,019
5,064,000 PetroChina Co Ltd Class H 1,058,368
514,000 Shandong International Power Development Co Ltd Class H 116,652
344,976 Shenzhen SEG Co Ltd Class B* 149,507
1,980,000 Stone Electronic Technology Ltd* 114,244
924,000 TCL International Holdings Ltd 239,912
326,000 Tsingtao Brewing Co Ltd Class H 195,414
254,000 Yanzhou Coal Mining Co Ltd Class H 109,102
367,000 Zhejiang Southeast Electric Power Co Class B 226,806
-----------
8,402,042
-----------
CZECH REPUBLIC -- 3.2%
57,355 Ceski Telecom AS* 525,441
233,779 CEZ AS 729,764
17,125 Komercni Banka AS 1,228,938
617 Philip Morris CR AS 230,704
120,600 Unipetrol* 164,908
-----------
2,879,755
-----------
EGYPT -- 0.5%
12,448 Commercial International Bank 78,149
6,900 Eastern Tobacco Co 68,072
23,500 Export Development Bank of Egypt 55,936
39,759 MobiNil-Egyptian Mobile Services Co 263,729
-----------
465,886
-----------
HUNGARY -- 0.7%
700 Delmagyarorszagi Aramszol 37,465
600 Gedeon Richter Rt 36,758
5,400 Magyar Tavkozlesi Rt (Matav) ADR 87,966
4,600 MOL Magyar Olaj es Gazipari Rt (New Shares) 99,193
31,700 OTP Bank Rt 309,043
13,000 Pannonplast Rt 85,680
-----------
656,105
-----------
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
INDIA -- 4.4%
22,700 Hindalco Industries Ltd GDR 144A 274,670
20,600 ICICI Banking Ltd ADR* 146,466
6,200 ITC Ltd GDR 84,630
52,400 Mahindra & Mahindra Ltd GDR 120,520
53,620 Ranbaxy Laboratories Ltd GDR 772,128
38,700 Reliance Industries Ltd GDR 144A 481,815
71,900 Satyam Computer Services Ltd ADR 756,388
77,600 State Bank of India GDR 1,101,920
7,075 Wipro Ltd ADR 214,938
-----------
3,953,475
-----------
INDONESIA -- 4.2%
3,946,700 Bank Central Asia Tbk 1,099,576
5,312,000 Gajah Tunggal Tbk* 125,572
1,694,500 HM Sampoerna Tbk 562,703
4,766,000 PT Matahari Putra Prima Tbk 209,235
682,000 Ramayana Lestari Sentosa 168,897
3,930,112 Telekomunikasi IndonesiaTbk PT Class B 1,581,601
-----------
3,747,584
-----------
MALAYSIA -- 0.3%
22,000 Berjaya Sports Toto 18,642
3,000 British American Tobacco Berhad 28,816
18,000 IJM Corp Berhad Class A 22,358
23,000 Malakoff Berhad 24,453
42,000 Maxis Communications Berhad* 59,684
12,000 Perusahaan Otomobil Nasional 25,263
148,000 Renong Berhad* 18,111
12,000 Resorts World Berhad 29,842
13,000 Telekom Malaysia Berhad 26,513
14,000 Tenaga Nasional Berhad 34,632
-----------
288,314
-----------
MEXICO -- 0.4%
14,000 Apasco SA de CV 77,084
26,000 Carso Global Telecom Class A* 26,469
16,000 Grupo Financiero Inbursa SA de CV* 11,796
15,000 Grupo Mexico SA Class B* 17,417
20,000 Grupo Modelo SA de CV Class C 41,302
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
MEXICO -- CONTINUED
30,000 Grupo Sanborns SA Class B* 30,161
6,300 Organizacion Soriana SA de CV Class B* 10,020
111,000 Savia SA Class A* 42,225
2,900 Telefonos de Mexico Class L ADR 84,303
-----------
340,777
-----------
PERU -- 0.1%
1,900 Cia de Minas Buenaventura SA ADR 47,880
-----------
PHILIPPINES -- 3.2%
1,746,140 Aboitiz Equity Ventures Inc* 73,016
14,863,900 Ayala Land Inc 1,267,623
166,000 Bank of the Philippine Islands 97,423
246,400 Equitable Banking Corp* 103,938
640,570 First Philippine Holdings* 96,335
16,612 Globe Telecom Inc* 159,950
603,902 La Tondena Distillers Inc 354,422
78,200 Philippine Long Distance Telephone* 419,505
87,600 San Miguel Corp Class B 107,642
2,272,000 SM Prime Holdings 220,845
-----------
2,900,699
-----------
POLAND -- 5.1%
268,700 Bank Millennium SA* 182,656
18,000 Bank Pekao SA* 405,719
40,300 BRE Bank SA 700,323
1,200 Browary Zywiec SA* 103,960
7,600 Debica SA 111,483
13,300 Grupa Kety SA 193,736
191,300 KGHM Polska Miedz SA* 611,096
67,800 Optimus SA* 116,955
47,659 Orbis SA 214,359
116,500 Polski Koncern Naftowy Orlen 510,593
457,700 Telekomunikacja Polska SA* 1,362,672
8,300 Telekomunikacja Polska SA GDR 144A* 24,568
-----------
4,538,120
-----------
RUSSIA -- 6.1%
40,000 AO Mosenergo ADR 166,000
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
RUSSIA -- CONTINUED
5,600 Golden Telecom Inc* 74,480
21,200 JSC Mining & Smelting Co ADR* 527,350
1,500 Lukoil ADR 144A 89,625
14,125 Lukoil Holding Co ADR 843,969
1,900 Mobile Telesystems ADR* 81,244
15,800 Rostelecom ADR 130,350
600 Sberbank RF 127,020
5,550 Surgutneftegaz ADR 88,800
29,700 Tatneft ADR 498,960
17,270 Yukos Corp ADR 2,836,597
-----------
5,464,395
-----------
SOUTH AFRICA -- 8.4%
147,000 ABSA Group Ltd 608,771
64,000 AECI Ltd 203,147
18,000 Amalgamated Beverage Industries Ltd 108,244
8,861 Edgars Consolidated Stores Ltd 59,329
62,000 Gencor Ltd 320,951
2,000 Impala Platinum Holdings Ltd 121,561
508,000 Iscor Ltd 1,118,027
87,000 Murray & Roberts Holdings Ltd 131,065
72,000 Naspers Ltd 204,436
109,956 Nedcor Ltd 1,308,821
97,000 Pick'n Pay Stores Ltd 149,738
10,700 Pretoria Portland Cement Co Ltd 118,077
142,000 Remgro Ltd 1,029,993
391,000 Sanlam Ltd 344,211
50,000 Sasol Ltd 588,647
20,000 Tiger Brands Ltd 156,973
128,000 Venfin Ltd* 259,488
1,073,000 Woolworths Holdings Ltd 685,168
-----------
7,516,647
-----------
SOUTH KOREA -- 12.9%
1,200 Amorepacific Corp 91,484
138,000 Chohung Bank* 424,873
22,800 Dongbu Steel 51,382
85,300 Hanjin Heavy Industry 202,593
3,100 Kangwon Land Inc 333,724
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
SOUTH KOREA -- CONTINUED
8,900 KIA Motors Corp 56,294
4,200 Kookmin Credit Card Co Ltd* 62,631
66,700 Korea Electric Power Corp 1,003,029
28,000 Korea Electric Power Corp ADR 231,000
109,900 Korea Exchange Bank* 331,454
8,800 Korea Gas Corp 184,309
12,300 Korean Air Lines 139,111
11,600 KT Corp 424,195
7,000 KT Freetel* 143,677
46,300 KT&G Corp 649,709
14,500 KT&G Corp GDR 144A 101,500
68,500 Kumho Industrial Co Ltd* 123,095
16,600 LG Chemicals Ltd 514,556
27,300 LG Electronics Inc 921,702
21,100 LG Engineering & Construction Ltd 249,244
6,100 LG Household & Health Care Ltd 130,315
53,200 LG Investment & Securities Co Ltd 561,572
30,500 LG Telecom Co Ltd* 102,974
4,990 POSCO 461,940
10,924 Samsung Electronics 2,557,917
1,614 Samsung Electronics GDR 144A (Non Voting) 91,998
1,400 Samsung Fire & Marine Insurance 66,854
53,500 Samsung Techwin Co Ltd* 255,925
4,600 Seoul City Gas Co Ltd 68,982
52,036 SK Corp 549,285
15,708 SK Global* 103,961
43,900 Ssangyong Motor* 209,634
15,500 Taegu Department Store Co 113,752
26,700 The Will-bes & Co Ltd* 70,349
-----------
11,585,020
-----------
TAIWAN -- 11.7%
100,000 Ambit Microsystems Corp 307,914
733,750 Asustek Computer Inc 1,245,791
489,000 Cheng Loong Corp* 147,052
1,214,000 China Bills Finance Corp* 310,924
3,251,779 China Development Financial Holding Corp* 1,225,851
1,141,000 China Steel Corp 709,226
1,190,000 Chinatrust Financial Holding Co* 955,424
473,000 Compal Electronics Inc 455,986
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
TAIWAN -- CONTINUED
360,950 First Financial Holding Co Ltd* 225,399
172,000 Fubon Financial Holding Co Ltd 135,125
566,580 Hsinchu International Bank* 229,078
1,607,700 Inventec Co Ltd 925,295
1,298,000 Mosel Vitelic Inc* 190,498
509,480 Nan Ya Plastic Corp 504,349
2,461,000 Ritek Corp 1,161,450
329,000 Synnex Technology International Corp 460,127
876,000 Taiwan Cement Corp* 308,806
1,479,000 Taiwan Pulp & Paper Corp* 287,288
66,000 Taiwan Styrene Monomer Corp* 56,788
458,000 Walsin Lihwa Corp* 135,094
711,960 Yageo Corp* 194,637
355,000 Yieh Loong Co Ltd* 144,554
103,000 Yulon Motor Co 121,822
-----------
10,438,478
-----------
THAILAND -- 6.4%
408,000 Advanced Info Service Pcl (Foreign Registered) 371,908
124,300 Electricity Generating Pcl NVDR 114,756
1,322,000 Land & House Pcl (Foreign Registered) 239,465
3,014,000 Land & House Pcl NVDR 524,817
1,957,000 National Finance Pcl NVDR* 599,198
281,240 PTT Exploration & Production Pcl (Foreign
Registered)(a) 847,960
100,000 PTT Pcl (Foreign Registered)(a) 102,255
398,000 Quality House Co Ltd (Foreign Registered)*(a) 57,209
227,000 Saha Union Pcl (Foreign Registered)(a) 95,501
799,000 Sahaviriya Steel Industry (Foreign Registered)*(a) 164,338
214,000 Shin Satellite (Foreign Registered)*(a) 53,019
7,000 Siam Cement Pcl (Foreign Registered) 210,401
38,800 Siam Cement Pcl NVDR 1,117,251
261,850 Siam Commercial Bank Pcl (Foreign Registered)* 198,904
273,000 Thai Airways International (Foreign Registered)(a) 188,232
670,200 Thai Farmers Bank NVDR* 450,351
1,198,200 Thai Petrochemical (Foreign Registered)* 90,177
345,200 Thai Union Frozen Products Pcl (Foreign Registered) 148,456
214,000 TPI Polene Co (Foreign Registered)*(a) 85,030
304,000 Vinythai Pcl (Foreign Registered)*(a) 65,724
-----------
5,724,952
-----------
</Table>
See accompanying notes to the financial statements.
7
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
TURKEY -- 5.8%
174,619,179 Akbank TAS* 667,195
27,544,000 Aksa Akrilik Kimya Sanayii 267,417
42,800,000 Aksigorta AS 150,128
7,657,000 Anadolu Isuzu Otomotiv Sanay* 50,359
36,991,000 Arcelik AS 335,966
2,315,000 Brisa Bridgestone Sabanci 65,977
41,422,000 Carsi Buyuk Magazacilik AS* 45,405
13,861,000 Enka Insaat ve Sanayi AS* 390,695
63,081,000 Eregli Demir ve Celik Fabrikalari TAS* 691,461
412,462,000 Finansbank* 248,020
50,511,000 Global Menkul Degerler AS* 34,802
198,000,000 Is Gayrimenkul Yatirim Ortakligi AS* 109,139
35,491,000 Milliyet Gazetecilik AS* 53,909
44,700,000 Turk Hava Yollari* 181,992
70,699,000 Turkcell Iletisim Hizmet AS* 476,050
1,017,417,250 Turkiye Garanti Bankasi* 1,433,880
-----------
5,202,395
-----------
VENEZUELA -- 0.0%
4,100 Compania Anonima Nacional Telefonos de Venezuela
(CANTV) ADR 41,533
-----------
TOTAL COMMON STOCKS (COST $79,251,999) 79,361,630
-----------
PREFERRED STOCKS -- 5.5%
BRAZIL -- 2.8%
3,556,000 Bco Itau SA (Registered) 156,428
68,970,000 Bombril SA 3.53% 106,286
22,505,600 Brasil Telecom Participacoes SA 2.19% 110,920
927,000 Companhia de Tecidos do Norte de Minas - Coteminas 56,363
15,850 Companhia Vale do Rio Doce Class A 435,220
15,500 Empresa Brasileira de Aeronautica SA ADR 159,805
7,044,500 Gerdau SA 65,589
717,154 Investimentos Itau SA 365,710
20,100 Perdigao SA 55,192
53,334 Petroleo Brasileiro SA (Petrobras) 3.01% 637,946
178,000 Sadia SA 61,345
11,442,000 Siderurgica de Tubarao 3.50% 150,359
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
BRAZIL -- CONTINUED
123,221,000 Tele Centro Oeste Celular SA 6.78% 148,459
-----------
2,509,622
-----------
RUSSIA -- 0.2%
225 Transneft 80,100
610,200 Unified Energy System* 72,614
-----------
152,714
-----------
SOUTH KOREA -- 2.5%
33,000 Dongbu Steel 11.70% 57,090
13,000 LG Chem Ltd 185,146
17,300 Samsung Electronics (Non Voting) 4.08% 1,942,110
3,000 Samsung SDI Co Ltd 3.63% 95,003
-----------
2,279,349
-----------
TOTAL PREFERRED STOCKS (COST $5,338,118) 4,941,685
-----------
RIGHTS AND WARRANTS -- 0.3%
THAILAND -- 0.3%
132,750 Adkinson Securities Warrants, Expires 6/14/03* --
132,750 Adkinson Securities Warrants, Expires 6/14/05* --
2,665,000 Land & House Warrants, Expires 9/02/08 (Foreign
Registered)* 307,703
116,526 Telecomasia Corp Pcl Warrants, Expires 4/03/08* --
-----------
307,703
-----------
TOTAL RIGHTS AND WARRANTS (COST $28,025) 307,703
-----------
</Table>
See accompanying notes to the financial statements.
9
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 4.5%
CASH EQUIVALENTS -- 4.5%
$ 4,000,000 Dresdner GC Time Deposit, 1.31%, due 3/03/03 4,000,000
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $4,000,000) 4,000,000
-----------
TOTAL INVESTMENTS -- 98.9%
(Cost $88,618,142) 88,611,018
Other Assets and Liabilities (net) -- 1.1% 1,009,837
-----------
TOTAL NET ASSETS -- 100.0% $89,620,855
===========
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
<Table>
144A - Securities exempt from registration under rule 144A of
the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally
to qualified institutional investors.
ADR - American Depositary Receipt
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
</Table>
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
10 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Financials 22.5%
Materials 14.8
Energy 13.8
Information Technology 13.4
Telecommunication Services 10.9
Consumer Discretionary 9.2
Industrials 5.4
Consumer Staples 4.7
Utilities 4.4
Health Care 0.9
-----
100.0%
=====
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $88,618,142) (Note 1) $88,611,018
Cash 32,211
Foreign currency, at value (cost $791,574) (Note 1) 795,830
Receivable for investments sold 3,818,894
Receivable for Fund shares sold 3,611
Dividends and interest receivable 335,688
Foreign taxes receivable 369
Receivable for expenses reimbursed by Manager (Note 2) 44,790
-----------
Total assets 93,642,411
-----------
LIABILITIES:
Payable for investments purchased 3,819,801
Payable for Fund shares repurchased 14,812
Payable to affiliate for (Note 2):
Management fee 44,860
Shareholder service fee - Class III 10,286
12b-1 fee - Class M 244
Administration fee - Class M 89
Accrued expenses 131,464
-----------
Total liabilities 4,021,556
-----------
NET ASSETS $89,620,855
===========
NET ASSETS CONSIST OF:
Paid-in capital $100,055,808
Accumulated undistributed net investment income 579,393
Accumulated net realized loss (11,011,359)
Net unrealized depreciation (2,987)
-----------
$89,620,855
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $89,042,342
===========
Class M shares $ 578,513
===========
SHARES OUTSTANDING:
Class III 10,432,554
===========
Class M 67,974
===========
NET ASSET VALUE PER SHARE:
Class III $ 8.54
===========
Class M $ 8.51
===========
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $223,685) $ 1,502,054
Interest 53,516
-----------
Total income 1,555,570
-----------
EXPENSES:
Management fee (Note 2) 492,799
Custodian fees 462,212
Audit fees 57,263
Transfer agent fees 38,515
Registration fees 23,617
Legal fees 10,519
Trustees fees and related expenses (Note 2) 2,471
Miscellaneous 1,833
Fees reimbursed by Manager (Note 2) (236,929)
-----------
852,300
Shareholder service fee (Note 2) - Class III 113,348
12b-1 fee (Note 2) - Class M 625
Administration fee (Note 2) - Class M 500
-----------
Net expenses 966,773
-----------
Net investment income 588,797
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 1,755,273
Closed swap contracts (296,448)
Foreign currency, forward contracts and foreign
currency related transactions (74,779)
-----------
Net realized gain 1,384,046
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (8,270,306)
Open swap contracts (35,488)
Foreign currency, forward contracts and foreign
currency related transactions 399
-----------
Net unrealized loss (8,305,395)
-----------
Net realized and unrealized loss (6,921,349)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,332,552)
===========
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 588,797 $ 1,029,438
Net realized gain (loss) 1,384,046 (6,820,591)
Change in net unrealized appreciation (depreciation) (8,305,395) 10,978,483
----------- -----------
Net increase (decrease) in net assets from
operations (6,332,552) 5,187,330
----------- -----------
Distributions to shareholders from:
Net investment income
Class III (1,010,952) (414,875)
----------- -----------
Total distributions from net investment income (1,010,952) (414,875)
----------- -----------
Net share transactions (Note 5):
Class III 23,980,200 15,393,038
Class M 579,467 --
----------- -----------
Increase in net assets resulting from net share
transactions 24,559,667 15,393,038
----------- -----------
Total increase in net assets 17,216,163 20,165,493
NET ASSETS:
Beginning of period 72,404,692 52,239,199
----------- -----------
End of period (including accumulated undistributed
net investment income of $579,393 and $813,684,
respectively) $89,620,855 $72,404,692
=========== ===========
</Table>
14 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.65 $ 8.81 $ 11.41 $ 5.74 $ 8.61
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.08 0.14 0.08 0.05 0.23
Net realized and unrealized gain
(loss) (1.04) 0.77 (2.48) 5.63 (2.94)
------- ------- ------- ------- -------
Total from investment operations (0.96) 0.91 (2.40) 5.68 (2.71)
------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.15) (0.07) -- -- (0.16)
From net realized gains -- -- (0.20) (0.01) --
------- ------- ------- ------- -------
Total distributions (0.15) (0.07) (0.20) (0.01) (0.16)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.54 $ 9.65 $ 8.81 $ 11.41 $ 5.74
======= ======= ======= ======= =======
TOTAL RETURN(a) (10.15)% 10.49% (21.27)% 98.96% (31.60)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $89,042 $72,405 $52,239 $65,191 $31,718
Net expenses to average daily net
assets 1.27% 1.40% 1.40% 1.28% 1.27%
Net investment income to average
daily net assets 0.78% 2.12% 0.91% 0.54% 3.65%
Portfolio turnover rate 108% 109% 98% 157% 158%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.31% 0.17% 0.15% 0.17% 0.34%
Purchase and redemption fees
consisted of the following per
share amounts:(b) $0.00(c) $ 0.04 $ 0.02 -- --
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown. Calculations excludes purchase
premiums and redemption fees.
(b) Effective March 1, 2000 the fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
(c) Purchase and redemption fees were less than $0.01 per share. The
redemption fee was rescinded effective April 1, 2002.
See accompanying notes to the financial statements. 15
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS M SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM
JULY 9, 2002
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 28, 2003
----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.85
-------
Income from investment operations:
Net investment income 0.01
Net realized and unrealized loss (1.35)
-------
Total from investment operations (1.34)
-------
NET ASSET VALUE, END OF PERIOD $ 8.51
=======
TOTAL RETURN(a) (13.60)%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 579
Net expenses to average daily net assets 1.57%*
Net investment income to average daily net assets 0.20%*
Portfolio turnover rate 108%
Fees and expenses reimbursed by the Manager to average
daily net assets: 0.41%*
</Table>
* Annualized.
** Not annualized.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
16 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Emerging Countries Fund (the "Fund") (formerly GMO Evolving Countries
Fund) is a series of GMO Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940, as amended, as an open-end,
non-diversified management investment company. The Fund is advised and
managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities
traded in the securities markets of developing countries of Asia, Latin
America, the Middle East, Africa and Europe ("Emerging Markets"). The
Fund's benchmark is the S&P/IFC Investable Composite Index.
Throughout the year ended February 28, 2003, the Fund offered Class III
shares. Effective July 9, 2002, the Fund began to offer Class M shares.
Class III shares bear a shareholder service fee while Class M shares bear
an administrative fee and a 12b-1 fee (See Note 2). The principal economic
difference between the classes of shares is the level of fees borne by the
classes.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Shares of mutual funds are valued at their net asset value as reported on
each business day. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their
17
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if there are movements in
foreign currency values that are unfavorable to the Fund. There were no
forward foreign currency contracts outstanding as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a
18
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
segregated account in the name of the futures broker, an amount of cash or
U.S. government and agency obligations in accordance with the initial
margin requirements of the broker or exchange. In addition, the Fund
maintains cash or securities in an amount that at least equals the net
amount payable in the event the Fund must deliver the full amount of the
contracts. Futures contracts are marked to market daily and an appropriate
payable or receivable for the change in value ("variation margin") is
recorded by the Fund. The payable or receivable is liquidated on the
following business day. Gains or losses are recognized but not considered
realized until the contracts expire or are closed. Futures contracts
involve, to varying degrees, risk of loss in excess of the variation
margin disclosed in the Statement of Assets and Liabilities. Losses may
arise from the changes in the value of the underlying instrument, if there
is an illiquid secondary market for the contracts, or if counterparties do
not perform under the contract terms. Futures contracts are valued at the
settlement price established each day by the board of trade or exchange on
which they are traded. As of February 28, 2003, there were no outstanding
futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
19
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the
20
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. At February 28, 2003, there were no open swap agreements.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid was as follows: ordinary income --
$44,875 and $1,010,952, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $1,070,417 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to passive foreign investment company transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $1,253,194, $7,353,298 and $156,212 expiring in 2009, 2010 and
2011, respectively. The Fund has elected to defer to March 1, 2003
post-October capital losses of $1,808,334.
21
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency and
passive foreign investment company transactions. The financial highlights
exclude these adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain
------------------------- -------------------------
$187,864 $(187,864)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service, 12b-1, and
administration fees, which are directly attributable to a class of shares,
are charged to that class' operations.
PURCHASES AND REDEMPTIONS OF FUND SHARES
Effective April 1, 2002 the Fund ceased charging a purchase premium or
redemption fee in connection with the purchase or sale of Fund shares.
Prior to April 1, 2002, the premium on cash purchases of Fund shares was
1.20% of the amount invested. In the case of cash redemptions, the fee was
.40% of the amount redeemed. All purchase premiums and redemption fees
were paid to and recorded by the Fund as paid-in capital. For the years
ended February 28, 2002 and February 28, 2003, the Fund received $230,775
and $0 in purchase premiums and $15,444 and $1,000 in redemption fees,
respectively.
22
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
INVESTMENT RISK
Investments in securities of issuers in emerging countries present certain
risks that are not inherent in many other investments. Many emerging
countries present elements of political and/or economic instability. The
securities markets of emerging countries are generally smaller and less
developed than the securities markets of the U.S. and developed foreign
markets. Further, countries may impose various types of foreign currency
regulations or controls which may impede the Fund's ability to repatriate
amounts it receives. The Fund may acquire interests in securities in
anticipation of improving conditions in the related countries. These
factors may result in significant volatility in the values of its
holdings. The markets for emerging countries are relatively illiquid.
Accordingly, the Fund may not be able to realize in an actual sale amounts
approximating those used to value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .65% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
Class M shares of the Fund pays GMO an administrative fee monthly at an
annual rate of .20% of average daily Class M net assets for support
services provided to Class M shareholders.
Fund Distributors, Inc. (the "Distributor") serves as the Fund's
distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the
Fund, Class M shares of the Fund pay a fee at the annual rate of .25% of
average daily Class M net assets for any activities or expenses intended
to result in the sale of Class M shares of the Fund. This fee may be spent
by the Distributor on personal services rendered to Class M shareholders
of the Fund and/or maintenance of Class M shareholder accounts.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding fees and expenses of the independent
Trustees of the Trust (including legal 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, interest expense and transfer
taxes), exceed 1.25% and 1.55% of the Fund's average daily net assets, for
Class III and Class M, respectively.
The Fund incurred fees and expenses indirectly as a shareholder in GMO
Alpha LIBOR Fund. For the year ended February 28, 2003, indirect operating
expenses (excluding investment-related
23
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
expenses) were less than .001% of the Fund's average daily net assets, and
indirect investment-related expenses (including, but not limited to,
interest expense, foreign audit expense, and investment-related legal
expense) were less than .001% of the Fund's average daily net assets.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $1,998. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, were as
follows:
<Table>
<Caption>
Purchases Sales
------------ -----------
U.S. Government securities $ 147,847 $ 159,663
Investments (non-U.S. Government securities) 100,865,466 78,790,691
</Table>
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$89,549,475 $9,068,543 $(10,007,000) $(938,457)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 50.7% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the
outstanding shares of the Fund. Investment activities of these
shareholders may have a material effect on the Fund.
24
<Page>
GMO EMERGING COUNTRIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------- -------------------------
Shares Amount Shares Amount
----------- ------------ ---------- -------------
Class III:
Shares sold 7,169,991 $ 63,503,546 2,036,289 $ 18,983,825
Shares issued to shareholders in
reinvestment of distributions 99,670 970,789 47,640 393,508
Shares repurchased (4,337,592) (40,494,135) (514,676) (3,984,295)
----------- ------------ ---------- -------------
Net increase 2,932,069 $ 23,980,200 1,569,253 $ 15,393,038
=========== ============ ========== =============
</Table>
<Table>
<Caption>
Period from July 9, 2002
(commencement of
operations)
through February 28, 2003
-------------------------
Shares Amount
----------- ------------
Class M:
Shares sold 170,323 $ 1,468,988
Shares issued to shareholders in
reinvestment of distributions -- --
Shares repurchased (102,349) (889,521)
----------- ------------
Net increase 67,974 $ 579,467
=========== ============
</Table>
25
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Countries Fund
(formerly GMO Evolving Countries Fund) (the "Fund") (a series of GMO Trust) at
February 28, 2003, and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
26
<Page>
GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND)
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$223,685 and recognized foreign source income of $1,725,739.
27
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios
Term of Principal in Fund Other
Office(1) and Occupation(s) Complex Directorships
Name, Address, Position(s) Length of During Past Overseen Held by
and Age Held with Fund Time Served Five Years by Trustee Trustee
------------------ -------------------- -------------------- -------------------- --------------- -------------
Jay O. Light Trustee of the Trust Since May 1996 Professor of 39 *(2)
c/o GMO Trust Business
40 Rowes Wharf Administration and
Boston, MA 02110 Senior Associate
Age: 61 Dean, Harvard
University.
Donald W. Trustee of the Trust Since December 2000 Advisory Counsel, 39 None
Glazer, Esq. Goodwin Procter LLP;
c/o GMO Trust Secretary and
40 Rowes Wharf Consultant,
Boston, MA 02110 Provant, Inc.
Age: 58 (provider of
performance
improvement training
services and
products) (1998 -
present);
Consultant --
Business and Law.
</Table>
28
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios
Term of Principal in Fund Other
Office(1) and Occupation(s) Complex Directorships
Name, Address, Position(s) Length of During Past Five Overseen Held by
and Age Held with Fund Time Served Years by Trustee Trustee
------------------ -------------------- -------------------- -------------------- --------------- -------------
R. Jeremy Chairman of the Since September Member, Grantham, 39 None
Grantham(3) Board of Trustees of 1985. President from Mayo,
c/o GMO Trust the Trust February 2002 - Van Otterloo & Co.
40 Rowes Wharf October 2002. LLC.
Boston, MA 02110
Age: 64
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
29
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
---------------------------- -------------- ------------------- --------------------------------------------------
Scott Eston President and President and Chief Chief Financial Officer (1997-present), Chief
c/o GMO Trust Chief Executive Officer Operating Officer (2000 - present) and Member,
40 Rowes Wharf Executive since October 2002; Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer of the Vice President from
Age: 47 Trust August 1998 -
October 2002.
Susan Randall Harbert Chief Chief Financial Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Financial Officer Since
40 Rowes Wharf Officer and February 2000;
Boston, MA 02110 Treasurer of Treasurer since
Age: 45 the Trust February 1998.
Brent Arvidson Assistant Since September Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust Treasurer of 1998. Otterloo & Co. LLC.
40 Rowes Wharf the Trust
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting
c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf the Trust 1997; Clerk since Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 March 2001; May
Age: 37 1999 - August 1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust and Secretary since August 1999; Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf of the Trust Secretary since Associate/Junior Partner, Hale and Dorr LLP
Boston, MA 02110 March 2001. (1991 - 1999).
Age: 58
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Laundering
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
30
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Emerging Country Debt Share Fund returned +15.8% for
the fiscal year ended February 28, 2003, as compared with +12.3% for the J.P.
Morgan Emerging Markets Bond Index Global (EMBIG).
The Fund outperformed the benchmark during the fiscal year by 3.5%. EMBIG
spreads over U.S Treasuries widened from 615 to 659 basis points during the
12-month period. The EMBIG return of 12.3% for the calendar year was driven by
carry (the yield on the index averaged over 10%) and a 1.2 percentage point drop
in U.S. interest rates.
The biggest gainers of the fiscal year were Russia (+31.6%), Lebanon (+25.6%),
and South Africa (+22.6%). Russia benefited from strong oil and other commodity
prices and prudent macro-economic policies, including ongoing fiscal surpluses,
which have significantly eased its debt service burden. Lebanon rebounded from a
relatively low level after a French-led group of donor countries pledged support
in return for promising to tackle its huge fiscal and current account deficits.
South Africa took advantage of gold and other commodities, as well as relative
isolation from problems in Latin America and the Middle East. Countries outside
Latin America (48% of the index) outperformed Latins, +19.5% to +6.5%.
The worst performing countries for the year were Uruguay (-35.5%), Ivory Coast
(-23.7%), and Argentina (-12.2%). The Uruguayan economy suffered from the
problems in neighboring Argentina and Brazil, with which most of its trade is
conducted. It is now trying to convince private investors to participate in a
debt exchange to improve its amortization profile. Ivory Coast was making good
progress toward reforming its economy in cooperation with the IMF, and
restructuring its defaulted bonds with its private creditors at a time when
Muslim rebels from the north took up arms against the southern Christian
government, a conflict that still has not been completely resolved. Argentina
continues to suffer from a lack of political leadership, although its economy
seems to have bottomed out. A new president is to be elected in April, and will
be responsible for dealing with holders of defaulted Argentine bonds. These
three countries were the only ones in the index to generate losses over the
period, and Uruguay and Ivory Coast are each less than 0.1% of the EMBIG.
Market selection added value, primarily from the Russia and Bulgaria overweights
and the underweight in Brazil. However, overweighting Ivory Coast and
underweighting Lebanon cost some alpha. Security selection added 290 basis
points of positive alpha in total, mostly from positions in Russia, where 2030
Eurobonds outperformed and the first phase of the FTO exchange was completed,
and Bulgaria, where we overweighted the Brady bonds.
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
Entering March 2003 the Fund, through its investment in GMO Emerging Country
Debt Fund, has meaningful overweightings in debt of Algeria and Russia. The Fund
meaningfully underweights the debt of Mexico, Malaysia, and Turkey. The Fund
emphasizes less liquid debt and obtains default protection when cheaply priced.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING COUNTRY DEBT SHARE FUND CLASS III SHARES AND THE
J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL
AS OF FEBRUARY 28, 2003
GMO EMERGING COUNTRY J.P. MORGAN EMERGING
DEBT SHARE FUND MARKETS BOND INDEX GLOBAL
7/20/98 $10,000 $10,000
9/30/98 $6,160 $7,683
12/31/98 $6,968 $8,565
3/31/99 $7,269 $9,013
6/30/99 $7,701 $9,422
9/30/99 $7,802 $9,562
12/31/99 $9,207 $10,636
3/31/2000 $10,539 $11,335
6/30/2000 $10,551 $11,376
9/30/2000 $11,396 $11,943
12/31/2000 $11,438 $12,169
3/31/2001 $11,800 $12,445
6/30/2001 $12,459 $12,877
9/30/2001 $12,016 $12,339
12/31/2001 $13,068 $12,334
3/31/2002 $14,247 $13,047
6/30/2002 $13,711 $12,446
9/30/2002 $13,775 $12,399
12/31/2002 $15,553 $13,951
2/28/2003 $16,411 $14,635
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING COUNTRY DEBT SHARE FUND CLASS III SHARES AND THE
J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL
AS OF FEBRUARY 28, 2003
J.P. MORGAN EMERGING
MARKETS BOND INDEX GLOBAL +*
7/20/98 $10,000
9/30/98 $7,586
12/31/98 $8,338
3/31/99 $8,760
6/30/99 $9,220
9/30/99 $9,330
12/31/99 $10,504
3/31/2000 $11,194
6/30/2000 $11,234
9/30/2000 $11,795
12/31/2000 $12,017
3/31/2001 $12,290
6/30/2001 $12,717
9/30/2001 $12,186
12/31/2001 $12,180
3/31/2002 $12,885
6/30/2002 $12,291
9/30/2002 $12,245
12/31/2002 $13,778
2/28/2003 $14,453
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 7/20/98
Class III 15.81% 11.34%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
* J.P. Morgan EMBI Global + represents the J.P. Morgan EMBI prior to 8/95, J.P.
Morgan EMBI+ through 12/31/99 and the J.P. Morgan EMBI Global thereafter. The
manager changed the benchmark due to the belief that the EMBIG is more
diversified and representative of the universe of emerging country debt.
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------
MUTUAL FUND -- 98.9%
6,871,915 GMO Emerging Country Debt Fund, Class III (Cost
$59,166,157) 65,420,635
----------
TOTAL INVESTMENTS -- 98.9%
(Cost $59,166,157) 65,420,635
Other Assets and Liabilities (net) -- 1.1% 719,420
----------
TOTAL NET ASSETS -- 100.0% $66,140,055
==========
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $59,166,157) (Note 1) $65,420,635
Cash 532,219
Receivable for Fund shares sold 187,679
Interest receivable 187
Receivable for expenses reimbursed by Manager (Note 2) 6,748
-----------
Total assets 66,147,468
-----------
LIABILITIES:
Accrued expenses 7,413
-----------
Total liabilities 7,413
-----------
NET ASSETS $66,140,055
===========
NET ASSETS CONSIST OF:
Paid-in capital $60,495,458
Accumulated undistributed net investment income 3,705
Accumulated net realized loss (613,586)
Net unrealized appreciation 6,254,478
-----------
$66,140,055
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $66,140,055
===========
SHARES OUTSTANDING:
Class III 6,914,927
===========
NET ASSET VALUE PER SHARE:
Class III $ 9.56
===========
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends from investment company shares $5,864,038
Interest 3,441
----------
Total income 5,867,479
----------
EXPENSES:
Registration fees 17,371
Custodian and transfer agent fees 11,306
Audit fees 11,106
Legal fees 8,616
Trustees fees and related expenses (Note 2) 1,311
Miscellaneous 5,518
Fees reimbursed by Manager (Note 2) (53,567)
----------
1,661
----------
Net expenses 1,661
----------
Net investment income 5,865,818
----------
REALIZED AND UNREALIZED GAIN:
Net realized gain on:
Investments 1,362,286
Realized gains distributions from investment company
shares 1,086,793
----------
Net realized gain on investments 2,449,079
----------
Change in net unrealized appreciation (depreciation) on
investments 360,455
----------
Net realized and unrealized gain 2,809,534
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,675,352
==========
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 5,865,818 $ 9,967,725
Net realized gain (loss) 2,449,079 (2,435,702)
Change in net unrealized appreciation (depreciation) 360,455 7,536,465
------------ ------------
Net increase in net assets from operations 8,675,352 15,068,488
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (6,495,001) (9,960,484)
------------ ------------
Total distributions from net investment income (6,495,001) (9,960,484)
------------ ------------
Net share transactions (Note 5):
Class III (25,991,923) (17,637,823)
------------ ------------
Decrease in net assets resulting from net share
transactions (25,991,923) (17,637,823)
------------ ------------
Total decrease in net assets (23,811,572) (12,529,819)
NET ASSETS:
Beginning of period 89,951,627 102,481,446
------------ ------------
End of period (including accumulated undistributed
net investment income of $3,705 and $7,241,
respectively) $ 66,140,055 $ 89,951,627
============ ============
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------------
2003 2002 2001 2000 1999*
----------- ----------- ---------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.25 $ 8.90 $ 8.70 $ 6.84 $ 10.00
------- ------- -------- ------- -------
Income from investment operations:
Net investment income(a) 0.83++ 1.03++ 1.33++ 1.10 0.03
Net realized and unrealized gain
(loss) 0.57 0.51 0.23 1.97 (3.16)
------- ------- -------- ------- -------
Total from investment operations 1.40 1.54 1.56 3.07 (3.13)
------- ------- -------- ------- -------
Less distributions to shareholders:
From net investment income (1.09) (1.19) (1.36) (1.20) (0.03)
From net realized gains -- -- -- (0.01) --
------- ------- -------- ------- -------
Total distributions (1.09) (1.19) (1.36) (1.21) (0.03)
------- ------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.56 $ 9.25 $ 8.90 $ 8.70 $ 6.84
======= ======= ======== ======= =======
TOTAL RETURN(b) 15.81% 18.47% 18.71% 46.71% (31.32)%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $66,140 $89,952 $102,481 $86,280 $41,216
Net expenses to average daily net
assets(c) 0.00%(d) 0.00%(d) 0.00% 0.00% 0.00%**
Net investment income to average
daily net assets(a) 8.88% 11.43% 14.39% 14.22% 0.64%**
Portfolio turnover rate 30% 14% 0% 0% 0%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.08% 0.06% 0.03% 0.04% 0.09%**
</Table>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by GMO Emerging Country Debt Fund.
(b) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in
underlying fund.
(See Note 1.)
(d) The ratio of net expenses to average daily net assets was less than
0.01%.
* Period from July 20, 1998 (commencement of operations) through February
28, 1999.
** Annualized.
+ Not Annualized.
++ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 5
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Emerging Country Debt Share Fund (the "Fund"), is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high total return through investment in Class III Shares of
GMO Emerging Country Debt Fund ("ECDF"), a portfolio of the Trust. GMO
also serves as investment manager to ECDF. ECDF pursues its objectives by
investing primarily in sovereign debt of developing countries in Asia,
Latin America, the Middle East, Africa and Europe. The Fund's benchmark is
the J.P. Morgan Emerging Markets Bond Index Global. The financial
statements of ECDF should be read in conjunction with the Fund's financial
statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of ECDF are valued at their net asset value as reported on each
business day. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost, which approximates fair value.
Securities for which quotations are not readily available or whose values
the manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value. Certain securities held by the underlying fund in which the Fund
invests were valued on the basis of a price provided by a principal market
maker. The prices provided by the principal market makers may differ from
the value that would be realized if the securities were sold and the
differences could be material to the financial statements.
6
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income were $9,960,484
and $6,495,001, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $3,705 and $128,471 of undistributed ordinary income
and undistributed long-term capital gains, respectively. The temporary
difference between book and tax basis distributable earnings are primarily
due to losses on wash sales transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of
7
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under U.S. federal
tax rules versus U.S. GAAP. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Net
Investment Income Realized Loss
----------------- -------------
$625,647 $(625,647)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from ECDF are recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur certain fees and expenses indirectly as
a shareholder in ECDF (See Note 2).
PURCHASES AND REDEMPTIONS OF FUNDS SHARES
The Fund does not charge any purchase premium or redemption fee in
connection with the purchase and sale of Fund shares. As a shareholder in
ECDF, the Fund will indirectly bear ECDF's purchase premium and redemption
fees which are .50% and .25%, respectively. These fees are paid to and
retained by ECDF.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in ECDF. Investments in emerging country debt present certain risks that
are not inherent in many other securities. Many emerging countries present
elements of political and/or economic instability, which may result in
ECDF's inability to collect on a timely basis, or in full, principal and
interest payments. Further, countries may impose various types of foreign
currency regulations or controls which may impede ECDF's ability to
repatriate amounts it receives. ECDF may acquire interests in securities
or bank loans which are in default at the time of acquisition in
anticipation of improving conditions in the
8
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
related countries. These factors may result in significant volatility in
the values of its holdings. The markets for emerging country debt are
relatively illiquid. Accordingly, ECDF may not be able to realize in an
actual sale amounts approximating those used to value its holdings.
Additionally, the investment risk associated with an investment in ECDF
may be more pronounced to the extent that ECDF engages in derivative
transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The manager does not directly charge an advisory fee or shareholder
service fee. GMO, in its capacity as Manager of ECDF, earns a management
fee at the annual rate of .35% of ECDF's average daily net assets.
Additionally, Class III shares of ECDF bear a shareholder service fee at
the annual rate of .15% of ECDF's average daily net assets.
GMO has entered into a binding agreement, effective until at least
June 30, 2003, to reimburse the Fund for its total annual direct operating
expenses (excluding fees and expenses of the independent Trustees of the
Trust (including legal 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, interest expense and transfer
taxes).
The Fund incurs fees and expenses indirectly as a shareholder in ECDF. For
the year ended February 28, 2003, the shareholder service fees incurred
indirectly by the Fund through its investment in ECDF were .15% of the
Fund's average daily net assets, indirect operating expenses (excluding
shareholder service fees and investment-related expenses) were .414% of
the Fund's average daily net assets, and indirect investment-related
expenses (including, but not limited to, interest expense, foreign audit
expense, and investment-related legal expense) were .079% of the Fund's
average daily net assets.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $862. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$20,064,831 and $45,800,869, respectively.
9
<Page>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
$59,908,214 $5,564,416 $(51,995) $5,512,421
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 100% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ---------- ------------
Shares sold 1,532,346 $ 14,338,722 441,370 $ 3,958,889
Shares issued to shareholders
in reinvestment of distributions 717,691 6,495,001 1,170,445 9,960,484
Shares repurchased (5,057,362) (46,825,646) (3,399,153) (31,557,196)
---------- ------------ ---------- ------------
Net decrease (2,807,325) $(25,991,923) (1,787,338) $(17,637,823)
========== ============ ========== ============
</Table>
10
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO EMERGING COUNTRY DEBT SHARE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Country Debt Share
Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
11
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
12
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
13
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
14
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
Emerging Markets Quantitative Division at Grantham, Mayo, Van Otterloo & Co.
LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Emerging Markets Fund returned -9.1% for the
fiscal year ended February 28, 2003. The Fund's benchmark, the S&P/IFC
Investable Composite, returned -11.6% during the same period.
We normally expect to obtain approximately 70% of our value added from country
selection and the rest from stock selection. During the fiscal year we were on
target with 1.5% added value coming from country selection and 1.0% coming from
security selection.
Like the previous three years, our largest overweight for 2002 came in the TIP
(Thailand, Indonesia, Philippines) region. While Philippines disappointed this
year (falling over 30%), Thailand and Indonesia were two of the top performing
markets on the back of strengthening economies and political reforms. Both
markets were approximately flat over the past 12 months, outperforming the
global emerging markets by 12%. Our overweight of this region added 0.8% to
performance.
The biggest driver outside of Asia was the weakening U.S. dollar (on the back of
economic uncertainty and the looming war in Iraq). A weak dollar meant a strong
euro, strong gold price, and strong commodity prices in general. South Africa
and Russia (up 34% and 35%, respectively) were the biggest beneficiaries of this
move because of their high concentration in mining and oil. Our 3.6% underweight
of South Africa cost the Fund 1.5%. This was partially balanced by the 2.5%
overweight in Russia, which added 0.8%.
Eastern Europe, with Czech Republic, Poland, and Hungary set to enter the
Eurozone in 2004, also benefited from the weak dollar. We are overweight the
Czech Republic and Poland, and building weight in all three markets. Our
combined 3% bet on the region added 0.8% to performance.
Mexico found itself on the other side of the dollar trade. Having risen in
sympathy with the strong dollar in the late-1990s, the Mexican peso fell
rapidly, even against the already weak dollar over the past 12 months. We have
been underweight in this market for 3 years on the back of an overvalued market
and currency. Our 6.4% underweight added 0.9% to performance.
Value stocks strung together their third straight year of strong returns. The
cheapest third of stocks outperformed by 4%, while their expensive counterparts
lagged by over 8%. Our bet on these two groups added 1% to performance.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
For the second year, emerging equities significantly outperformed their global
counterparts in a difficult environment. The S&P 500 and MSCI EAFE fell 22.7%
and 17.5%, respectively, over the year ended February 28, 2003, further
supporting the case for emerging markets as a diversifying asset class.
Nevertheless, there is even more hope for the future. A couple of secular trends
fuel this optimism. First there is a realization among emerging market
policymakers that they need to reduce their dependence on export-led growth and
boost their domestic economy. This has led to low interest rates, driving up
consumption in most of our investable markets. Second, as western economies
struggle to recover from the overhang of the bubble, cost control through
outsourcing has become a mainstream strategy. Production and services are being
moved aggressively to lower-cost destinations, primarily in emerging markets.
As always, short-term (absolute) performance of the asset class will likely be
driven by global equity moves, global growth, and any developments in the
conflict with Iraq. But, trading at 10 times price to earnings, with strong
growth prospects, emerging markets have a safety net that the rest of global
equities do not. We would expect the asset class to continue to outperform
global equities.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING MARKETS FUND CLASS III SHARES
AND THE S&P/IFC INVESTABLE COMPOSITE INDEX
AS OF FEBRUARY 28, 2003 GMO EMERGING MARKETS FUND S&P/IFC INVESTABLE COMPOSITE INDEX
12/9/93 $9,920 $10,000
12/31/93 $10,926 $11,127
3/31/94 $11,035 $9,812
6/30/94 $10,926 $9,500
9/30/94 $13,232 $11,776
12/31/94 $11,612 $9,792
3/31/95 $9,679 $8,352
6/30/95 $10,808 $9,082
9/30/95 $10,895 $9,051
12/31/95 $10,152 $8,967
3/31/96 $11,101 $9,642
6/30/96 $11,885 $10,060
9/30/96 $11,324 $9,834
12/31/96 $11,334 $9,809
3/31/97 $12,566 $10,744
6/30/97 $14,154 $11,392
9/30/97 $14,509 $10,364
12/31/97 $11,322 $8,363
3/31/98 $11,821 $8,950
6/30/98 $8,483 $7,051
9/30/98 $6,746 $5,520
12/31/98 $8,052 $6,521
3/31/99 $8,922 $7,233
6/30/99 $11,991 $8,952
9/30/99 $10,885 $8,671
12/31/99 $14,311 $10,899
3/31/2000 $14,561 $11,046
6/30/2000 $12,689 $9,915
9/30/2000 $11,679 $8,627
12/31/2000 $10,333 $7,438
3/31/2001 $10,520 $7,075
6/30/2001 $11,321 $7,588
9/30/2001 $9,393 $5,890
12/31/2001 $11,343 $7,569
3/31/2002 $13,643 $8,548
6/30/2002 $12,646 $7,874
9/30/2002 $10,526 $6,640
12/31/2002 $11,434 $7,272
2/28/2003 $11,330 $7,063
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 12/9/93
Class III -10.59% -0.21% 1.36%
1/9/98
Class IV -10.54% -0.17% 1.86%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 80 bp on the purchase and 80 bp on the redemption.
Transaction fees are retained by the Fund to cover trading costs. Performance
for Class IV shares may vary due to different shareholder servicing fees. Past
performance is not indicative of future performance. Information is unaudited.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
COMMON STOCKS -- 80.2%
ARGENTINA -- 0.6%
180,400 BBVA Banco Frances SA ADR* 862,312
291,000 Grupo Financiero Galicia SA ADR* 739,140
63,500 IRSA Inversiones y Representaciones SA GDR* 481,965
715,700 Perez Companc SA ADR* 5,217,453
613,450 Telecom Argentina SA ADR* 2,466,069
122,779 Tenaris SA ADR* 2,749,022
--------------
12,515,961
--------------
BRAZIL -- 2.5%
2,408,716,800 Banco do Brasil SA 6,479,037
718,408,500 Companhia Siderurgica Nacional SA 12,480,058
1,288,732,000 Electrobras 6,066,320
356,500 Petroleo Brasileiro SA (Petrobras) 4,775,642
178,000 Petroleo Brasileiro SA (Petrobras) ADR 2,379,860
1,441,200 Souza Cruz (Registered) 8,047,945
452,301,000 Tele Norte Leste Participacoes SA 2,154,418
451,750 Vale Do Rio Doce 13,163,911
--------------
55,547,191
--------------
CHILE -- 0.4%
16,400 AFP Provida SA ADR 367,032
79,300 Banco Santander Chile SA ADR 1,420,263
33,500 Compania de Telecommunicaciones de Chile ADR 316,910
84,800 Cristalerias de Chile SA ADR 1,547,600
94,000 Embotelladora Andina SA ADR 606,300
720,481 Enersis SA ADR* 2,881,924
126,400 Masisa SA ADR 783,680
13,500 Sociedad Quimica y Minera de Chile ADR 301,050
--------------
8,224,759
--------------
CHINA -- 9.9%
36,340,000 Brilliance China Automotive Holdings Ltd 8,480,312
45,683,000 China Eastern Airlines Corp Ltd Class H 5,974,620
32,240,000 China Everbright Ltd 9,714,454
4,188,000 China Insurance International Holdings Co Ltd 2,282,186
12,217,000 China Mobile Ltd* 26,316,575
284,800 China Mobile Ltd ADR* 3,115,712
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
CHINA -- CONTINUED
98,229,000 China Petroleum & Chemical Corp Class H 18,514,525
6,706,000 China Resources Enterprise Ltd 6,018,900
25,954,000 China Unicom* 15,723,949
398,800 China Unicom ADR* 2,460,596
9,522,940 Chongqing Changan Automobile Co Ltd Class B 4,823,071
10,882,000 CNOOC Ltd 15,278,417
52,000 CNOOC Ltd ADR 1,449,240
14,756,000 Cosco Pacific Ltd 13,338,693
53,668,800 Denway Motors Ltd 20,644,228
13,546,000 Guangdong Investments Ltd* 2,049,503
8,426,000 Huaneng Power International Inc Class H 7,508,648
10,528,000 Legend Holdings Ltd 3,610,981
2,607,000 People's Food Holdings Ltd 1,341,612
124,363,000 PetroChina Co Ltd Class H 25,991,677
18,716,000 Shandong International Power Development Co Ltd Class H 4,247,582
4,403,000 Shanghai Industrial Holdings Ltd Class H 6,831,083
8,686,000 Sinopec Shanghai Petrochemical Co Ltd Class H* 1,458,971
10,662,000 TCL International Holdings Ltd 2,768,339
7,700,000 Top Form International Ltd* 957,675
5,121,847 TPV Technology Ltd 1,477,626
2,050,000 Victory City International Holdings 502,045
10,146,918 Zhejiang Southeast Electric Power Co Class B 6,270,795
--------------
219,152,015
--------------
CZECH REPUBLIC -- 2.5%
378,376 Ceske Radiokomunikace* 2,439,305
937,965 Ceski Telecom AS* 8,592,891
4,402,378 CEZ AS 13,742,447
339,000 Komercni Banka AS 24,327,584
48,000 Komercni Banka AS GDR 1,152,000
14,330 Philip Morris CR AS 5,358,173
--------------
55,612,400
--------------
EGYPT -- 0.4%
188,744 Commercial International Bank 1,184,940
147,216 Eastern Tobacco Co 1,452,355
590,136 Egyptian International Pharmaceuticals Industries Co 910,344
721,257 MobiNil-Egyptian Mobile Services Co 4,784,230
--------------
8,331,869
--------------
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
HUNGARY -- 0.5%
22,150 Gedeon Richter Rt 1,356,972
103,400 Magyar Tavkozlesi Rt (Matav) ADR 1,684,386
74,600 MOL Magyar Olaj es Gazipari Rt (New Shares) 1,608,648
621,300 OTP Bank Rt 6,057,039
73,100 Pannonplast Rt 481,783
--------------
11,188,828
--------------
INDIA -- 0.7%
575,300 Bharat Heavy Electricals Ltd 2,533,420
1,060 BSES Ltd 5,093
900 Cipla Ltd 14,463
3,000 Cipla Ltd (New Shares)(a) 1
850 Escorts Ltd 745
133,200 e-Serve International Ltd 1,372,381
203,900 Galaxy Entertainment Corp* 77,428
1,318 Great Eastern Shipping Co 1,016
2,990 HCL Infosytems Ltd 5,457
400 ITC Ltd 5,455
87 Mahindra GESCO Developers Ltd 24
21,500 Mastek Ltd 262,971
21,275 NIIT Ltd 60,368
102,750 Polaris Software Lab 318,392
71,360 Ranbaxy Laboratories Ltd GDR 1,027,584
8,029 Reliance Industries 49,557
179,500 Reliance Industries Ltd GDR 144A 2,234,775
355,600 State Bank of India GDR 5,049,520
339,900 Tata Engineering & Locomotive GDR* 1,148,862
524,200 U TV Software Comm Ltd*+(a) 274,940
206,046 Venky's (India) Ltd 208,575
200 Wockhardt Life Sciences Ltd* 104
2,100 Wockhardt Ltd 20,046
--------------
14,671,177
--------------
INDONESIA -- 4.4%
25,161,692 Astra International Tbk* 6,656,158
69,382,000 Bank Central Asia Tbk 19,330,270
14,803,400 Bimantara Citra Tbk PT 3,999,343
30,109,200 Citra Marga Nusaphala Persad* 1,152,376
5,915,500 Gudang Garam 5,027,526
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
INDONESIA -- CONTINUED
33,535,500 HM Sampoerna Tbk 11,136,345
28,275,800 Indah Kiat Pulp & Paper* 557,018
32,617,500 Indofood Sukses Makmur Tbk 2,111,224
896,000 Indonesian Satellite Corp Tbk PT 791,760
29,868,000 Indorama Synthetics* 1,361,686
3,154,000 International Nickel* 2,272,258
41,841,000 Mayora Indah Tbk 1,695,588
186,900 PT Indosat (Persero) Tbk Class B ADR 1,626,030
38,503,000 PT Matahari Putra Prima Tbk 1,690,344
2,798,000 Semen Gresik 2,299,251
301,969 Telekomunikasi Indonesia Class B ADR 2,415,752
83,810,280 Telekomunikasi IndonesiaTbk PT Class B 33,727,895
--------------
97,850,824
--------------
ISRAEL -- 0.0%
11,736 Clal Industries Ltd* 33,347
--------------
LEBANON -- 0.0%
24,118 Banque Libanaise* 132,649
--------------
MALAYSIA -- 1.4%
301,000 Affin Holdings Berhad 64,953
11,064,000 Arab-Malaysian Corp Berhad* 2,664,095
710,000 Edaran Otomobil Berhad 1,457,368
4,310,000 Highlands and Lowlands Berhad 3,334,579
1,978,400 Hong Leong Credit Berhad 2,051,288
2,963,000 IJM Corp Berhad Class A 3,680,358
1,298,800 IOI Corp Berhad 2,033,647
1,546,873 Malakoff Berhad 1,644,570
1,159,000 Malaysian International Shipping (Foreign Registered) 2,196,000
632,000 Malaysian Oxygen Berhad 1,729,684
482,667 OYL Industries BHD 2,921,406
1,262,000 Perusahaan Otomobil Nasional 2,656,842
1,039,000 Resorts World Berhad 2,583,829
3,491,700 Saship Holdings*(a)(b) 9,189
137,463 Silverstone Corp BHD* 6,692
1,206,000 Sime UEP Properties Berhad 1,269,474
14,130,000 Tan Chong International Ltd 1,757,395
--------------
32,061,369
--------------
</Table>
See accompanying notes to the financial statements.
4
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
MEXICO -- 0.8%
1,963,000 Alfa SA Class A 2,855,402
106,110 America Movil SA de CV ADR 1,464,318
68,147 Cemex SA de CV ADR (Participating Certificates) 1,223,239
16,524 Cemex SA de CV CPO 59,417
1,084,300 Corporacion GEO SA de CV Series B* 2,061,405
3,840,000 Grupo Cementos de Chihuahua SA de CV* 2,608,518
8,232,755 Grupo Financiero Serfin SA de CV Class B*(a)(b) 7,457
3,720,000 Grupo Herdez SA de CV* 1,179,268
519,500 Grupo Modelo SA de CV Class C 1,072,808
209,400 Telefonos de Mexico Class L ADR 6,087,258
--------------
18,619,090
--------------
PERU -- 0.0%
39,200 Cia de Minas Buenaventura SA ADR 987,840
146,238 Union de Cervecerias Peruanas Backus & Johnson SA 57,998
--------------
1,045,838
--------------
PHILIPPINES -- 2.2%
36,062,184 Ayala Corp 2,810,899
167,333,000 Ayala Land Inc 14,270,490
3,108,400 Bank of the Philippine Islands 1,824,279
71,648,450 Filinvest Land Inc* 1,143,222
12,255,528 First Philippine Holdings* 1,843,106
201,212 Globe Telecom Inc* 1,937,392
8,511,305 Ionics Circuits Inc 78,050
674,000 Ionics EMS Inc 52,319
2,894,410 Metropolitan Bank & Trust Co 1,459,812
1,366,110 Philippine Long Distance Telephone* 7,328,513
50,000 Philippine Long Distance Telephone GDR 144A 1,200,000
7,324,551 San Miguel Corp Class B 9,000,365
48,611,000 SM Prime Holdings 4,725,141
--------------
47,673,588
--------------
POLAND -- 1.2%
303,400 Bank Pekao SA* 6,838,625
400,200 BRE Bank SA 6,954,575
2,085,800 KGHM Polska Miedz SA* 6,662,961
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
POLAND -- CONTINUED
1,490,200 Polski Koncern Naftowy Orlen 6,531,205
--------------
26,987,366
--------------
RUSSIA -- 5.0%
632,610 Bashneft* 1,783,960
2,649,789 Chelyabinsk Pipe Works 271,603
7,500 Cherepovets MK Severstal* 431,250
17,100 Dalmoreproduct 3,420
90,000 Divot Holdings NV*+(a)(b) 900
272,800 Electrosila* 777,480
29,221 Elsib 58,442
479,997 JSC Mining & Smelting Co ADR* 11,939,925
37,000 Lukoil ADR 144A 2,210,750
159,300 Lukoil Holding Co ADR 9,518,175
38,700 Mobile Telesystems ADR* 1,654,812
785,700 North-West Telecom 272,638
350,000 Onaco Oil Co* 546,000
40,000 Orenburgneft* 448,400
548,200 Rostelecom ADR 4,522,650
135,000 Russia Petroleum* 810,000
35,500 Sberbank RF 7,515,350
10,000 Seversky Tube Works ADR* 62,000
6,375 Severstal-Auto* 6,375
6,375 Severstal-Resursources* 638
8,896,214 Sibirtelecom 226,853
353,100 Sibneft ADR* 7,591,650
116,810 Sun Interbrew Ltd Class A GDR* 379,633
718,000 Sun Interbrew Ltd Class B GDR* 2,692,500
119,450 Tatneft ADR 2,006,760
37,000 Trade House GUM ADR* 114,700
2,400 Udmurtneft* 240,000
214,000 United Heavy Machinery ADR 144A* 1,198,400
1,345,180 United Heavy Machinery Uralmash-Izhora Group ADR* 7,533,008
155,000 Yukos Corp ADR 25,458,750
1,878,500 Yukos Oil 20,522,613
--------------
110,799,635
--------------
SOUTH AFRICA -- 8.8%
4,705,940 ABSA Group Ltd 19,488,709
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
SOUTH AFRICA -- CONTINUED
3,003,800 AECI Ltd 9,534,572
3,648,000 African Bank Investments Ltd 2,903,890
154,690 AngloGold Ltd 4,961,719
2,169,493 Anglovaal Industries Inc 3,550,769
5,501,000 Foschini Ltd 7,912,066
1,504,000 Gencor Ltd 7,785,644
6,900 Goldfields Ltd 86,409
4,000 Harmony Gold Mining Co Ltd 54,804
150,000 Impala Platinum Holdings Ltd 9,117,060
7,184,375 Iscor Ltd 15,811,665
782,279 Kumba Resources Ltd 2,909,867
246,008 Liberty International Plc 2,226,703
3,560,000 MTN Group Ltd* 5,627,953
1,018,000 Nampak Ltd 1,571,475
1,218,000 Naspers Ltd 3,458,382
1,832,716 Nedcor Ltd 21,815,072
2,793,200 Premier Group Ltd*(a) 3,463
3,098,770 Remgro Ltd 22,476,850
47 Sage Group Ltd 10
18,013,057 Sanlam Ltd 15,857,547
2,090,110 Sasol Ltd 24,606,756
833,000 Standard Bank Investment Corp 2,969,430
452,000 Tiger Brands Ltd 3,547,582
761,200 Tongaat-Hulett Group 3,492,133
2,152,000 Venfin Ltd* 4,362,649
--------------
196,133,179
--------------
SOUTH KOREA -- 14.5%
38,180 Amorepacific Corp 2,910,719
175,400 Cheil Industries Inc 2,093,956
1,955,400 Chohung Bank* 6,020,270
199,620 Daelim Industrial Co Ltd 2,809,547
1,367,500 Daesang Corp 2,211,096
12,330 Gwangju Shinsegae Co Ltd 413,186
78,450 Hanil Cement Manufacturing 2,132,704
1,257,500 Hankook Tire Co Ltd 2,744,345
221,840 Hanssem Co Ltd 2,053,644
1,536,348 Hanwha Corp* 2,419,750
437,840 Hyosung Corp 3,924,842
67,400 Hyundai Motor Co 1,417,283
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
SOUTH KOREA -- CONTINUED
64,900 Kangwon Land Inc 6,986,680
791,600 KIA Motors Corp 5,006,979
98,400 Kookmin Credit Card Co Ltd* 1,467,365
1,740,170 Korea Electric Power Corp 26,168,518
2,062,800 Korea Exchange Bank* 6,221,321
192,300 Korean Air Lines 2,174,884
399,500 KT Corp 14,609,119
346,600 KT Freetel* 7,114,062
539,700 KT&G Corp 7,573,388
576,000 KT&G Corp GDR 144A 4,032,000
481,700 LG Chemicals Ltd 14,931,429
309,410 LG Electronics Inc 10,446,298
335,800 LG Engineering & Construction Ltd 3,966,640
72,950 LG Household & Health Care Ltd 1,558,434
355,500 LG International Corp 1,474,239
2,553,600 LG Investment & Securities Co Ltd 26,955,439
252,800 Poongsan Corp 2,054,338
141,276 POSCO 13,078,371
674,600 Samsung Corp 3,492,672
383,000 Samsung Electronics 89,681,649
63,860 Samsung Fire & Marine Insurance 3,049,487
54,400 Samsung SDI Co Ltd 3,099,066
100,841 Shin Young Securities Co 1,161,617
21,400 Shinsegae Co Ltd 2,760,943
1,314,870 SK Corp 13,879,581
513,945 SK Global* 3,401,471
1,500 SK Telecom 207,347
214,000 SK Telecom ADR 3,293,460
1,390,400 Ssangyong Motor* 6,639,534
621,962 Taihan Electric Wire 2,475,030
27,800 Tongyang Confectionery Co 1,164,495
--------------
321,277,198
--------------
SRI LANKA -- 0.0%
333,600 Lanka Walltile Ltd 112,761
1,591,169 Millenium Information Technology*+(a) 787,470
--------------
900,231
--------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
TAIWAN -- 11.7%
12,342,290 Ambassador Hotel* 3,569,497
1,412,000 Ambit Microsystems Corp 4,347,741
15,040,050 Asustek Computer Inc 25,535,624
5,848,055 Chang Hwa Bank 2,625,314
54,273,020 China Development Financial Holding Corp* 20,459,757
13,780,400 China Housing Food & Synthetic* 1,594,164
8,058,000 China Manmade Fibers* 3,455,085
14,347,000 China Steel Corp 8,917,847
26,310,000 Chinatrust Financial Holding Co* 21,123,712
9,971,000 Compal Electronics Inc 9,612,331
2,623,000 Delta Electronics Inc 2,747,545
3,990,110 Evergreen Marine Corp 2,709,830
5,044,710 First Financial Holding Co Ltd* 3,150,222
5,587,000 Formosa Chemicals & Fibre Co 5,562,883
3,617,000 Formosa Plastics Corp 4,548,573
3,159,785 Formosa Taffeta Co 1,318,471
4,720,000 Fubon Financial Holding Co Ltd 3,708,086
1,725,250 GigaByte Technology Co Ltd 2,333,432
2,240,288 Hon Hai Precision Industry Co Ltd 7,220,497
17,540,880 Hsinchu International Bank* 7,092,068
19,393,200 Inventec Co Ltd 11,161,554
13,493,606 Mega Financial Holdings Co Ltd* 6,562,358
11,734,050 Nan Ya Plastic Corp 11,615,865
11,994,886 Orient Semiconductor Electronics Ltd* 1,846,695
38,836,000 Ritek Corp 18,328,357
5,716,000 Synnex Technology International Corp 7,994,176
32,247,010 Taiwan Cement Corp* 11,367,651
12,381,909 Taiwan Semiconductor* 14,965,185
13,786,914 Teco Electric & Machinery* 4,185,667
6,980,472 United Microelectronics* 3,957,275
632,167 United Microelectronics ADR* 2,041,899
15,549,000 Waterland Financial Holdings* 3,132,173
2,078,000 Wintek Corp* 1,734,158
27,803,040 Yageo Corp* 7,600,831
8,708,810 Yang Ming Marine Transport* 4,586,222
6,371,000 Yulon Motor Co 7,535,197
--------------
260,247,942
--------------
THAILAND -- 6.5%
10,329,295 Advanced Info Service Pcl (Foreign Registered) 9,415,508
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
THAILAND -- CONTINUED
2,705 Advanced Info Service Pcl NVDR 2,418
433,000 Bangkok Bank Pcl (Foreign Registered)* 642,643
629,000 Bangkok Bank Pcl NVDR* 786,526
16,339,700 Bangkok Expressway Pcl (Foreign Registered)(a) 5,728,538
19,778,000 Bank of Ayudhya Pcl (Foreign Registered)* 3,698,119
2,034,100 Banpu Pcl (Foreign Registered)(a) 1,806,610
853,400 BIG C Supercenter Pcl (Foreign Registered)*(a) 289,221
4,292,800 BIG C Supercenter Pcl NVDR* 1,454,846
2,352,800 Central Pattana Pcl (Foreign Registered)*(a) 1,264,798
1,847,600 Central Pattana Pcl NVDR* 993,217
21,105,640 Charoen Pokphand Foods Pcl (Foreign Registered)(a) 2,071,840
836,460 Electricity Generating Pcl (Foreign Registered) 782,012
2,109,300 Electricity Generating Pcl NVDR 1,947,350
5,724,000 GMM Grammy Pcl (Foreign Registered) 2,648,947
13,450 Italian-Thai Development Pcl (Foreign Registered)*(a) 5,250
53,112,100 Land & House Pcl NVDR 9,248,221
32,154,200 National Finance Pcl NVDR* 9,845,040
3,927,000 National Petrochemical (Foreign Registered)(a) 4,635,117
3,608,158 PTT Exploration & Production Pcl (Foreign
Registered)(a) 10,878,868
12,639,200 PTT Pcl (Foreign Registered)(a) 12,924,273
8,879,000 Quality House Co Ltd (Foreign Registered)*(a) 1,276,285
590,000 Regional Container Lines (Foreign Registered) 723,969
1,707,000 Saha Pathana International Holdings Pcl (Foreign
Registered)(a) 3,191,773
3,004,100 Saha Union Pcl (Foreign Registered)(a) 1,263,849
16,566,000 Sansiri Pcl (Foreign Registered)*(a) 2,381,229
956,900 Siam Cement Pcl NVDR 27,554,068
6,844,300 Siam Commercial Bank Pcl (Foreign Registered)* 5,199,013
3,108,050 Star Block Co Ltd (Foreign Registered)*(a) 726
11,335,000 Thai Farmers Bank NVDR* 7,616,717
5,703,650 Thai German Ceramics Industry (Foreign Registered)(a) 5,265,728
5,630,800 Thai Union Frozen Products Pcl (Foreign Registered) 2,421,566
7,136,300 Tisco Finance Pcl (Foreign Registered)*(a) 3,135,735
1,355,000 Univenture Pcl (Foreign Registered)(a) 823,419
2,145,000 Univenture Pcl NVDR* 1,303,494
--------------
143,226,933
--------------
TURKEY -- 5.8%
322,496,000 Adana Cimento Class A 1,474,614
8,135,552,138 Akbank TAS* 31,084,791
590,573,500 Akcansa Cimento AS 1,720,117
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
TURKEY -- CONTINUED
174,518,000 Aksa Akrilik Kimya Sanayii 1,694,350
524,656,000 Aksigorta AS 1,840,322
361,385,000 Anadolu Isuzu Otomotiv Sanay* 2,376,788
527,411,000 Arcelik AS 4,790,141
262,055,000 Aselsan Askeri Elektroni* 2,626,295
24,163,000 Brisa Bridgestone Sabanci 688,642
930,300,000 Carsi Buyuk Magazacilik AS* 1,019,746
393,489,000 Doktas Dokumculuk Ticaret* 776,380
57,359,000 Eczacibasi Yapi* 1,329,335
88,185,000 Enka Insaat ve Sanayi AS* 2,485,640
1,072,251,000 Eregli Demir ve Celik Fabrikalari TAS* 11,753,456
5,236,795,000 Finansbank* 3,148,965
695,675,000 Ford Otomotive Sanayii AS* 7,516,689
78,619,000 Galatasaray Sportif Sinai ve Ticari Yatirimlar AS* 1,772,806
1,466,524,000 Global Menkul Degerler AS* 1,010,446
499,216,260 Hurriyet Gazeteci* 1,375,854
109,828,000 Mardin Cimento Sanayii 509,068
42,150,000 Medya Holding*(a) --
480,492,000 Milliyet Gazetecilik AS* 729,842
58,823,000 Netas Telekomunik 1,031,659
84,124,000 Sasa Dupont Sabanci Polyester Sanayi AS* 869,431
2,015,000,000 Tansas Perakende Magazacilik Ticaret AS* 1,293,689
1,646,692,750 Trakya Cam Sanayii 3,506,893
1,574,714,000 Turkcell Iletisim Hizmet AS* 10,603,304
15,856,147,087 Turkiye Garanti Bankasi* 22,346,590
123,975,000 Uzel Makina Sanayii AS* 165,015
1,793,130,000 Vestel Elektronik Sanayi* 4,099,546
3,181,579,000 Yapi ve Kredi Bankasi* 3,537,302
--------------
129,177,716
--------------
VENEZUELA -- 0.4%
795,312 Compania Anonima Nacional Telefonos de Venezuela
(CANTV) ADR 8,056,511
30,055 Mantex SA Class A ADR* 56,353
350,434 Mercantil Servicios Financieros ADR 1,140,347
--------------
9,253,211
--------------
TOTAL COMMON STOCKS (COST $1,864,710,513) 1,780,664,316
--------------
</Table>
See accompanying notes to the financial statements.
11
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
PREFERRED STOCKS -- 6.2%
BRAZIL -- 4.3%
9,877,000 Ambev Ciade Rebid 1.67% 1,389,256
111,258,000 Bco Itau SA (Registered) 4,894,230
23,904,000 Belgo Mineira (Registered) 2,799,628
836,749,000 Brasil Telecom Participacoes SA 2.19% 4,123,960
467,700 Companhia Vale do Rio Doce Class A 12,842,421
1,004,010,860 Electrobras Class B (Registered) 9.83% 5,007,395
318,900 Empresa Brasileira de Aeronautica SA ADR 3,287,859
427,413,000 Gerdau SA 3,979,528
22,322,178 Investimentos Itau SA 11,383,122
1,588,900 Petroleo Brasileiro SA (Petrobras) 3.01% 19,005,363
521,700 Petroleo Brasileiro SA ADR 6.93% 6,260,400
461,135,000 Siderurgica de Tubarao 3.50% 6,059,745
5,777,141,000 Tele Centro Oeste Celular SA 6.78% 6,960,411
407,300 Tele Centro Oeste Celular SA ADR 2.38% 1,405,185
74,732 Tele Norte Leste Participacoes ADR 4.11% 504,441
113,647,414 Tele Norte Leste Participacoes SA 3.44% 754,677
757,312,648 Tractebel Energia SA Class B 0.96% 420,140
9,347,654 Unipar Class B 2.52% 2,671,507
34,362,000 Votorantim Celulose e Papel SA 2.53% 1,303,522
--------------
95,052,790
--------------
RUSSIA -- 0.3%
100,800 Red October 144A* 92,736
16,125 Transneft 5,740,500
--------------
5,833,236
--------------
SOUTH KOREA -- 1.6%
242,100 LG Electronics Inc 3,772,513
289,663 Samsung Electronics (Non Voting) 4.08% 32,517,775
--------------
36,290,288
--------------
TOTAL PREFERRED STOCKS (COST $145,361,179) 137,176,314
--------------
RIGHTS AND WARRANTS -- 3.8%
INDIA -- 3.6%
275,900 Bajaj Auto Warrants, Expires 6/30/03 (Merrill
Lynch)*(f) 2,987,362
394,734 Bharat Heavy Electricals Ltd Warrants, Expires 9/9/05
(Merrill Lynch)*(f) 1,725,224
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
INDIA -- CONTINUED
1,608,000 Bharat Heavy Electricals Warrants, Expires 8/3/04
(Goldman Sachs)*(f) 7,027,925
402,000 Digital Global Soft Warrants, Expires 8/3/04 (Goldman
Sachs)*(f) 5,440,909
445,317 Digital Global Soft Warrants, Expires 6/30/03 (Merrill
Lynch)*(f) 6,027,187
5,638 EServe Warrants, Expires 10/10/05 (Merrill Lynch)(f) 57,654
935,935 Hero Honda Warrants, Expires 6/5/03 (Merrill Lynch)*(f) 4,355,654
225,000 Hero Honda Warrants, Expires 8/3/04 (Goldman Sachs)*(f) 1,047,105
822,652 Hindustan Petroleum Warrants, Expires 6/30/03 (Merrill
Lynch)*(f) 5,371,835
435,000 ICICI Bank Ltd Warrants, Expires 5/8/03 (Merrill
Lynch)*(f) 1,349,588
1,052,500 ICICI Bank Ltd Warrants, Expires 7/16/04 (Merrill
Lynch)*(f) 3,265,381
58,518 Infosys Technology Warrants, Expires 8/3/04 (Goldman
Sachs)*(f) 5,209,454
132,876 Infosys Technology Warrants, Expires 9/5/05 (Merrill
Lynch)*(f) 11,829,033
443,209 Ranbaxy Laboratories Ltd Warrants, Expires 8/3/04
(Goldman Sachs)*(f) 5,666,427
365,363 Ranbaxy Laboratories Ltd Warrants, Expires 9/2/05
(Merrill Lynch)*(f) 7,473,829
949,910 Reliance Industries Warrants, Expires 7/3/03 (Merrill
Lynch)*(f) 5,819,149
470,450 Satyam Computer Warrants, Expires 11/4/05 (Merrill
Lynch)*(f) 2,211,915
11,280 State Bank of India Warrants, Expires 12/23/05 (Merrill
Lynch)*(f) 67,127
509,000 Tata Engineering & Locomotive Warrants, Expires 7/3/03
(Merrill Lynch)*(f) 1,728,615
718,280 United Phosphorous Warrants, Expires 10/10/05 (Merrill
Lynch)*(f) 2,086,388
--------------
80,747,761
--------------
MALAYSIA -- 0.0%
200,750 Affin Holdings Berhad Warrants, Expires 7/08/05* 7,396
265,600 IJM Corp Berhad Warrants, Expires 8/24/04* 125,811
--------------
133,207
--------------
THAILAND -- 0.2%
4,226,464 Charoen Pokphand Foods Pcl Warrants, Expires 4/29/05
(Foreign Registered)* 233,130
834,000 Kiatnakin Finance Ltd Warrants, Expires 03/30/09* 294,342
30,569,000 Land & House Warrants, Expires 9/02/08 (Foreign
Registered)* 3,529,528
2,689,393 Telecomasia Corp Pcl Warrants, Expires 4/03/08* --
--------------
4,057,000
--------------
TOTAL RIGHTS AND WARRANTS (COST $84,588,221) 84,937,968
--------------
PRIVATE EQUITY SECURITIES -- 2.4%
POLAND -- 2.4%
21,635,077 CHP Investors*+(a) 28,926,098
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
POLAND -- CONTINUED
17,000,000 MHP Investors*+(a) 17,000,000
9,204,400 Polimex Investment Partners*+(a) 6,138,414
--------------
52,064,512
--------------
TOTAL PRIVATE EQUITY SECURITIES (COST $50,467,010) 52,064,512
--------------
DEBT OBLIGATIONS -- 1.6%
UNITED STATES -- 1.6%
$ 1,650,586 U.S. Treasury Inflation Indexed Note, 4.25%, due
01/15/10(c) 1,951,303
$ 29,288,367 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09(c) 33,704,508
--------------
35,655,811
--------------
TOTAL DEBT OBLIGATIONS (COST $32,777,909) 35,655,811
--------------
CONVERTIBLE SECURITIES -- 0.8%
INDONESIA -- 0.0%
$ 26,000,000 APP Finance (VI), Zero Coupon, due 11/18/12 601,250
--------------
MALAYSIA -- 0.1%
$ 3,279,400 Berjaya Sports Toto BHD, 8.00%, due 06/25/12 2,580,370
--------------
RUSSIA -- 0.7%
$ 124,330 Divot Holdings NV*+(a)(b) 1,244
$ 46,624 Divot Holdings, Convertible Securities*+(a)(b) 466
$ 11,300,000 Lukinter Finance CB, 3.50%, due 11/29/07 12,797,250
$ 1,800,000 Lukoil Finance, 3.50%, due 11/29/07 2,038,500
--------------
14,837,460
--------------
TOTAL CONVERTIBLE SECURITIES (COST $21,807,031) 18,019,080
--------------
</Table>
See accompanying notes to the financial statements.
14
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
MUTUAL FUNDS -- 0.7%
UNITED STATES -- 0.7%
133,320 GMO Alpha LIBOR Fund(c) 3,162,354
461,898 GMO Short-Duration Collateral Fund(c) 11,552,065
--------------
14,714,419
--------------
TOTAL MUTUAL FUNDS (COST $14,960,357) 14,714,419
--------------
INVESTMENT FUNDS -- 0.6%
INDIA -- 0.0%
170 SPG Infinity Technology Fund I*+(a) 242,420
1,227,400 TDA India Technology Fund II LP*+(a) 764,989
10,500 UTI Masterplus 1991 Units* 3,540
--------------
1,010,949
--------------
KAZAKHSTAN -- 0.0%
450,000 Kazakhstan Investment Fund*+(a) 50,209
--------------
POLAND -- 0.0%
1,749,150 The Emerging Europe Fund II, LP*+(a) 1,084,473
--------------
ROMANIA -- 0.1%
3,600 Romanian Investment Fund*+(a) 1,309,622
--------------
RUSSIA -- 0.5%
9,500,000 NCH Eagle Fund LP*+(a) 10,048,831
--------------
UKRAINE -- 0.0%
16,667 Societe Generale Thalmann Ukraine Fund*+(a) 820,869
--------------
TOTAL INVESTMENT FUNDS (COST $22,138,299) 14,324,953
--------------
EQUITY LINKED SECURITIES -- 0.2%
RUSSIA -- 0.2%
5,685,000 Renaissance Gazprom Note*+(a)(d) 3,701,503
--------------
TOTAL EQUITY LINKED SECURITIES (COST $4,782,059) 3,701,503
--------------
</Table>
See accompanying notes to the financial statements.
15
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 4.5%
CASH EQUIVALENTS -- 4.5%
$ 73,800,000 Royal Bank of Canada GC Time Deposit, 1.33%, due
3/03/03 73,800,000
26,302,159 The Boston Global Investment Trust(e) 26,302,159
--------------
100,102,159
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $100,102,159) 100,102,159
--------------
TOTAL INVESTMENTS -- 101.0%
(Cost $2,341,694,737) 2,241,361,035
Other Assets and Liabilities (net) -- (1.0%) (21,753,531)
--------------
TOTAL NET ASSETS -- 100.0% $2,219,607,504
==============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
<Table>
144A - Securities exempt from registration under rule 144A of
the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional investors.
ADR - American Depositary Receipt
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
</Table>
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
+ Direct placement securities are restricted as to resale. They have been
valued at fair value by the Trustees after consideration of
restricitions as to resale, financial condition and prospects of the
issuer, general market conditions, and pertinent information in
accordance with the Fund's Prospectus and the Investment Company Act of
1940, as amended. The Fund has limited rights to registration under the
Securities Act of 1933 with respect to those restricted securities.
16 See accompanying notes to the financial statements.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
Additional information on each restricted security is as follows:
<Table>
<Caption>
MARKET
VALUE AS A MARKET
PERCENTAGE VALUE AS OF
ACQUISITION ACQUISITION OF FUND'S FEBRUARY 28,
ISSUER, DESCRIPTION DATE COST NET ASSETS 2003
- ----------------------------------------------------------------------------------------------------------
CHP Investors 12/13/99 - 3/05/01 $22,825,006 1.30% $ 28,926,098
Divot Holdings NV, Convertible Securities 9/21/01 124,330 0.00 1,244
Divot Holdings NV, Common Stocks 6/26/00 1,502,100 0.00 900
Divot Holdings, Convertible Securities 3/27/02 46,624 0.00 466
Kazakhstan Investment Fund 10/16/97 3,285,000 0.00 50,209
MHP Investors 11/27/01 17,935,000 0.77 17,000,000
Millenium Information Technology 10/21/99 2,252,570 0.04 787,470
NCH Eagle Fund LP 1/21/97 9,500,000 0.45 10,048,831
Polimex Investment Partners 7/07/99 - 9/21/01 9,707,005 0.28 6,145,778
Renaissance Gazprom Note 5/24/01 - 1/17/02 4,782,059 0.17 3,701,503
Romanian Investment Fund 5/12/97 3,600,000 0.06 1,309,622
Societe Generale Thalmann Ukraine Fund 7/15/97 1,666,700 0.04 820,869
SPG Infinity Technology Fund I 12/23/99 1,105,000 0.01 242,420
TDA India Technology Fund II LP 2/23/00 - 10/02/01 1,227,400 0.03 764,989
The Emerging Europe Fund II, LP 12/05/97 - 3/17/00 1,749,150 0.05 1,084,473
U TV Software Comm Ltd 2/29/00 3,004,959 0.01 274,940
</Table>
(b) Bankrupt issuer.
(c) All or a portion of this security is held as collateral for open swap
contracts (Note 6).
(d) A derivative security whose price is linked to the return on the
specified Russian security.
(e) Represents investment of security lending collateral (Note 1).
(f) Structured warrants with risks similar to equity swaps (Note 2).
See accompanying notes to the financial statements. 17
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Financials 21.1%
Materials 15.0
Information Technology 13.5
Energy 11.7
Telecommunication Services 10.1
Consumer Discretionary 8.7
Industrials 6.9
Consumer Staples 4.5
Utilities 3.8
Health Care 0.8
Miscellaneous 3.9
-----
100.0%
=====
</Table>
18 See accompanying notes to the financial statements.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$24,914,517 (cost $2,341,694,737) (Note 1) $2,241,361,035
Foreign currency, at value (cost $16,103,568) (Note 1) 16,257,838
Receivable for investments sold 5,504,491
Receivable for Fund shares sold 9,731,662
Dividends and interest receivable 7,674,566
Foreign taxes receivable 993,877
Receivable for expenses reimbursed by Manager (Note 2) 72,128
--------------
Total assets 2,281,595,597
--------------
LIABILITIES:
Payable for investments purchased 25,588,543
Payable upon return of securities loaned (Note 1) 26,302,159
Due to custodian 5,401,391
Payable to affiliate for (Note 2):
Management fee 1,373,885
Shareholder service fee 219,712
Net payable for open swap contracts (Notes 1 and 6) 952,585
Accrued expenses 2,149,818
--------------
Total liabilities 61,988,093
--------------
NET ASSETS $2,219,607,504
==============
NET ASSETS CONSIST OF:
Paid-in capital $2,724,784,791
Distributions in excess of net investment income (2,327,854)
Accumulated net realized loss (401,769,041)
Net unrealized depreciation (101,080,392)
--------------
$2,219,607,504
==============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $1,215,653,319
==============
Class IV shares $1,003,954,185
==============
SHARES OUTSTANDING:
Class III 137,798,619
==============
Class IV 113,980,837
==============
NET ASSET VALUE PER SHARE:
Class III $ 8.82
==============
Class IV $ 8.81
==============
</Table>
See accompanying notes to the financial statements. 19
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $4,935,218) $ 38,775,395
Interest (including securities lending income of
$141,316) 4,123,972
Dividends from investment company shares 160,768
-------------
Total income 43,060,135
-------------
EXPENSES:
Management fee (Note 2) 15,328,439
Custodian fees 3,610,379
Legal fees 206,151
Audit fees 135,759
Transfer agent fees 49,445
Trustees fees and related expenses (Note 2) 39,802
Registration fees 36,787
Miscellaneous 25,067
Fees reimbursed by Manager (Note 2) (286,002)
-------------
19,145,827
Shareholder service fee (Note 2) - Class III 1,535,695
Shareholder service fee (Note 2) - Class IV 912,029
-------------
Net expenses 21,593,551
-------------
Net investment income 21,466,584
-------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (net of foreign capital gains tax of
$1,881,053) (44,393,138)
Realized gains distributions from investment company
shares 71,338
Closed swap contracts (4,514,455)
Foreign currency, forward contracts and foreign
currency related transactions (1,889,315)
-------------
Net realized loss (50,725,570)
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (167,262,651)
Open swap contracts (2,526,222)
Foreign currency, forward contracts and foreign
currency related transactions 153,789
-------------
Net unrealized loss (169,635,084)
-------------
Net realized and unrealized loss (220,360,654)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(198,894,070)
=============
</Table>
20 See accompanying notes to the financial statements.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 21,466,584 $ 25,084,464
Net realized loss (50,725,570) (109,659,468)
Change in net unrealized appreciation (depreciation) (169,635,084) 237,597,552
-------------- --------------
Net increase (decrease) in net assets from
operations (198,894,070) 153,022,548
-------------- --------------
Distributions to shareholders from:
Net investment income
Class III (14,313,177) (12,628,140)
Class IV (12,715,508) (10,389,852)
-------------- --------------
Total distributions from net investment income (27,028,685) (23,017,992)
-------------- --------------
Net share transactions (Note 4):
Class III 498,075,637 195,960,013
Class IV 385,039,223 208,626,765
-------------- --------------
Increase in net assets resulting from net share
transactions 883,114,860 404,586,778
-------------- --------------
Total increase in net assets 657,192,105 534,591,334
NET ASSETS:
Beginning of period 1,562,415,399 1,027,824,065
-------------- --------------
End of period (including distributions in excess of
net investment income of $2,327,854 and accumulated
undistributed net investment income of $5,824,554,
respectively) $2,219,607,504 $1,562,415,399
============== ==============
</Table>
See accompanying notes to the financial statements. 21
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ---------- ---------- ---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.84 $ 9.04 $ 11.16 $ 6.31 $ 9.56
---------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.11+ 0.18+ 0.17+ 0.13+ 0.25
Net realized and unrealized gain
(loss) (1.00) 0.80 (2.27) 4.77 (3.19)
---------- -------- -------- -------- --------
Total from investment operations (0.89) 0.98 (2.10) 4.90 (2.94)
---------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.13) (0.18) (0.02) (0.05) (0.19)
From net realized gains -- -- -- -- (0.12)
---------- -------- -------- -------- --------
Total distributions (0.13) (0.18) (0.02) (0.05) (0.31)
---------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.82 $ 9.84 $ 9.04 $ 11.16 $ 6.31
========== ======== ======== ======== ========
TOTAL RETURN(a) (9.14)% 11.15% (18.79)% 77.43% (30.96)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $1,215,653 $826,960 $560,205 $727,197 $524,741
Net expenses to average daily net
assets 1.16% 1.19%(b) 1.23% 1.18% 1.16%
Net investment income to average
daily net assets 1.12% 2.32% 1.69% 1.41% 2.75%
Portfolio turnover rate 59% 74% 90% 73% 76%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.02% 0.02% 0.02% 0.03% 0.21%
Purchase and redemption fees
consisted of the following per
share amounts:(c) $ 0.05 $ 0.05 $ 0.03 -- --
</Table>
+ Computed using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown. Calculation excludes purchase
premiums and redemption fees.
(b) Includes stamp duties and transfer taxes not reimbursed by the Manager,
which approximate .035% of average daily net assets.
(c) Effective March 1, 2000, the Fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
22 See accompanying notes to the financial statements.
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ---------- ---------- ---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.83 $ 9.03 $ 11.16 $ 6.31 $ 9.56
---------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.11+ 0.17+ 0.17+ 0.13+ 0.28
Net realized and unrealized gain
(loss) (0.99) 0.82 (2.28) 4.77 (3.21)
---------- -------- -------- -------- --------
Total from investment operations (0.88) 0.99 (2.11) 4.90 (2.93)
---------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.14) (0.19) (0.02) (0.05) (0.20)
From net realized gains -- -- -- -- (0.12)
---------- -------- -------- -------- --------
Total distributions (0.14) (0.19) (0.02) (0.05) (0.32)
---------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.81 $ 9.83 $ 9.03 $ 11.16 $ 6.31
========== ======== ======== ======== ========
TOTAL RETURN(a) (9.09)% 11.22% (18.82)% 77.76% (31.01)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $1,003,954 $735,455 $467,619 $480,208 $261,187
Net expenses to average daily net
assets 1.12% 1.14%(b) 1.18% 1.13% 1.12%
Net investment income to average
daily net assets 1.16% 2.27% 1.73% 1.45% 2.87%
Portfolio turnover rate 59% 74% 90% 73% 76%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.02% 0.02% 0.02% 0.03% 0.21%
Purchase and redemption fees
consisted of the following per
share amounts:(c) $ 0.02 $ 0.03 $ 0.03 -- --
</Table>
+ Computed using average shares outstanding throughout the period.
(a) The total return would have been lower had certain expenses not been
reimbursed during the periods shown. Calculation excludes purchase
premiums and redemption fees.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .04% of average daily net assets.
(c) Effective March 1, 2000, the Fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
See accompanying notes to the financial statements. 23
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities
traded in the securities markets of developing countries in Asia, Latin
America, the Middle East, Africa, and Europe ("Emerging Markets"). The
Fund's benchmark is the S&P/IFC Investable Composite Index.
Throughout the year ended February 28, 2003, the Fund had two classes of
shares outstanding: Class III and Class IV. The principal economic
difference between the classes of shares is the level of shareholder
service fees borne by the classes. Eligibility for and automatic
conversion among the various classes of shares is generally based on the
total amount of assets invested in a particular fund or with GMO, as more
fully outlined in the Trust's prospectus.
At February 28, 2003, 0.5% of the Fund was invested in the GMO
Short-Duration Collateral Fund and 0.1% of the Fund was invested in the
GMO Alpha LIBOR Fund, separate funds of GMO Trust managed by GMO. Shares
of the GMO Short-Duration Collateral Fund and GMO Alpha LIBOR Fund are not
publicly available for direct purchase. The financial statements of the
GMO Short-Duration Collateral Fund and GMO Alpha LIBOR Fund should be read
in conjunction with the Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding
24
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
closing values of such securities on their respective exchanges, and those
values are then translated into U.S. dollars at the current exchange rate.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates fair value. Shares of mutual
funds are valued at their net asset value as reported on each business
day. Securities for which quotations are not readily available or whose
values the Manager has determined to be unreliable are valued at fair
value as determined in good faith by the Trustees or other persons acting
at their direction. A security's value may be deemed unreliable if, for
example, the Manager becomes aware of information or events occurring
after the close of a foreign market that would materially affect that
security's value.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. These prices provided by the
principal market makers may differ from the value that would be realized
if the securities were sold and the differences could be material to the
financial statements.
Indian regulators have alleged that the Fund violated certain conditions
under which it was granted permission to operate in India and have
restricted a portion of the Fund's locally held assets pending resolution
of the dispute. The amount of these restricted assets is small relative to
the size of the Fund, representing approximately 0.06% of the Fund's total
assets as of February 28, 2003. The valuation of this possible claim and
all matters relating to the Fund's response to these allegations are
subject to the supervision and control of the Trust's Board of Trustees,
and all costs in respect of this matter are being borne by the fund.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's
25
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
portfolio securities. A forward currency contract is an agreement between
two parties to buy and sell a currency at a set price on a future date.
The market value of a forward currency contract fluctuates with changes in
forward currency exchange rates. Forward currency contracts are marked to
market daily and the change in value is recorded by the Fund as an
unrealized gain or loss. Realized gains or losses equal to the difference
between the value of the contract at the time it was opened and the value
at the time it was closed are recorded upon delivery or receipt of the
currency or, if a forward currency contract is offset by entering into
another forward currency contract with the same broker, upon settlement of
the net gain or loss. These contracts may involve market risk in excess of
the unrealized gain or loss reflected in the Fund's Statement of Assets
and Liabilities. In addition, the Fund could be exposed to risk if the
counterparties are unable to meet the terms of the contracts or if there
are movements in foreign currency values that are unfavorable to the Fund.
There were no forward foreign currency contracts outstanding as of
February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
28, 2003, there were no outstanding futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from
26
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
writing options which are exercised or closed are added to the proceeds or
offset against the amounts paid on the underlying future, security or
currency transaction to determine the realized gain or loss. The Fund as a
writer of an option has no control over whether the underlying future,
security or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 28, 2003, there were no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based
27
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
on the relative performance of two different groups or "baskets" of
securities, adjusted by an interest rate payment. To the extent that the
relative performance of the two baskets of securities exceeds or falls
short of the offsetting interest rate obligation, the Fund will receive a
payment from or make a payment to the counterparty, respectively. In
connection with these agreements, cash or securities may be set aside as
collateral by the Fund's custodian in accordance with the terms of the
swap agreement. The Fund earns interest on cash set aside as collateral.
The Fund also may enter into structured warrants, which are derivatives
like swaps and have risks similar to swaps. Swaps are marked to market
daily based upon quotations from market makers and the change in value, if
any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. See Note 5 for a
summary of all open swap agreements as of February 28, 2003.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of collateral, the risk of delay in recovery or
loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $24,914,517 collateralized by cash in the amount of
$26,302,159 which was invested in a short-term instrument.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
28
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid was as follows: ordinary income --
$23,017,992 and $27,028,685, respectively.
As of February 28, 2003 the components of distributable earnings on a tax
basis consisted of $16,578,660 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to passive foreign investment company transactions and
losses on wash sale transactions.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $184,350,946, $114,351,984 and $64,302,847 expiring in 2007, 2010
and 2011, respectively. The Fund has elected to defer to March 1, 2003
post-October capital losses of $19,381,010.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions and passive foreign investment company transactions. The
financial highlights exclude these adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
$(2,590,307) $4,060,069 $(1,469,762)
</Table>
29
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of the securities adjusted for inflation is recorded as
interest income.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
PURCHASES AND REDEMPTIONS OF FUND SHARES
Effective April 1, 2002, the level of purchase premium and redemption fees
charged to the Fund are each .80%. Prior to April 1, 2002, the premium on
cash purchases of Fund shares was 1.20% of the amount invested and the fee
for cash redemptions was .40% of the amount redeemed. If the Manager
determines that any portion of a cash purchase or redemption fee is offset
by a corresponding cash redemption or purchase occurring on the same day,
the purchase premium or redemption fee charged by the Fund will be reduced
by 100% with respect to that portion. In addition, the purchase premium or
redemption fee charged by the Fund may be waived if the Manager determines
the Fund is either substantially overweighted or underweighted in cash so
that a redemption or purchase will not require a securities transaction.
All purchase premiums and redemption fees are paid to and recorded by the
Fund as paid-in capital. These fees are allocated relative to each class'
net assets on the share transaction date. For the years ended February 28,
2002 and February 28, 2003, the Fund received $4,883,014 and $7,148,446 in
purchase premiums and $73,894 and $79,299 in redemption fees,
respectively. There is no premium for reinvested distributions.
30
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
INVESTMENT RISK
Investments in securities of emerging countries present certain risks that
are not inherent in many other investments. Many emerging countries
present elements of political and/or economic instability. The securities
markets of emerging countries are generally smaller and less developed
than the securities markets of the U.S. and developed foreign markets.
Further, countries may impose various types of foreign currency
regulations or controls which may impede the Fund's ability to repatriate
amounts it receives. The Fund may acquire interests in securities in
anticipation of improving conditions in the related countries. These
factors may result in significant volatility in the values of its
holdings. The markets for emerging countries are relatively illiquid.
Accordingly, the Fund may not be able to realize in an actual sale amounts
approximating those used to value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .81% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .105% for Class IV shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, custody
fees and the following fund expenses: fees and expenses of the independent
Trustees of the Trust (including legal 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, interest expense and transfer taxes)
exceed the management fee.
The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha
LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended
February 28, 2003, indirect operating expenses (excluding
investment-related expenses) were less than .001% of the Fund's average
daily net assets, and indirect investment-related expenses (including, but
not limited to, interest expense, foreign audit expense, and
investment-related legal expense) were less than .001% of the Fund's
average daily net assets.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
31
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $28,141. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, were as
follows:
<Table>
<Caption>
Purchases Sales
-------------- --------------
U.S. Government securities $ 67,098,009 $ 41,169,858
Investments (non-U.S. Government securities) 1,827,979,228 1,022,924,247
</Table>
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$2,341,280,537 $219,610,042 $(320,051,430) $(100,441,388)
</Table>
4. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- -------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ----------- ------------
Shares sold 78,465,027 $ 750,254,514 32,338,323 $282,585,254
Shares issued to shareholders in reinvestment
of distributions 1,032,167 9,789,196 1,004,357 8,683,208
Shares repurchased (25,770,379) (261,968,073) (11,259,655) (95,308,449)
----------- ------------- ----------- ------------
Net increase 53,726,815 $ 498,075,637 22,083,025 $195,960,013
=========== ============= =========== ============
</Table>
32
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- -------------------------
Shares Amount Shares Amount
Class IV: ----------- ------------- ----------- ------------
Shares sold 39,386,555 $ 388,617,328 22,755,584 $206,010,111
Shares issued to shareholders in reinvestment
of distributions 698,767 6,650,570 303,239 2,616,654
Shares repurchased (948,372) (10,228,675) -- --
----------- ------------- ----------- ------------
Net increase 39,136,950 $ 385,039,223 23,058,823 $208,626,765
=========== ============= =========== ============
</Table>
5. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
TOTAL RETURN SWAP AGREEMENTS
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
---------- ---------- -------------------------------------------------- --------------
$ 377,598 3/13/03 Agreement with Morgan Stanley & Co. International $ (23,225)
Limited dated 3/10/02 to receive the notional
amount multiplied by the change in the market
value of Macronix International common stock
(including dividends) and to pay the notional
amount multiplied by the 1 month LIBOR adjusted by
a specific spread.
10,512,316 9/11/03 Agreement with Merrill Lynch International dated (1,144,174)
9/9/02 to receive the notional amount multiplied
by the return of the MSCI Taiwan Index and to pay
the notional amount multiplied by the 3 month
LIBOR adjusted by a specific spread.
4,143,424 9/25/03 Agreement with Morgan Stanley & Co. International 294,411
Limited dated 9/20/02 to receive the notional
amount multiplied by the return on the MSCI
Thailand Index and to pay the notional amount
multiplied by the 3 month LIBOR adjusted by a
specified spread.
</Table>
33
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
TOTAL RETURN SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
---------- ---------- -------------------------------------------------- --------------
$2,354,216 10/9/03 Agreement with Morgan Stanley & Co. International $ (63,259)
Limited dated 10/9/02 to receive the notional
amount multiplied by the return on the MSCI India
Index and to pay the notional amount multiplied by
the 3 month LIBOR adjusted by a specified spread.
5,796,187 10/18/03 Agreement with Morgan Stanley & Co. International (107,888)
Limited dated 10/8/02 to receive the notional
amount multiplied by the return of the MSCI India
Index and to pay the notional amount multiplied by
the 3 month LIBOR adjusted by a specified spread.
4,969,707 10/15/03 Agreement with Morgan Stanley & Co. International (128,039)
Limited dated 10/15/02 to receive the notional
amount multiplied by the return of the MSCI
Thailand Index and to pay the notional amount
multiplied by the 3 month LIBOR adjusted by a
specified spread.
1,300,000 1/14/04 Agreement with Morgan Stanley & Co. International (34,931)
Limited dated 1/09/03 to receive the notional
amount multiplied by the return of the MSCI India
Index and to pay the notional amount multiplied by
the 3 month LIBOR adjusted by a specified spread.
10,000,000 2/3/04 Agreement with Merrill Lynch International dated 254,520
1/30/03 to receive the notional amount multiplied
by the return of the MSCI India Index and to pay
the notional amount multiplied by the 3 month
LIBOR adjusted by a specific spread.
-----------
$ (952,585)
===========
</Table>
34
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO EMERGING MARKETS FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Markets Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
35
<Page>
GMO EMERGING MARKETS FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$6,819,874 and recognized foreign source income of $39,941,301.
36
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Five Overseen Directorships
and Age Held with Fund Time Served Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
37
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
38
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Principal Occupation(s)
Name, Address, Position(s) Term of Office(4) and Length During Past
and Age Held with Fund of Time Served Five Years
------------------------- ------------------------- ---------------------------- -------------------------
Scott Eston President and Chief President and Chief Chief Financial Officer
c/o GMO Trust Executive Officer of the Executive Officer since (1997 - present), Chief
40 Rowes Wharf Trust October 2002; Vice President Operating Officer
Boston, MA 02110 from August 1998 - October (2000 - present) and
Age: 47 2002. Member, Grantham, Mayo,
Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer Chief Financial Officer Member, Grantham, Mayo,
c/o GMO Trust and Treasurer of the Since February 2000; Van Otterloo & Co. LLC.
40 Rowes Wharf Trust Treasurer since February
Boston, MA 02110 1998.
Age: 45
Brent Arvidson Assistant Treasurer of Since September 1998. Senior Fund
c/o GMO Trust the Trust Administrator, Grantham,
40 Rowes Wharf Mayo, Van Otterloo & Co.
Boston, MA 02110 LLC.
Age: 33
William R. Royer, Esq. Vice President and Clerk Vice President since General Counsel, Anti-
c/o GMO Trust of the Trust February 1997; Clerk since Money Laundering
40 Rowes Wharf March 2001; May 1999 - Reporting Officer (July
Boston, MA 02110 August 1999. 2002 - February 2003) and
Age: 37 Member, Grantham, Mayo,
Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Vice President since August Associate General
c/o GMO Trust Secretary of the Trust 1999; Secretary since March Counsel, Grantham, Mayo,
40 Rowes Wharf 2001. Van Otterloo & Co. LLC
Boston, MA 02110 (June 1999 - present);
Age: 58 Associate/ Junior
Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Since February 2003. Anti-Money Laundering
c/o GMO Trust Money Laundering Reporting Officer
40 Rowes Wharf Compliance Officer (February 2003 - present)
Boston, MA 02110 and Compliance Officer,
Age: 32 Grantham, Mayo, Van
Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
39
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Active Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
For the fiscal year ended February 28, 2003, the Class III shares of the GMO
Foreign Fund outperformed the Morgan Stanley Capital International Europe,
Australasia and Far East (MSCI EAFE) Index by +8.6% after fees, declining 8.9%
while the benchmark tumbled 17.5%. Stock selection was the source of the
outperformance.
GMO country selection subtracted 0.6% from returns during the fiscal year.
Germany had the worst return of the benchmark markets, plummeting 35.6%. Real
GDP is estimated to have grown only 0.2% for 2002, while domestic demand was
down 1.3%, the biggest decline since German unification. The only factor that
stopped aggregate economic output from shrinking was exports, but those are
threatened by the recent euro strength. The Finnish market fell 30.6%, which can
be attributed to weakness in Finnish telecom-related stocks. Nokia shares, for
example, lost over a third of their value during the last 12 months. The MSCI
Netherlands index lost 28.7%. The heavyweight financial sector, particularly
insurance companies, fell due to two factors: 1) immensely higher payouts and
reserve provisioning due to catastrophic loss (both 9/11 and storm damage); and
2) very weak global equity markets. Both effects led to the heavy selling of
equity positions further exacerbating the cycle. The coup de grace for the
Netherlands was the emergence of scandals in this normally stolid market. An
accounting scandal in the retail sector drove large cap stocks down, while
insider trading and market manipulation allegations (still pending trial) pushed
down the smaller cap segment. The Fund had an overweight position in Germany, a
neutral position in Finland, and an underweight position in the Netherlands.
Among benchmark countries, only two indices had positive absolute returns this
fiscal year: New Zealand and Austria. New Zealand was the best performing
market, with a return of 26.3%. Returns for New Zealand during the fiscal year
were aided by the strong New Zealand dollar, which appreciated versus the U.S.
dollar by an impressive 32.7%. The MSCI Austria index gained 16.8%. The ability
to improve margins and generate free cash -- all at globally cheap
valuations -- lured both financial investors and industrial acquisition teams to
this market. Even after such strong performance the Austrian market continues to
offer value, if not liquidity. While Australia did not have a positive return
for the fiscal year, down 1.8%, it was the best performing large MSCI EAFE
market. Despite a severe drought, GDP in Australia grew by an impressive 3.8%,
making it one the best performing economies globally. The economy was aided by
strong gains in household credit demand and housing prices. However, there is
now concern that a consumer credit bubble is looming, and a rental yield of 3.0%
versus a three-month treasury rate of 4.8% hints that residential property may
be overpriced. The strong Australian dollar also contributed substantially to
returns for the fiscal year, rising by 17.5% versus the U.S. dollar. The Fund
had overweight positions in New Zealand and Austria, but has gone from an over-
to an underweight in Australia during the year.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
GMO stock picking added 9.2% to returns during the fiscal year. Stock selection
was particularly strong in Germany, Japan, the United Kingdom, Australia, and
Finland. In Germany the largest contributors to returns were Adidas-Salomon,
Continental, and Deutsche Telekom, all of which were undervalued companies with
strong managements that were willing to restructure. Adidas-Salomon is on its
second year of restructuring and is poised to achieve margins equivalent to the
U.S. company Nike, its closest competitor. Continental AG restructured its tire
operations in Europe by shifting production to lower cost Eastern European
countries. Deutsche Telekom used strict cost controls and asset sales to
generate substantial free cash to pay off some of its debt. The holdings that
contributed to outperformance in Japan had two things in common -- low
valuations and delivery of good earnings performance. They included
electronics-related firms (Konica, Canon, Yamaha, Arisawa), auto-related names
(Nissan, Aisin Seiki, Honda), and consumer goods companies (Kao, Bandai).
Inexpensive defensive stocks drove outperformance in the United Kingdom. While
expensive defensive stocks such as pharmaceuticals declined, defensive value
worked quite well. Gallaher and Imperial Tobacco, both large holdings in the
U.K. portfolio, each rose 45% in a market that declined by 18.7%. The largest
single contributor to our performance in Australia was MIM Holding. MIM is
benefiting from takeover discussions with Xstrata, the Swiss mining company.
Australian holdings in consumer non-discretionary companies also added to
returns. Our largest holdings in this sector are Lion Nathan, a brewer, and
Foodland, a food retailer, and both offered strong earnings growth in a time of
economic uncertainty. Metso, Uponor, M-Real, and some timely buying of Nokia
late in the fiscal year generated a positive return in Finland, despite the
Finnish market being down 30.6%. Uponor was the best performer of the four, up
nearly 20%.
OUTLOOK
Lower market valuations are an alluring prospect for international value
investors in the teeth of geopolitical uncertainty. There is even the prospect
of a weaker U.S. dollar. After years of a headwind this tailwind should benefit
our investors.
We expect that our stock selection will be the principal driver of our returns.
Country valuation differences are relatively narrow entering 2003. Thus, it will
be our fundamental stock analysis which allows us to discern the greatest
opportunities to make money.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO FOREIGN FUND CLASS III SHARES AND THE MSCI EAFE INDEX
AS OF FEBRUARY 28, 2003 GMO FOREIGN FUND MSCI EAFE INDEX
2/28/93 $10,000 $10,000
3/31/93 $10,694 $10,872
6/30/93 $11,366 $11,965
9/30/93 $12,490 $12,759
12/31/93 $13,471 $12,869
3/31/94 $13,991 $13,319
6/30/94 $14,244 $13,999
9/30/94 $14,590 $14,013
12/31/94 $14,348 $13,870
3/31/95 $14,238 $14,128
6/30/95 $15,153 $14,231
9/30/95 $16,024 $14,824
12/31/95 $16,335 $15,424
3/31/96 $16,804 $15,870
6/30/96 $17,424 $16,121
9/30/96 $17,459 $16,101
12/31/96 $18,674 $16,357
3/31/97 $18,849 $16,101
6/30/97 $21,113 $18,190
9/30/97 $21,958 $18,062
12/31/97 $19,955 $16,648
3/31/98 $22,553 $19,097
6/30/98 $22,338 $19,300
9/30/98 $19,452 $16,556
12/31/98 $22,739 $19,977
3/31/99 $22,813 $20,255
6/30/99 $24,862 $20,770
9/30/99 $26,175 $21,681
12/31/99 $29,325 $25,364
3/31/2000 $28,368 $25,337
6/30/2000 $28,285 $24,333
9/30/2000 $26,769 $22,370
12/31/2000 $27,410 $21,770
3/31/2001 $24,990 $18,786
6/30/2001 $25,828 $18,590
9/30/2001 $22,580 $15,987
12/31/2001 $24,643 $17,102
3/31/2002 $25,647 $17,189
6/30/2002 $26,357 $16,825
9/30/2002 $22,074 $13,505
12/31/2002 $23,229 $14,376
2/28/2003 $22,206 $13,460
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE INCEPTION
1 YEAR 5 YEAR 10 YEAR 9/30/96
Class II -9.00% 0.41% n/a 3.76%
Class III -8.89% 0.47% 8.30% n/a
Class IV 1/9/98
-8.92% 0.53% n/a 2.60%
Class M 1/25/2002
-9.09% n/a n/a -7.67%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. The Fund commenced operations on June 28, 1996
subsequent to a transaction involving, in essence, the reorganization of the GMO
International Equities Pool of the Common Fund for Non-Profit Organizations (the
GMO Pool) as the Foreign Fund. All information relating to the time periods
prior to June 28, 1996 relates to the GMO Pool. performance for Classes II, IV
and M may vary due to different shareholder servicing fees. Past performance is
not indicative of future performance. Information is unaudited.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
COMMON STOCKS -- 89.0%
AUSTRALIA -- 3.9%
1,603,628 Amcor Ltd 8,018,852
411,040 Capral Aluminum Ltd 695,937
760,518 Foodland Associated 8,293,521
154,000 Foster's Group Ltd 403,725
3,490,121 Insurance Australia Group Ltd 6,481,019
2,684,380 John Fairfax Holdings Ltd 4,805,597
824,550 Lihir Gold Ltd* 695,526
76,000 Lihir Gold Ltd ADR*+ 1,292,000
1,829,663 Lion Nathan Ltd 5,807,031
1,291,600 Mayne Group Ltd 2,476,832
1,267,364 Menzies Gold NL* 22,304
13,633,466 MIM Holdings Ltd 11,748,326
6,918,127 Oil Search Ltd* 2,854,820
10,946,321 Pasminco Ltd*(a) --
847,427 Publishing & Broadcasting Ltd 3,959,810
516,800 Sons of Gwalia Ltd 439,068
1,283,107 Westpac Banking Corp 10,940,081
-------------
68,934,449
-------------
AUSTRIA -- 0.5%
30,555 Erste Bank Der Oesterreichischen Sparkassen AG 2,045,088
12,040 Flughafen Wien AG 436,018
10,497 Oesterreichische Brau Beteiligungs AG 858,142
14,540 OMV AG 1,571,039
233,840 Telekom Austria AG* 2,464,880
13,864 VA Technologie AG (Bearer) 216,668
35,040 Wienerberger AG 597,082
-------------
8,188,917
-------------
BELGIUM -- 1.5%
48,604 Almanij NV 1,564,752
25,192 CFE (CIE Francois D'enter) 4,881,918
302,170 Dexia 2,758,500
24,663 Electrabel SA 6,193,555
138,065 Fortis B 1,889,842
100,135 Fortis Strip* 1,079
31,755 Groupe Bruxelles Lambert SA 1,180,781
108,793 KBC Bancassurance Holding 3,287,889
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
BELGIUM -- CONTINUED
40,152 Solvay Et Cie 2,380,170
71,049 UCB SA 1,624,190
-------------
25,762,676
-------------
BRAZIL -- 0.3%
450,300 Cia de Concessoes Rodoviarias* 883,189
109,800 Ultrapar Participacoes SA ADR 731,268
202,600 Votorantim Celulose e Papel SA ADR 3,851,426
-------------
5,465,883
-------------
CANADA -- 1.9%
147,200 BCE Inc 2,743,821
622,000 Hudson's Bay Co 3,507,048
110,840 Inco Ltd* 2,362,176
220,100 KAP Resources Ltd*(a) 1,477
300,750 Norske Skog Canada Ltd* 958,895
3,512,030 Nortel Networks Corp* 7,543,627
67,500 Rothmans Inc 1,131,796
443,740 Teck Cominco Ltd Class B 3,574,225
977,610 Tembec Inc* 6,542,336
475,860 Timberwest Forest Corp 3,928,768
129,296 Trizec Canada Inc 985,038
-------------
33,279,207
-------------
CHINA -- 0.8%
3,931,440 China Mobile Ltd* 8,468,694
3,323,230 Shanghai Industrial Holdings Ltd Class H 5,155,862
-------------
13,624,556
-------------
DENMARK -- 0.3%
188,420 Carlsberg A/S Class B 6,109,766
-------------
FINLAND -- 2.7%
674,000 Huhtamaki Oyj Class I 6,116,601
1,236,927 Metso Oyj 12,798,335
554,000 M-real Oyj 4,209,563
1,688,100 Nokia Oyj 22,560,984
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
FINLAND -- CONTINUED
124,000 Uponor Oyj 2,536,624
-------------
48,222,107
-------------
FRANCE -- 4.0%
30,360 Accor SA 932,577
40,525 Alcatel SA 292,205
77,940 Assurances Generales de France 2,145,455
24,482 Aventis SA Class A 1,111,672
58,740 Axa 717,935
74,205 BIC SA 2,367,353
155,982 BNP Paribas 6,455,708
18,510 Casino Guichard Perrachon SA 1,057,354
26,020 Christian Dior SA 890,408
72,460 Cie de Saint-Gobain 2,189,070
38,118 Danone 4,510,977
709,300 Eurotunnel SA Units (Bearer)* 290,504
12,075 Guyenne et Gascogne SA 937,039
15,498 Imerys SA 1,650,330
11,690 Lafarge SA 680,372
52,966 Lagardere S.C.A. 1,949,513
85,104 Michelin SA Class B 2,760,925
21,383 Pernod Ricard 1,655,898
133,092 Peugeot SA 5,881,309
48,455 Schneider Electric SA 2,107,793
31,563 Sophia (EX-SFI) 1,029,063
787,520 Suez SA 10,312,787
18,010 Technip-Coflexip SA 1,164,671
72,014 Thales SA 1,650,131
102,963 Total Fina Elf SA 13,605,354
6,082 Wendel Investissement 159,291
76,131 Wendel Investissement 1,787,956
22,431 Worms et Cie SA 373,521
-------------
70,667,171
-------------
GERMANY -- 8.2%
44,133 Aareal Bank AG* 487,582
254,020 Adidas-Salomon AG 20,259,924
130,643 Allianz AG (Registered) 9,363,667
121,340 Bilfinger & Berger 2,419,435
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
GERMANY -- CONTINUED
105,483 Celanese AG* 2,080,519
343,210 Commerzbank AG 2,163,984
1,053,320 Continental AG* 16,518,154
711,380 DaimlerChrysler AG (Registered) 21,698,328
44,130 DePfa Bank Plc 1,605,262
222,715 Deutsche Bank AG 9,073,596
984,270 Deutsche Lufthansa AG* 8,253,383
270,520 Deutsche Post AG 2,740,725
1,496,130 Deutsche Telekom 17,189,558
188,350 Fraport AG Frankfurt Airport Services Worldwide 3,684,516
99,499 Gehe AG 3,731,953
231,240 K&S AG 4,311,687
36,310 Koelnische Rueckversicherungs-Gesellschaft AG (New
Shares)* 1,721,936
117,410 Koelnische Rueckversicherungs-Gesellschaft AG
(Registered)* 5,555,303
90,590 MG Technologies AG 514,552
92,700 Muenchener Rueckversicherungs AG 8,292,701
89,770 Repower Systems AG* 2,031,836
-------------
143,698,601
-------------
GREECE -- 0.1%
117,800 Greek Organization of Football Prognostics SA 1,104,594
-------------
HONG KONG -- 3.7%
1,229,290 Beijing Enterprises Class H 1,205,789
2,158,449 Great Eagle Holdings Ltd 1,252,322
9,035,430 Hang Lung Group Co Ltd 7,646,246
6,747,420 Hang Lung Properties Ltd 6,142,591
522,225 Hanison Construction Holdings Ltd 16,740
4,465,050 HKR International Ltd* 687,010
7,444,001 Hong Kong Land Holdings 9,156,121
3,941,865 Hysan Development Co Ltd 3,032,554
109,859 Jardine Matheson Holdings Ltd 626,196
2,298,073 Jardine Strategic Holdings Ltd 5,791,144
1,263,016 Liu Chong Hing Bank Ltd 1,157,898
8,931,323 New World Development Co Ltd 4,065,366
1,484,399 NWS Holdings Ltd 352,110
1,907,000 PCCW Ltd* 1,247,028
4,792,890 SCMP Group Ltd 1,736,087
832,240 Swire Pacific Ltd Class A 3,542,764
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
HONG KONG -- CONTINUED
5,281,290 Swire Pacific Ltd Class B 3,588,983
3,317,790 Wharf Holdings Ltd 6,806,508
8,501,810 Wheelock and Co Ltd 6,540,609
-------------
64,594,066
-------------
INDIA -- 1.1%
475,000 Gail India Ltd GDR 144A 4,512,500
212,300 Hindalco Industries Ltd GDR 144A 2,568,830
244,600 ICICI Banking Ltd ADR* 1,739,106
224,500 ITC Ltd GDR 3,064,425
295,000 Reliance Industries Ltd GDR 144A 3,672,750
197,000 State Bank of India GDR 2,797,400
136,127 Videsh Sanchar Nigam Ltd ADR 505,031
-------------
18,860,042
-------------
INDONESIA -- 0.3%
11,710,615 Astra International Tbk* 3,097,872
2,336,500 Indonesian Satellite Corp Tbk PT 2,064,673
35,700 PT Indosat (Persero) Tbk Class B ADR 310,590
2,982,000 PT Matahari Putra Prima Tbk 130,915
300,000 Timah Tbk PT (Foreign Registered) 23,639
-------------
5,627,689
-------------
IRELAND -- 1.1%
814,737 Allied Irish Banks Plc 10,335,514
877,570 Bank of Ireland 9,666,535
-------------
20,002,049
-------------
ITALY -- 3.6%
285,231 Assicurazioni Generali SPA 7,209,045
639,466 Banca Intesa SPA 1,481,815
521,959 Banca Intesa SPA - RNC 871,979
186,039 Banca Nazionale Del Lavoro SPA* 223,171
299,038 Banca Toscana 1,398,796
130,354 Buzzi Unicem SPA 793,800
814,760 CIR-Compagnie Industriali Riunite SPA 756,964
178,447 Danieli and Co SPA (Savings Shares) 253,491
1,284,635 Enel SPA 7,545,959
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
ITALY -- CONTINUED
1,288,021 ENI-Ente Nazionale Idrocarburi SPA 19,115,914
38,834 Ericsson SPA 709,866
117,110 Fiat SPA 908,792
96,946 Grouppo Editoriale L'Espresso 337,498
98,553 IFIL Finanziaria di Partecipazioni SPA (Savings
Shares) 220,407
231,170 Italcementi SPA 1,253,250
58,000 Pagnossin SPA 82,079
178,971 RAS SPA 2,200,931
71,852 San Paolo IMI SPA 503,374
521,000 Snam Rete Gas SPA 1,847,446
431,006 Telecom Italia Mobile SPA (Savings Shares) 1,811,699
622,892 Telecom Italia SPA 4,330,227
1,023,482 Telecom Italia SPA (Savings Shares) 5,019,145
1,045,032 UniCredito Italiano SPA 4,189,968
-------------
63,065,616
-------------
JAPAN -- 17.6%
423,000 Aeon Co Ltd 8,515,458
410,100 Aisin Seiki Co Ltd 5,616,003
318,000 Ajinomoto Co Inc 3,370,302
639,000 Alps Electric Co Ltd 7,804,745
185,803 Arisawa Manufacturing 3,724,704
206,400 Bandai Co 7,070,586
609,000 Bank of Fukuoka Ltd 2,467,422
76 C&S Co Ltd 887
638,000 Canon Inc 23,043,011
699,300 Chubu Electric Power Co Inc 12,835,534
242,100 Credit Saison Co 4,320,837
674,000 Daikin Industries Ltd 10,774,878
878,000 Daimaru Inc 2,970,607
553,000 Denso Corp 8,274,536
1,339 East Japan Railway Co 6,172,595
137,000 Fuji Photo Film Co Ltd 4,345,528
695,600 Honda Motor Co Ltd 25,417,568
979,000 Itochu Corp 2,335,191
86,000 Japan Airport Terminal Co Ltd 491,013
338,800 JFE Holdings Inc* 4,920,445
661,000 Kao Corp 13,949,630
176,600 Kirin Beverage Corp 2,980,055
886,000 Konica Corp 7,111,981
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
JAPAN -- CONTINUED
72,300 Kose Corp 2,085,371
83,300 Kyocera Corp 4,375,496
1,308,000 Mitsubishi Corp 8,751,347
2,893,000 Mitsubishi Electric Corp* 7,732,612
796,000 Mitsubishi Rayon Co Ltd 1,865,020
703,000 Mitsui Fudosan Co Ltd 4,608,374
1,013,000 Nippon Oil Co Ltd 4,309,909
1,653,100 Nissan Motor Co 12,402,620
150,800 Nissin Food Products 3,023,015
715,000 NTN Corp 2,939,226
7,064 NTT Docomo Inc* 13,324,356
84,900 ORIX Corp 4,682,157
590,000 Ricoh Company Ltd 8,913,005
134,200 Rinnai Corp 2,786,729
55,000 Seino Transportation Co Ltd 344,259
211,000 Sekisui House Ltd 1,488,467
127,600 Shimachu Co 2,320,491
456,000 Shiseido Co Ltd 5,288,019
316,000 Showa Corp 2,737,018
889,000 Sumitomo Chemical Co Ltd 3,007,824
834,000 Sumitomo Trust & Banking 2,913,445
329,000 Takeda Chemical Industries Ltd 12,133,136
391,000 Tanabe Seiyaku Co Ltd 3,191,499
303,600 Tokyo Broadcasting System Inc 3,774,938
1,563,000 Tokyo Gas Co 4,732,958
175,640 Tostem Inax Holding Corp 2,167,551
347,000 Ushio Inc 3,563,189
1,073 West Japan Railway Co 3,476,075
243,000 Yamaha Corp 2,735,741
184,000 Yamanouchi Pharmaceutical Co Ltd 5,011,461
137,000 Yamato Kogyo Co 637,344
-------------
309,836,168
-------------
MALAYSIA -- 0.1%
1,059,000 Maxis Communications Berhad* 1,504,895
-------------
MEXICO -- 0.3%
222,200 Coca-Cola Femsa SA ADR 4,019,598
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
MEXICO -- CONTINUED
2,682,100 Grupo Financiero BBVA Bancomer SA* 2,021,155
-------------
6,040,753
-------------
NETHERLANDS -- 2.5%
122,472 Aegon NV 1,313,403
110,902 Akzo Nobel NV 2,401,361
110,750 Fortis NV 1,518,340
16,099 Fugro NV 563,924
47,886 Hagemeyer NV 233,800
133,874 Hal Trust (Participating Units) 2,597,209
260,444 ING Groep NV 3,522,867
156,013 Koninklijke Ahold NV 588,528
69,720 Koninklijke BAM NBM NV 882,945
242,432 Koninklijke Philips Electronics NV 4,044,819
92,391 Koninklijke Philips Electronics NV ADR 1,542,930
297,144 Koninklijke Vendex KBB NV 2,139,349
100,987 Koninklijke Volker Wessels 1,632,657
50,831 Koninklijke Wessanen NV 264,067
168,820 Laurus NV* 191,052
189,442 Reed Elsevier NV 1,945,841
185,770 Royal Dutch Petroleum 7,358,192
78,252 TPG NV 1,096,420
61,023 Unilever NV 3,459,533
21,060 Univar NV* 113,492
131,321 VNU NV 2,888,786
50,421 Vopak NV* 570,609
119,010 Wegener NV 487,422
35,387 Wereldhave NV 2,023,333
-------------
43,380,879
-------------
NEW ZEALAND -- 1.3%
1,972,386 Air New Zealand Class B* 570,872
6,099,177 Carter Holt Harvey Ltd 5,873,007
6,198,833 Telecom Corp of New Zealand 14,525,639
8,100,237 Trans Tasman Properties Ltd* 1,172,234
-------------
22,141,752
-------------
NORWAY -- 2.0%
350,000 Ekornes ASA 4,249,796
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
NORWAY -- CONTINUED
267,410 Norske Skogindustrier AS Class A 3,414,912
380,020 Prosafe ASA* 5,462,915
532,030 Smedvig ASA Class A 2,294,433
252,000 Smedvig ASA Class B 914,439
2,523,220 Statoil ASA 19,368,616
-------------
35,705,111
-------------
SINGAPORE -- 0.7%
2,471,840 Allgreen Properties Ltd 1,200,992
977,780 DBS Group Holdings Ltd 5,397,285
3,567,000 MobileOne Ltd* 2,522,732
968,450 Singapore Land Ltd 1,793,065
6,039,820 SMRT Corp Ltd 1,857,979
-------------
12,772,053
-------------
SOUTH AFRICA -- 0.4%
273,500 Allied Technologies Ltd 714,855
502,410 Liberty Group Ltd 3,363,894
1,528,961 Old Mutual Plc 1,969,710
182,787 Sun International Ltd* 50,994
260,114 Western Areas Ltd* 1,048,184
-------------
7,147,637
-------------
SOUTH KOREA -- 1.3%
19,865 Hansol Paper Manufacturing Ltd 90,367
209,060 Korea Electric Power Corp 3,143,825
913,300 KT Corp ADR 16,896,050
226,000 Samsung Corp 1,170,092
8,040 Samsung Electronics 1,882,612
5,300 Samsung Fire & Marine Insurance 253,089
-------------
23,436,035
-------------
SPAIN -- 5.5%
88,370 ACS Actividades Cons y Serv 3,049,751
278,360 Altadis SA 6,597,361
730,000 Amadeus Global Travel Distribution 3,359,610
1,071,652 Banco Bilbao Vizcaya SA 9,136,260
98,470 Banco Popular Espanol 4,011,751
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
SPAIN -- CONTINUED
1,254,442 Banco Santander Central Hispano 8,044,624
854,918 Endesa SA 10,227,880
288,400 Gas Natural SDG SA 5,657,243
814,733 Iberdrola SA 12,486,855
266,000 NH Hoteles SA* 2,264,889
116,650 Red Electrica de Espana 1,424,468
746,480 Repsol YPF SA 10,459,230
1,783,337 Telefonica SA* 17,298,726
114,877 Transportes Azkar SA 543,545
202,390 Union Fenosa SA 2,558,735
-------------
97,120,928
-------------
SWEDEN -- 1.6%
449,490 Autoliv Inc SDR 9,297,243
950,300 Billerud AB 11,168,175
722,000 SAAB AB Class B 7,551,769
-------------
28,017,187
-------------
SWITZERLAND -- 2.8%
184,880 ABB Ltd* 383,122
1,330 Bank Sarasin & Cie AG 1,118,142
2,316 Belimo Holding AG 580,708
18,440 Bobst Group AG (Registered)* 462,360
2,822 Bqe Cant Vaudoise* 159,726
5,996 Centerpulse AG* 1,154,097
123,068 Credit Suisse Group* 2,291,642
1,905 Fischer (George) AG (Registered)* 155,940
5,177 Forbo Holdings AG (Registered) 1,450,782
9,298 Geberit AG* 2,489,066
22,620 Hero AG 2,335,398
19,955 Holcim Ltd 3,233,858
640 Jelmoli (Bearer) 384,661
3,906 Jelmoli (Registered) 463,765
7,655 Kraftwerk Laufenberg (Bearer) 1,817,780
13,520 Lonza Group AG 769,723
24,370 Nestle SA 4,906,350
130,900 Novartis AG 4,807,389
504 Schweizerische National-Versicherungs-Gesellschaft 158,708
5,020 SGS Societe Generale Surveillance Holdings SA
(Registered) 1,702,950
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
SWITZERLAND -- CONTINUED
1,674 Sulzer AG (Registered)* 195,362
18,740 Swatch Group AG 1,554,757
62,586 Swiss Reinsurance Co 3,369,305
27,390 Swisscom AG 8,140,243
3,480 Unique Zurich Airport* 56,460
15,121 Valora Holding AG 2,503,440
21,021 Zurich Financial Services AG 1,782,754
-------------
48,428,488
-------------
TAIWAN -- 0.4%
25,000 Asustek Computer Inc 42,446
282,380 Compal Electronics GDR 144A* 1,389,310
646,070 Standard Foods Ltd 150,595
1,935,160 Taiwan Cement Corp* 682,179
5,567,000 United Microelectronics* 3,155,968
295,900 United Microelectronics ADR* 955,757
-------------
6,376,255
-------------
THAILAND -- 0.5%
1,248,600 PTT Exploration & Production Pcl (Foreign
Registered)(a) 3,764,623
115,400 Siam Cement Pcl (Foreign Registered) 3,468,608
81,350 Siam Cement Pcl NVDR 2,342,485
-------------
9,575,716
-------------
UNITED KINGDOM -- 18.0%
946,814 Abbey National Plc 5,816,174
2,365,000 Aggregate Industries Plc 2,626,204
674,591 Allied Domecq Plc 3,182,332
249,339 Amersham Plc 1,690,719
228,200 AstraZeneca Plc 7,361,287
887,906 Aviva Plc 5,534,725
129,891 AWG Plc* 1,076,150
537,428 BAA Plc 3,665,357
2,429,510 BAE Systems Plc 4,209,393
2,205,845 Barclays Plc 12,751,145
116,043 Berkley Group 1,148,768
1,121,746 BG Group Plc 4,324,395
250,747 BHP Billiton Plc 1,303,340
366,790 Boots Group Plc 3,131,302
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
2,047,188 BP Plc 12,898,103
364,833 BPB Plc 1,511,325
501,600 British Energy Plc (Deferred Shares)*(a) --
707,876 British Sky Broadcasting Plc* 7,007,621
3,352,701 BT Group Plc 8,634,172
408,920 Bunzl Co 2,479,746
323,200 Cadbury Schweppes Plc 1,634,122
2,486,964 Centrica Plc 5,523,276
556,622 Chubb Plc 526,041
490,755 Cookson Group Plc* 133,340
959,883 Diageo Plc 9,525,044
233,822 Dixons Group Plc (New Shares) 338,830
418,898 FKI Plc 418,977
200,000 Galen Holdings Plc 1,071,068
663,885 Gallaher Group Plc 6,514,619
901,693 GlaxoSmithKline Plc 15,850,064
469,989 GUS Plc 3,756,919
395,358 Hanson Plc 1,854,174
1,143,771 HBOS Plc 11,926,285
532,860 Hilton Group Plc 1,250,569
1,043,483 HSBC Holdings Plc 11,242,156
1,247,193 Imperial Chemical Industries Plc 2,985,970
498,518 Imperial Tobacco Group Plc 7,777,562
634,940 International Power Plc* 907,585
2,480,378 Invensys Plc 625,095
995,000 John Wood Group Plc 2,468,379
131,570 Johnson Matthey 1,702,443
605,273 Kidde Plc 545,802
1,254,017 Kingfisher Plc 4,518,275
2,614,644 Legal & General Group Plc 3,078,449
1,360,120 Lloyds TSB Group Plc 7,583,831
59,438 Lonmin Plc 772,840
318,669 Marks & Spencer Group Plc 1,533,413
810,000 Matalan Plc 2,755,795
1,512,501 mmO2 Plc* 1,131,612
1,185,044 National Grid Transco Plc 7,615,576
177,717 P&O Princess Cruises Plc 1,116,889
352,000 Pearson Plc 2,661,289
460,717 Peninsular & Oriental Steam Navigation Co 1,141,124
725,596 Prudential Plc 3,862,956
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
328,240 Rank Group Plc 1,207,220
218,690 Reed Elsevier Plc 1,596,566
1,649,020 Rentokil Initial Plc 4,746,696
214,669 Reuters Group Plc 402,369
367,200 Rexam Plc 1,866,711
125,441 RMC Group 727,102
586,302 Royal Bank of Scotland Group 13,418,227
955,000 SABMiller Plc 5,881,502
221,370 Sainsbury (J) 808,937
441,421 Scottish & Newcastle Plc 2,336,148
368,960 Scottish & Southern Energy Plc 3,661,238
649,000 Scottish Power Plc 3,726,064
492,863 Severn Trent Plc 5,465,212
2,423,750 Shell Transport & Trading (Registered) 14,039,403
254,310 Six Continents Plc 2,479,489
412,160 Smith (David S.) Holdings Plc 973,790
183,400 SSL International Plc 596,523
140,434 Standard Chartered Plc 1,541,747
226,228 TI Automotive Ltd*(a) --
869,546 Tomkins Plc 2,574,889
268,447 Trinity Mirror Plc 1,682,867
592,632 Unilever Plc 5,283,353
350,384 United Utilities 3,256,150
365,980 Viridian Group Plc 2,937,039
8,968,273 Vodafone Group Plc 16,068,242
200,354 Whitbread Plc 1,644,159
233,676 Wolseley 1,843,996
-------------
317,468,266
-------------
TOTAL COMMON STOCKS (COST $1,768,098,077) 1,566,159,512
-------------
PREFERRED STOCKS -- 1.7%
AUSTRALIA -- 0.0%
100,022 News Corporation Ltd 0.93% 518,364
-------------
BRAZIL -- 0.1%
88,610,000 Gerdau SA 825,024
-------------
</Table>
See accompanying notes to the financial statements.
13
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
FRANCE -- 0.0%
16,658 Casino Guichard Perrachon SA 3.74% 769,508
-------------
GERMANY -- 1.4%
306,560 Bayerische Motoren Werke AG 2.41% 5,815,223
192,904 Rheinmetall AG (Non Voting) 3.92% 2,079,119
55,000 Rheinmetall AG 2.51% 776,555
53,890 Villeroy & Boch AG (Non Voting) 5.78% 464,661
522,349 Volkswagen AG 5.30% 15,313,267
-------------
24,448,825
-------------
ITALY -- 0.1%
107,933 Fiat SPA 4.95% 511,853
70,578 Fondiaria - SAI 8.00% 396,319
42,571 IFI Istituto Finanziario Industries 4.82% 367,064
-------------
1,275,236
-------------
THAILAND -- 0.1%
1,954,080 Siam Commercial Bank Ltd* 1,472,925
-------------
TOTAL PREFERRED STOCKS (COST $33,020,570) 29,309,882
-------------
CONVERTIBLE SECURITIES -- 1.2%
JAPAN -- 1.2%
JPY 456,000,000 Internet Initiative Japan Inc, 144A, 1.75%, due
03/31/05 3,394,206
JPY 2,181,000,000 SMFG Finance, 144A, 2.25%, due 7/11/05 16,879,805
-------------
20,274,011
-------------
TOTAL CONVERTIBLE SECURITIES (COST $22,478,419) 20,274,011
-------------
DEBT OBLIGATIONS -- 0.0%
UNITED KINGDOM -- 0.0%
GBP 35,888 BAE Systems Plc, 7.45%, due 11/30/03 11,305
GBP 102,000 BG Transco Holdings Plc Index Linked, 4.186%, due
12/14/22 181,674
GBP 102,000 BG Transco Holdings Plc, 4.98%, Variable Rate, due
12/14/09 159,168
</Table>
14 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
GBP 102,000 BG Transco Holdings Plc, 7.00%, due 12/16/24 178,392
-------------
530,539
-------------
TOTAL DEBT OBLIGATIONS (COST $395,369) 530,539
-------------
INVESTMENT FUNDS -- 0.0%
SOUTH KOREA -- 0.0%
38,500 Alliance Korean Investment Fund A* 298,375
-------------
TOTAL INVESTMENT FUNDS (COST $327,839) 298,375
-------------
RIGHTS AND WARRANTS -- 0.0%
FRANCE -- 0.0%
85,957 Wendel Investissement Warrants, Expires 3/27/03* 927
-------------
TOTAL RIGHTS AND WARRANTS (COST $185,439) 927
-------------
SHORT-TERM INVESTMENTS -- 7.4%
CASH EQUIVALENTS -- 7.4%
USD 71,500,000 Societe Generale GC Time Deposit, 1.34%, due
3/03/03 71,500,000
58,300,757 The Boston Global Investment Trust(b) 58,300,757
-------------
129,800,757
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $129,800,757) 129,800,757
-------------
TOTAL INVESTMENTS -- 99.3%
(Cost $1,954,306,470) 1,746,374,003
Other Assets and Liabilities (net) -- 0.7% 12,916,373
-------------
TOTAL NET ASSETS -- 100.0% $1,759,290,376
=============
</Table>
See accompanying notes to the financial statements.
15
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
144A - Securities exempt from registration under rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
SDR - Swedish Depository Receipt
* Non-income producing security.
+ Direct placement securities are restricted as to resale. They have been
valued at fair value by the Trustees after consideration of
restricitions as to resale, financial condition and prospects of the
issuer, general market conditions, and pertinent information in
accordance with the Fund's Prospectus and the Investment Company Act of
1940, as amended. The Fund has limited rights to registration under the
Securities Act of 1933 with respect to those restricted securities.
16 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
Additional information on each restricted security is as
follows:
<Table>
<Caption>
MARKET
VALUE AS A MARKET
PERCENTAGE VALUE AS OF
ACQUISITION ACQUISITION OF FUND'S FEBRUARY 28,
ISSUER, DESCRIPTION DATE COST NET ASSETS 2003
- ----------------------------------------------------------------------------------------------------------
Lihir Gold Ltd ADR 10/07/99 $1,454,640 0.07% $ 1,292,000
</Table>
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) Represents investment of security lending collateral (Note 1).
<Table>
<Caption>
CURRENCY ABBREVIATIONS:
GBP - British Pound
JPY - Japanese Yen
USD - United States Dollar
</Table>
See accompanying notes to the financial statements. 17
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Financials 21.1%
Consumer Discretionary 17.6
Industrials 10.5
Telecommunication Services 9.1
Materials 9.0
Consumer Staples 8.4
Energy 8.0
Utilities 7.5
Information Technology 4.9
Health Care 3.9
-----
100.0%
=====
</Table>
18 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$55,069,097 (cost $1,954,306,470) (Note 1) $1,746,374,003
Cash 1,873
Foreign currency, at value (cost $78,057,595) (Note 1) 78,174,865
Receivable for investments sold 10,650,452
Receivable for Fund shares sold 5,269,247
Dividends and interest receivable 3,011,096
Foreign taxes receivable 767,969
Receivable for expenses reimbursed by Manager (Note 2) 173,880
--------------
Total assets 1,844,423,385
--------------
LIABILITIES:
Payable for investments purchased 25,242,381
Payable upon return of securities loaned (Note 1) 58,300,757
Payable for Fund shares repurchased 348,339
Payable to affiliate for (Note 2):
Management fee 798,604
Shareholder service fee 204,796
12b-1 Distribution fee - Class M 1,844
Administration fee - Class M 696
Accrued expenses 235,592
--------------
Total liabilities 85,133,009
--------------
NET ASSETS $1,759,290,376
==============
NET ASSETS CONSIST OF:
Paid-in capital $2,028,461,787
Accumulated undistributed net investment income 19,995,289
Accumulated net realized loss (81,442,939)
Net unrealized depreciation (207,723,761)
--------------
$1,759,290,376
==============
</Table>
See accompanying notes to the financial statements. 19
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- (CONTINUED) -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
NET ASSETS ATTRIBUTABLE TO:
Class II shares $ 305,422,632
==============
Class III shares $1,241,561,519
==============
Class IV shares $ 207,857,600
==============
Class M shares $ 4,448,625
==============
SHARES OUTSTANDING:
Class II 34,395,494
==============
Class III 139,450,438
==============
Class IV 23,343,659
==============
Class M 502,095
==============
NET ASSET VALUE PER SHARE:
Class II $ 8.88
==============
Class III $ 8.90
==============
Class IV $ 8.90
==============
Class M $ 8.86
==============
</Table>
20 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $4,008,907) $ 34,031,218
Interest (including securities lending income of
$979,882) 4,057,057
-------------
Total income 38,088,275
-------------
EXPENSES:
Management fee (Note 2) 9,153,120
Custodian fees 1,089,383
Legal fees 76,100
Transfer agent fees 68,750
Audit fees 64,540
Registration fees 42,219
Trustees fees and related expenses (Note 2) 32,572
Miscellaneous 21,908
Fees reimbursed by Manager (Note 2) (1,353,328)
-------------
9,195,264
Shareholder service fee (Note 2) - Class II 392,825
Shareholder service fee (Note 2) - Class III 1,721,218
Shareholder service fee (Note 2) - Class IV 178,420
-------------
12b-1 Distribution fee (Note 2) - Class M 3,101
-------------
Administration fee (Note 2) - Class M 2,481
-------------
Net expenses 11,493,309
-------------
Net investment income 26,594,966
-------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (43,163,300)
Foreign currency, forward contracts and foreign
currency related transactions 13,496,848
-------------
Net realized loss (29,666,452)
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (152,111,649)
Foreign currency, forward contracts and foreign
currency related transactions 905,883
-------------
Net unrealized loss (151,205,766)
-------------
Net realized and unrealized loss (180,872,218)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(154,277,252)
=============
</Table>
See accompanying notes to the financial statements. 21
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 26,594,966 $ 22,627,904
Net realized loss (29,666,452) (31,941,438)
Change in net unrealized appreciation (depreciation) (151,205,766) (99,343,365)
-------------- --------------
Net decrease in net assets from operations (154,277,252) (108,656,899)
-------------- --------------
Distributions to shareholders from:
Net investment income
Class II (3,740,934) (913,145)
Class III (21,554,280) (11,258,163)
Class IV (4,218,845) (1,559,674)
Class M (48,153) --
-------------- --------------
Total distributions from net investment income (29,562,212) (13,730,982)
-------------- --------------
Net realized gains
Class II -- (667,887)
Class III -- (10,672,198)
Class IV -- (1,492,707)
-------------- --------------
Total distributions from net realized gains -- (12,832,792)
-------------- --------------
(29,562,212) (26,563,774)
-------------- --------------
Net share transactions: (Note 5)
Class II 230,185,805 43,713,899
Class III 320,862,731 143,493,669
Class IV 103,451,466 6,306,235
Class M 4,689,233 858
-------------- --------------
Increase in net assets resulting from net share
transactions 659,189,235 193,514,661
-------------- --------------
Total increase in net assets 475,349,771 58,293,988
NET ASSETS:
Beginning of period 1,283,940,605 1,225,646,617
-------------- --------------
End of period (including accumulated undistributed
net investment income of $19,995,289 and
$9,509,502, respectively) $1,759,290,376 $1,283,940,605
============== ==============
</Table>
22 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------
2003 2002 2001 2000 1999
-------- -------- ------- ------- -------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.94 $ 11.21 $ 13.14 $ 11.79 $ 12.09
-------- -------- ------- ------- -------
Income from investment operations:
Net investment income(b) 0.15 0.16 0.20 0.17 0.20
Net realized and unrealized gain
(loss) (1.03) (1.20) (0.41) 2.89 (0.14)
-------- -------- ------- ------- -------
Total from investment operations (0.88) (1.04) (0.21) 3.06 0.06
-------- -------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.18) (0.11) (0.29) (0.21) (0.25)
From net realized gains -- (0.12) (1.43) (1.50) (0.11)
-------- -------- ------- ------- -------
Total distributions (0.18) (0.23) (1.72) (1.71) (0.36)
-------- -------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.88 $ 9.94 $ 11.21 $ 13.14 $ 11.79
======== ======== ======= ======= =======
TOTAL RETURN(a) (9.00)% (9.37)% (1.84)% 25.63% 0.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $305,423 $100,127 $61,681 $60,278 $33,780
Net expenses to average daily net
assets 0.82% 0.82% 0.82% 0.82% 0.82%
Net investment income to average
daily net assets 1.54% 1.56% 1.63% 1.28% 1.64%
Portfolio turnover rate 22% 22% 38% 35% 27%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.09% 0.09% 0.09% 0.10% 0.25%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 23
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 11.22 $ 13.16 $ 11.81 $ 12.10
---------- ---------- ---------- ---------- --------
Income from investment operations:
Net investment income(b) 0.17 0.19 0.21 0.20 0.20
Net realized and unrealized gain
(loss) (1.04) (1.23) (0.43) 2.86 (0.12)
---------- ---------- ---------- ---------- --------
Total from investment operations (0.87) (1.04) (0.22) 3.06 0.08
---------- ---------- ---------- ---------- --------
Less distributions to shareholders:
From net investment income (0.18) (0.11) (0.29) (0.21) (0.26)
From net realized gains -- (0.12) (1.43) (1.50) (0.11)
---------- ---------- ---------- ---------- --------
Total distributions (0.18) (0.23) (1.72) (1.71) (0.37)
---------- ---------- ---------- ---------- --------
NET ASSET VALUE, END OF PERIOD $ 8.90 $ 9.95 $ 11.22 $ 13.16 $ 11.81
========== ========== ========== ========== ========
TOTAL RETURN(a) (8.89)% (9.33)% (1.85)% 25.65% 0.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $1,241,562 $1,049,456 $1,019,541 $1,022,498 $927,108
Net expenses to average daily net
assets 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income to average
daily net assets 1.77% 1.88% 1.71% 1.48% 1.60%
Portfolio turnover rate 22% 22% 38% 35% 27%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.09% 0.09% 0.09% 0.10% 0.25%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
24 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.96 $ 11.22 $ 13.16 $ 11.81 $ 12.11
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(b) 0.18 0.20 0.22 0.21 0.22
Net realized and unrealized gain
(loss) (1.05) (1.22) (0.43) 2.86 (0.15)
-------- -------- -------- -------- --------
Total from investment operations (0.87) (1.02) (0.21) 3.07 0.07
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.19) (0.12) (0.30) (0.22) (0.26)
From net realized gains -- (0.12) (1.43) (1.50) (0.11)
-------- -------- -------- -------- --------
Total distributions (0.19) (0.24) (1.73) (1.72) (0.37)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.90 $ 9.96 $ 11.22 $ 13.16 $ 11.81
======== ======== ======== ======== ========
TOTAL RETURN(a) (8.92)% (9.19)% (1.79)% 25.74% 0.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $207,858 $134,357 $144,425 $141,175 $130,760
Net expenses to average daily net
assets 0.69% 0.69% 0.69% 0.69% 0.69%
Net investment income to average
daily net assets 1.79% 1.97% 1.77% 1.55% 1.81%
Portfolio turnover rate 22% 22% 38% 35% 27%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.09% 0.09% 0.09% 0.10% 0.25%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 25
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED
FEBRUARY
28/29,
-----------------
2003 2002+
------ ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.93 $ 9.85
------ ---------
Income from investment operations:
Net investment income(b) 0.05 0.00(c)
Net realized and unrealized gain (loss) (0.93) 0.08
------ ---------
Total from investment operations (0.88) 0.08
------ ---------
Less distributions to shareholders:
From net investment income (0.19) --
------ ---------
Total distributions (0.19) --
------ ---------
NET ASSET VALUE, END OF PERIOD $ 8.86 $ 9.93
====== =========
TOTAL RETURN(a) (9.09)% 0.81%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $4,449 $ 1
Net expenses to average daily net assets 1.06% 1.05%*
Net investment income to average daily net assets 0.55% 0.35%*
Portfolio turnover rate 22% 22%
Fees and expenses reimbursed by the Manager to
average daily net assets: 0.10% 0.09%*
</Table>
+ Period from January 25, 2002 (commencement of operations) to February
28, 2002.
* Annualized.
** Not Annualized.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
(c) Net investment income earned was less than $.01 per share.
26 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities
of non-U.S. issuers. The Fund's benchmark is the Morgan Stanley Capital
International EAFE Index.
Throughout the year ended February 28, 2003, the Fund had four classes of
shares outstanding: Class II, Class III, Class IV, and Class M. Class M
shares bear an administrative fee and a 12b-1 fee while classes II, III,
and IV bear a shareholder service fee (See Note 2). The principal economic
difference among the classes of shares is the level of fees borne by the
classes. Eligibility for and automatic conversion among the various
classes of shares is generally based on the total amount of assets
invested in a particular fund or with GMO, as more fully outlined in the
Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Shares of mutual funds are valued at their net asset value as reported on
each business day. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their
27
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. These prices may differ from the
value that would have been used had a broader market for the securities
existed and the differences could be material to the financial statements.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if there are movements in
foreign currency values that are unfavorable to the Fund. There were no
forward foreign currency contracts outstanding as of February 28, 2003.
28
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
28, 2003, there were no outstanding futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the
29
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
amounts paid or offset against the proceeds on the underlying future,
security or currency transaction to determine the realized gain or loss.
The risk associated with purchasing put and call options is limited to the
premium paid. At February 28, 2003, there were no open purchased option
contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003, there were no open swap agreements.
30
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $55,069,097 collateralized by cash in the amount of
$58,300,757 which was invested in a short-term instrument.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ U.S.
GAAP. During the years ended February 28, 2002 and February 28, 2003, the
tax basis of distributions paid was as follows: ordinary income --
$13,793,543 and $29,562,212, respectively; and long-term capital gains --
$12,770,231 and $0, respectively.
At February 28, 2003, the components of distributable earnings on a tax
basis consisted of $21,765,321 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to passive foreign investment company transactions and
losses on wash sale transactions.
31
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $23,898,414 and $17,460,238 expiring in 2010 and 2011,
respectively. The Fund has elected to defer to March 1, 2003 post-October
capital losses of $38,136,022.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions. The financial highlights exclude these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss Paid-in Capital
----------------- ----------------- ---------------
$13,453,033 $(14,254,467) $801,434
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service, 12b-1, and
administration fees, which are directly attributable to a class of shares,
are charged to that class' operations.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic
32
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
developments including the possible imposition of capital controls or
other foreign governmental laws or restrictions. In addition, the
securities of some foreign companies and securities markets are less
liquid and at times may be more volatile than securities of comparable
U.S. companies and U.S. securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .60% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .22%
for Class II shares, .15% for Class III shares, and .09% for Class IV
shares.
The Class M shares of the Fund pays GMO an administrative fee monthly at
the annual rate of .20% of average daily Class M net assets for support
services provided to Class M shareholders.
Fund Distributors, Inc. (the "Distributor") serves as the Fund's
distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the
Fund, Class M shares of the Fund pay a fee, at the annual rate of 0.25% of
average daily Class M net assets for any activities or expenses primarily
intended to result in the sale of Class M shares of the Fund. This fee may
be spent by the Distributor on personal services rendered to Class M
shareholders of the Fund and/or maintenance of Class M shareholder
accounts.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees (Class II,
Class III and Class IV only), administrative fee (Class M only), 12b-1 fee
(Class M only), fees and expenses of the independent Trustees of the Trust
(including legal 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, interest expense and transfer taxes) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $22,271. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003 aggregated
$898,547,625 and $315,955,222, respectively.
33
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003 the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$1,957,939,335 $85,743,229 $(297,308,561) $(211,565,332)
</Table>
4. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class II: ----------- ------------- ----------- -------------
Shares sold 26,662,327 $ 252,786,694 6,901,919 $ 66,851,376
Shares issued to shareholders in reinvestment
of distributions 330,624 3,216,043 147,774 1,500,948
Shares repurchased (2,675,281) (25,816,932) (2,475,524) (24,638,425)
----------- ------------- ----------- -------------
Net increase 24,317,670 $ 230,185,805 4,574,169 $ 43,713,899
=========== ============= =========== =============
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ----------- -------------
Shares sold 50,940,076 $ 493,560,075 26,800,942 $ 274,364,642
Shares issued to shareholders in reinvestment
of distributions 1,230,614 12,079,797 1,685,173 17,307,866
Shares repurchased (18,151,641) (184,777,141) (13,914,112) (148,178,839)
----------- ------------- ----------- -------------
Net increase 34,019,049 $ 320,862,731 14,572,003 $ 143,493,669
=========== ============= =========== =============
</Table>
34
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class IV: ----------- ------------- ----------- -------------
Shares sold 9,587,705 $ 100,892,832 423,565 $ 4,206,000
Shares issued to shareholders in reinvestment
of distributions 272,027 2,678,839 203,713 2,100,235
Shares repurchased (11,514) (120,205) -- --
----------- ------------- ----------- -------------
Net increase 9,848,218 $ 103,451,466 627,278 $ 6,306,235
=========== ============= =========== =============
<Caption>
Period from January 25,
2002
(commencement of
Year Ended operations)
February 28, 2003 through February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class M: ----------- ------------- ----------- -------------
Shares sold 561,276 $ 5,236,694 87 $ 858
Shares issued to shareholders in reinvestment
of distributions 5,216 48,153 -- --
Shares repurchased (64,484) (595,614) -- --
----------- ------------- ----------- -------------
Net increase 502,008 $ 4,689,233 87 $ 858
=========== ============= =========== =============
</Table>
35
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO FOREIGN FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Foreign Fund (the "Fund") (a
series of GMO Trust) at February 28, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
36
<Page>
GMO FOREIGN FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$4,008,907 and recognized foreign source income of $38,040,125.
37
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
38
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
39
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------------------ -------------- -------------- --------------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present), Chief
c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member,
40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer of the Officer since
Age: 47 Trust October 2002;
Vice President
from August
1998 -
October 2002.
Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Financial Financial
40 Rowes Wharf Officer and Officer Since
Boston, MA 02110 Treasurer of February 2000;
Age: 45 the Trust Treasurer
since February
1998.
Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust Treasurer of September Otterloo & Co. LLC.
40 Rowes Wharf the Trust 1998.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting
c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 since March
Age: 37 2001; May
1999 - August
1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP
Boston, MA 02110 Secretary (1991 - 1999).
Age: 58 since March
2001.
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Laundering
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
40
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Active Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
For the fiscal year ended February 28, 2003, Class III shares of GMO Foreign
Small Companies Fund fell 3.6%, outperforming its Salomon Smith Barney ("SSB")
Extended Market Index ("EMI") World ex-US Index benchmark by 6.8% after fees.
The Fund's benchmark lost 10.4%. Stock selection was the source of the
outperformance.
GMO country selection subtracted 1.1% from returns during the fiscal year. The
worst performing market in the SSB EMI World ex-US Index was Norway, with a
decline of 30.2%. The sharp rise in the value of the Norwegian krone, combined
with very high interest rates, proved deadly for Norway's smaller companies,
many of which are exporters with a significant part of costs denominated in
krone. The SSB EMI Netherlands Index lost 28.4%. The pressure on the financial
sector, particularly insurance stocks, caused them to unwind their equity
portfolios at any price. The illiquid smaller cap stocks were very vulnerable.
Further, the stock exchange regulator leveled allegations of insider trading and
market manipulation at the team that managed the Orange Fund, the leader in
Dutch small cap investment. Turmoil and uncertainty led to selling pressure
across the board. The South Korean market fell 26.0%. Geopolitical tension had
this market on edge for most of the last year, and the nuclear stand-off in
North Korea has added considerably to the equity risk premium in South Korea.
Germany was the worst performing major market for the 12 months ending in
February, declining 24.0%. Real GDP is estimated to have grown only 0.2% for
2002, with domestic demand down 1.3% for the biggest decline since German
unification. The only factor that stopped aggregate economic output from
shrinking was exports, but those are threatened by the recent euro strength. The
Fund was overweight Norway, South Korea, and Germany, but underweight the
Netherlands.
Austria was the best performing market, with a return of 20.8%. The ability to
improve margins and generate free cash -- all at globally cheap valuations --
lured both financial investors and industrial acquisition teams to this market.
Even after such strong performance the Austrian market continues to offer value,
if not liquidity. New Zealand gained 18.4%. Returns for New Zealand during the
fiscal year were aided by the strong New Zealand dollar, which appreciated
versus the U.S. dollar by an impressive 32.7%. The Fund was overweight in both
of these countries. Spain was up 13.2%, helped by a 24.6% move in the currency.
The small cap companies were primarily exposed to the growing Spanish economy,
so their earnings were less affected by the poorly performing economies of
Brazil and Argentina and the global economic malaise. The best performing major
market was Australia, up 10.6%. Despite a severe drought, GDP in Australia grew
by an impressive 3.8%, making it one the best performing economies globally. The
economy was aided by strong gains in household credit demand and housing prices.
However, there is now concern that a consumer credit bubble is looming, and a
rental yield of 3.0% versus a 3-month treasury rate of 4.8% is a sign that
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
residential property may be overpriced. The strong Australian dollar also
contributed substantially to returns for the fiscal year, rising by 17.5% versus
the U.S. dollar. The Fund started the fiscal year with overweight positions in
Spain and Australia, but ended the year underweight these countries.
GMO stock selection added 7.9% to returns during the fiscal year. Stock
selection was particularly strong in Japan, the United Kingdom, Korea, France,
and Germany. The holdings that contributed to outperformance in Japan had two
things in common -- low valuations and delivery of good earnings or dividends.
They included a consumer electronics firm (Funai), a retailer (Cawachi), an
apartment builder (Daito Trust), a cosmetics company (Kose), and a real estate
investment trust (ORIX JREIT). In the United Kingdom, our largest holding, Anglo
Irish Banks, drove our outperformance. Anglo Irish far exceeded analysts'
forecasts and soared 58.9% while the Irish market increased 4.1%. Korea has an
abundance of extremely cyclical companies with low valuations. Our portfolio is
concentrated in industry leaders that offer consistent free cash generation.
Companies such as Korea Electric Terminal, Samsung SDI, and Hanmi Pharmaceutical
contributed to the positive return in Korea. In France we sought strong free
cash flow and high yields. This strategy delivered an absolute return in a very
negative environment. The largest contributor to our positive performance in
Germany was Stada Arzneimittel AG. Stada is a generics drug producer benefiting
from the large pipeline of patent expirations across Europe.
OUTLOOK
Foreign small capitalization stocks are set to deliver strong returns in 2003
even though they already had powerful outperformance in 2002. We expect that
stock selection will again be the principle driver of our returns. Country
valuation differences are narrow entering 2003. Smaller cap companies offer
fundamental investors a unique opportunity to pounce on the undiscovered and
misunderstood value opportunities across the markets. The possibility of a weak
dollar just adds more allure.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO FOREIGN SMALL COMPANIES FUND CLASS III SHARES AND THE
SSB EMI WORLD EX-U.S. INDEX
AS OF FEBRUARY 28, 2003 GMO FOREIGN SMALL COMPANIES FUND
1/4/95 $10,000
3/31/95 $9,936
6/30/95 $10,244
9/30/95 $10,744
12/31/95 $10,836
3/31/96 $11,430
6/30/96 $12,285
9/30/96 $12,228
12/31/96 $13,230
3/31/97 $13,179
6/30/97 $14,235
9/30/97 $14,173
12/31/97 $12,727
3/31/98 $14,110
6/30/98 $13,988
9/30/98 $11,554
12/31/98 $13,301
3/31/99 $13,706
6/30/99 $15,598
9/30/99 $17,111
12/31/99 $18,824
3/31/2000 $19,045
6/30/2000 $18,686
9/30/2000 $17,378
12/31/2000 $17,367
3/31/2001 $17,217
6/30/2001 $18,344
9/30/2001 $16,613
12/31/2001 $18,002
3/31/2002 $19,621
6/30/2002 $20,662
9/30/2002 $17,693
12/31/2002 $18,475
2/28/2003 $17,811
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO FOREIGN SMALL COMPANIES FUND CLASS III SHARES AND THE
SSB EMI WORLD EX-U.S. INDEX
AS OF FEBRUARY 28, 2003 SALOMON SMITH BARNEY EMI WORLD EX-U.S. INDEX
1/4/95 $10,000
3/31/95 $10,062
6/30/95 $10,057
9/30/95 $10,455
12/31/95 $10,655
3/31/96 $11,267
6/30/96 $11,765
9/30/96 $11,499
12/31/96 $11,427
3/31/97 $11,217
6/30/97 $12,023
9/30/97 $11,539
12/31/97 $10,352
3/31/98 $12,132
6/30/98 $12,088
9/30/98 $10,259
12/31/98 $11,609
3/31/99 $11,774
6/30/99 $12,498
9/30/99 $13,134
12/31/99 $14,366
3/31/2000 $14,658
6/30/2000 $14,403
9/30/2000 $13,644
12/31/2000 $12,885
3/31/2001 $11,512
6/30/2001 $11,862
9/30/2001 $10,034
12/31/2001 $10,862
3/31/2002 $11,515
6/30/2002 $11,746
9/30/2002 $9,676
12/31/2002 $10,070
2/28/2003 $9,684
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 1/4/95
CLASS III -3.64% 5.42% 7.33%
6/14/2002
Class IV n/a n/a -12.76%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The Fund commenced operations on June 30, 2000 subsequent to a transaction
involving, in essence, the reorganization of the GMO Small Cap Active Pool of
the Common Fund for Non-Profit Organizations (the GMO Pool) as the GMO Foreign
Small Companies Fund. All information relating to the time periods prior to June
30, 2000 relates to the GMO Pool. The total returns of the GMO Pool have been
restated to reflect the current expenses of Class III shares of the GMO Foreign
Small Companies Fund. The total returns would have been lower had certain
expenses not been reimbursed during the periods shown and do not include the
effect of taxes on distributions and redemptions. Past performance is not
indicative of future performance. Information is unaudited.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
COMMON STOCKS -- 89.2%
AUSTRALIA -- 3.7%
421,949 Amcor Ltd 2,109,932
126,572 APN News & Media Ltd 227,358
1,393,304 Brazin Ltd 1,082,274
480,797 Consolidated Rutile Ltd 259,677
2,902,128 David Jones Ltd 1,954,884
32,000 Foodland Associated 348,963
888,145 Insurance Australia Group Ltd 1,649,251
654,372 John Fairfax Holdings Ltd 1,171,462
201,000 Lihir Gold Ltd* 169,548
6,000 Lihir Gold Ltd ADR*+ 102,000
744,781 Lion Nathan Ltd 2,363,805
1,000,000 Mayne Group Ltd 1,917,646
378,868 McGuigan Simeon Wines Ltd 1,007,032
1,353,112 MIM Holdings Ltd 1,166,013
371,000 Oil Search Ltd* 153,096
608,500 Pacifica Group Ltd 1,414,297
825,000 Pasminco Ltd*(a) --
501,000 Sons of Gwalia Ltd 425,645
------------
17,522,883
------------
AUSTRIA -- 1.0%
14,550 Erste Bank Der Oesterreichischen Sparkassen AG 973,852
26,248 Oesterreichische Brau Beteiligungs AG 2,145,804
15,480 OMV AG 1,672,605
------------
4,792,261
------------
BELGIUM -- 1.4%
34,000 Almanij NV 1,094,592
37,918 Bekaert SA 1,338,428
167 CFE (CIE Francois D'enter) 32,363
68,300 KBC Bancassurance Holding 2,064,129
44,320 Omega Pharma SA 683,084
21,490 Solvay Et Cie 1,273,906
5,006 Unibra SA 375,524
------------
6,862,026
------------
BRAZIL -- 0.2%
479,600 Cia de Concessoes Rodoviarias* 940,656
------------
</Table>
See accompanying notes to the financial statements.
1
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CANADA -- 3.6%
485,000 Hudson's Bay Co 2,734,595
73,800 Inco Ltd* 1,572,795
90,600 KAP Resources Ltd*(a) 608
133,877 Norske Skog Canada Ltd* 426,846
14,000 Rothmans Inc 234,743
1,000,000 SFK Pulp Fund 7,175,460
260,300 Teck Cominco Ltd Class B 2,096,657
237,600 Tembec Inc* 1,590,060
153,400 Timberwest Forest Corp 1,266,492
------------
17,098,256
------------
CROATIA -- 0.4%
160,000 Pliva D.D. 2,008,000
------------
DENMARK -- 0.8%
50,000 Carlsberg A/S Class B 1,621,316
36,000 Kobenhavns Lufthavne AS 2,298,134
------------
3,919,450
------------
FINLAND -- 5.2%
216,900 Aspocomp Group Oyj* 1,496,159
603,815 Huhtamaki Oyj Class I 5,479,667
252,000 Jaakko Poyry Group 3,938,281
324,800 Metso Oyj 3,360,667
255,000 M-real Oyj 1,937,615
1,123,562 Rapala VMC Oyj 5,316,181
160,000 Uponor Oyj 3,273,063
------------
24,801,633
------------
FRANCE -- 6.2%
39,100 Assurances Generales de France 1,076,306
23,271 Bacou Dalloz* 1,617,756
6,800 Bail-Investissement 1,006,277
22,800 BIC SA 727,386
161,900 Boursorama* 436,240
20,216 Buffalo Grill 165,595
391,900 Canal Plus 1,757,142
3,700 Casino Guichard Perrachon SA 211,357
7,320 Christian Dior SA 250,492
10,356 Clarins 483,413
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
FRANCE -- CONTINUED
6,450 Damartex SA* 75,080
44,100 Essilor International SA 1,711,115
39,101 Eurazeo 2,052,367
369,100 Eurotunnel SA Units (Bearer)* 151,170
6,300 Gaumont SA* 291,976
90,469 GrandVision SA 1,745,384
4,444 Groupe Partouche 259,604
9,000 Guyenne et Gascogne SA 698,414
11,400 Imerys SA 1,213,948
5,900 Klepierre 787,883
22,100 Lagardere S.C.A. 813,432
55,200 LISI 1,029,256
60,000 Michelin SA Class B 1,946,507
9,407 Natexis Banques Populaires 724,929
1,351 SAGA* 55,332
4,600 Schneider Electric SA 200,100
18,500 Seb SA 1,563,241
7,250 SOMFY International SA 789,219
41,203 Sophia (EX-SFI) 1,343,360
25,000 Thales SA 572,851
34,000 Valeo SA 965,235
51,872 Virbac SA 1,355,760
30,001 Worms et Cie SA 499,577
49,341 Zodiac SA 925,327
------------
29,503,031
------------
GERMANY -- 5.1%
8,028 Aareal Bank AG* 88,689
32,992 Adidas-Salomon AG 2,631,350
98,200 Bilfinger & Berger 1,958,039
88,600 Commerzbank AG 558,635
190,200 Continental AG* 2,982,715
8,028 DePfa Bank Plc 292,025
280,500 Deutsche Lufthansa AG* 2,352,072
100,007 Fraport AG Frankfurt Airport Services Worldwide 1,956,344
78,200 Gildemeister AG 297,522
77,747 Hannover Rueckversicherungs AG* 1,747,141
85,673 K&S AG 1,597,454
119,840 Repower Systems AG* 2,712,435
73,600 Stada Arzneimittel AG 3,530,011
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
GERMANY -- CONTINUED
100,622 Sudzucker AG 1,583,376
------------
24,287,808
------------
GREECE -- 0.1%
75,000 Greek Organization of Football Prognostics SA 703,265
------------
HONG KONG -- 2.2%
2,092,325 Great Eagle Holdings Ltd 1,213,957
2,083,000 Hang Lung Group Co Ltd 1,762,742
1,757,000 Hang Lung Properties Ltd 1,599,505
228,650 Hanison Construction Holdings Ltd 7,329
5,298,800 HKR International Ltd* 815,294
2,266,993 Hysan Development Co Ltd 1,744,042
145,200 Jardine Matheson Holdings Ltd 827,640
329,000 Liu Chong Hing Bank Ltd 301,618
3,186,490 New World Development Co Ltd 1,450,429
918,000 Orient Overseas International Ltd 488,479
910,699 SCMP Group Ltd 329,875
------------
10,540,910
------------
INDIA -- 0.1%
154,000 Hexaware Ltd GDR* 214,611
231,000 Aptech Training GDS* 81,543
18,200 Videsh Sanchar Nigam Ltd ADR 67,522
------------
363,676
------------
INDONESIA -- 0.4%
1,738,000 International Nickel* 1,252,119
9,084,000 Surya Citra Media 455,044
------------
1,707,163
------------
IRELAND -- 0.4%
246,000 Greencore Group 617,773
379,440 IFG Group Plc 163,584
150,000 Irish Continental Group Plc 1,102,589
------------
1,883,946
------------
ITALY -- 3.7%
659,000 Banca Intesa SPA 1,527,081
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
ITALY -- CONTINUED
85,000 Banca Popolare di Bergamo Credit 1,522,608
209,800 Benetton Group SPA 1,435,877
174,200 Buzzi Unicem SPA 1,060,803
49,700 Davide Campari-Milano SPA 1,540,041
260,000 Enel SPA 1,527,243
663,800 ERG SPA 2,546,979
9,585 Ericsson SPA 175,209
57,716 Grouppo Editoriale L'Espresso 200,926
718,852 Locazione Attrezzature SPA 619,823
30,000 Pagnossin SPA 42,455
567,000 Parmalat Finanziaria SPA 935,002
70,552 RAS SPA 867,627
485,000 Snam Rete Gas SPA 1,719,792
433,000 Telecom Italia SPA (Savings Shares) 2,123,428
------------
17,844,894
------------
JAPAN -- 22.2%
112,000 Arisawa Manufacturing 2,245,210
800,000 Bank of Yokohama 2,936,773
775,000 Brother Industries Ltd 4,673,927
110,500 Cawachi Ltd 7,355,762
825,000 Central Glass Co Ltd 3,893,846
400,000 Daikin Industries Ltd 6,394,587
441,000 Dainippon Pharmaceutical Co Ltd 3,607,080
475,000 Daito Trust Construction Co Ltd 9,260,943
109,500 Funai Electric Co Ltd 12,550,011
380,000 Izumi Co Ltd 3,930,979
1,150,000 JACCS Co 4,163,248
430 Japan Retail Fund Investment Corp 1,902,220
165,000 Koei Co Ltd 3,091,351
121,000 Kose Corp 3,490,040
700,000 NHK Spring Co Ltd 2,078,241
1,250,000 Nippon Paint Co 3,182,491
200,000 Nissin Company Ltd 1,344,893
210,000 Okamura Corp 790,442
1,100 Orix JREIT Inc 4,540,495
83,000 Sanyo Chemical Industries 500,562
2,150,000 Showa Denko* 3,037,006
1,085,000 Showa Shell Sekiyu 7,167,562
650,000 Sumitomo Realty and Development Co Ltd 2,518,080
200,000 TIS Inc 2,784,521
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
343,000 Tokai Rubber Industries 3,191,372
570,000 Toyo Suisan Kaisha 5,496,299
------------
106,127,941
------------
MEXICO -- 0.3%
1,346,700 Grupo Imsa SA 1,414,915
------------
NETHERLANDS -- 1.2%
35,300 Fortis NV 483,949
3,760 Fugro NV 131,707
97,365 Hagemeyer NV 475,378
49,800 Imtech NV 587,735
99,144 Kas Bank NV 1,586,832
54,741 Koninklijke Vendex KBB NV 394,119
27,200 Laurus NV* 30,782
36,465 Nutreco Holding NV 495,205
59,604 VNU NV 1,311,163
25,263 Wegener NV 103,468
------------
5,600,338
------------
NEW ZEALAND -- 0.6%
230,000 Air New Zealand Class B* 66,569
1,207,475 Evergreen Forests Ltd* 356,203
179,232 Fletcher Challenge Forests Ltd* 102,753
1,927,200 Tourism Holdings Ltd 1,094,133
2,358,857 Tranz Rail Holdings Ltd* 1,470,493
------------
3,090,151
------------
NORWAY -- 2.5%
385,390 Ekornes ASA 4,679,511
251,800 Norske Skogindustrier AS Class A 3,215,567
130,350 Prosafe ASA* 1,873,825
409,000 Smedvig ASA Class A 1,763,854
100,000 Smedvig ASA Class B 362,873
------------
11,895,630
------------
SINGAPORE -- 1.3%
2,159,000 Allgreen Properties Ltd 1,048,992
2,000,000 MobileOne Ltd* 1,414,484
1,233,800 Singapore Land Ltd 2,284,355
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SINGAPORE -- CONTINUED
1,400,000 United Overseas Land 1,344,335
------------
6,092,166
------------
SOUTH AFRICA -- 1.3%
9,202,800 Allan Gray Property Trust 3,160,749
10,317,337 Martprop Property Fund 2,558,514
138,989 Western Areas Ltd* 560,085
------------
6,279,348
------------
SOUTH KOREA -- 2.0%
100,000 Asia Cement Co Ltd 1,889,163
325,000 Dongkuk Steel Mill 1,147,635
331,920 Handsome Corp 1,943,720
29,610 Hanil Cement Manufacturing 804,963
113,270 Korea Electric Terminal Co 1,670,131
320,963 Kortek Corp 865,832
50,000 Sam Yang 705,818
240,000 Woongjin.com Co Ltd 764,043
------------
9,791,305
------------
SPAIN -- 2.1%
64,000 ACS Actividades Cons y Serv 2,208,714
74,400 Altadis SA 1,763,341
70,000 Amadeus Global Travel Distribution 322,154
60,000 Augus de Barcelona SA 592,359
10,000 Cia de Distribucion Integral Logista SA 221,488
137,000 Cortefiel SA 620,166
106,800 Gas Natural SDG SA 2,094,985
70,000 Red Electrica de Espana 854,803
90,000 Union Fenosa SA 1,137,833
7,348 Uralita SA 43,954
------------
9,859,797
------------
SWEDEN -- 2.8%
157,300 Autoliv Inc SDR 3,253,590
377,400 Billerud AB 4,435,304
170,500 PerBio Science AB* 2,164,062
349,200 SAAB AB Class B 3,652,462
------------
13,505,418
------------
</Table>
See accompanying notes to the financial statements.
7
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SWITZERLAND -- 2.7%
1,752 Bank Sarasin & Cie AG 1,472,920
2,500 Belimo Holding AG 626,844
16,470 Bobst Group AG (Registered)* 412,965
61,180 Charles Voegele Holding AG* 776,030
700 Eichhof Holding AG 278,761
3,120 Forbo Holdings AG (Registered) 874,336
6,110 Geberit AG* 1,635,642
4,990 Helvetia Patria Holding 493,112
2,600 Hero AG 268,437
1,000 Jelmoli (Bearer) 601,032
3,250 Jelmoli (Registered) 385,878
28,970 Lonza Group AG 1,649,324
1,000 Schaffner Holding AG (Registered) 84,071
2,220 Sika AG 553,363
65,000 Swisslog Holding AG* 114,565
3,880 Unique Zurich Airport* 62,950
17,908 Valiant Holding (Registered) 1,063,122
10,650 Valora Holding AG 1,763,219
------------
13,116,571
------------
THAILAND -- 0.2%
588,900 Electricity Generating Pcl (Foreign Registered) 550,567
1,000,000 Shin Satellite (Foreign Registered)*(a) 247,750
------------
798,317
------------
UNITED KINGDOM -- 15.5%
2,484,540 Aggregate Industries Plc 2,758,946
175,000 Alliance & Leicester Plc 2,136,229
261,800 Alliance Unichem Plc 1,618,518
643,173 Anglo Irish Bank Corp 4,305,513
674,400 Balfour Beatty Plc 1,696,940
549,800 Bodycote International Plc 675,472
348,600 BPB Plc 1,444,080
500,000 Brambles Industries Plc 1,185,263
839,100 Carphone Warehouse Group Plc* 700,483
402,711 Cattle's Plc 1,690,436
130,000 Computacenter Plc 552,860
260,000 Cookson Group Plc* 70,643
463,424 Crest Nicholson 1,591,267
696,493 FKI Plc 696,624
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
2,207,600 Fyffes Plc 3,033,849
500,000 Galen Holdings Plc 2,677,670
465,000 Hays Plc 527,343
127,400 Imperial Tobacco Group Plc 1,987,614
311,700 Jarvis Plc 1,234,761
850,000 John Wood Group Plc 2,108,665
245,000 Kelda Group Plc 1,582,188
1,540,000 Kidde Plc 1,388,687
362,344 Kier Group Plc 2,611,081
205,000 Kingston Communications Plc* 145,303
60,376 Lonmin Plc 785,036
712,200 Matalan Plc 2,423,058
209,800 Mothercare Plc 315,585
220,300 Northern Rock Plc 2,338,743
866,436 Novar Plc 1,569,432
124,031 Pennon Group Plc 1,303,059
1,050,000 PHS Group Plc 1,141,160
220,000 Premier Farnell Plc 511,120
135,000 Provident Financial Plc 1,221,608
405,000 Rank Group Plc 1,489,533
423,700 Rexam Plc 2,153,936
750,000 RM Plc 1,139,979
629,300 Smith (David S.) Holdings Plc 1,486,816
230,000 Smith (WH) Group Plc 956,401
689,300 Somerfield Plc 857,716
305,000 SSL International Plc 992,037
288,600 Tate & Lyle 1,262,579
550,300 Tomkins Plc 1,629,542
110,000 Travis Perkins Plc 1,665,905
195,000 Trinity Mirror Plc 1,222,435
780,000 TT Electronics 1,050,434
230,700 Ultra Electronics Holdings 1,607,937
315,000 Viridian Group Plc 2,527,917
488,100 Westbury Plc 2,433,272
165,100 William Hill Plc 525,949
167,800 Wolseley 1,324,152
------------
74,355,776
------------
TOTAL COMMON STOCKS (COST $459,190,334) 426,707,531
------------
</Table>
See accompanying notes to the financial statements.
9
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
PREFERRED STOCKS -- 1.4%
AUSTRALIA -- 0.1%
1,150,000 Village Roadshow Ltd 19.08% 467,578
------------
FRANCE -- 0.1%
6,800 Casino Guichard Perrachon SA 3.74% 314,123
------------
GERMANY -- 1.1%
316,007 Dyckerhoff AG (Non Voting) 11.72% 1,515,636
15,686 Koegel Fahrzeugwerke AG* 43,956
57,826 Rheinmetall AG (Non Voting) 3.92% 623,248
10,000 Rheinmetall AG 2.51% 141,192
10,000 Villeroy & Boch AG (Non Voting) 5.78% 86,224
100,000 Volkswagen AG 5.30% 2,931,616
------------
5,341,872
------------
ITALY -- 0.0%
10,000 IFI Istituto Finanziario Industries 4.82% 86,224
------------
NEW ZEALAND -- 0.1%
915,787 Fletcher Challenge Forests Ltd* 525,019
------------
TOTAL PREFERRED STOCKS (COST $8,492,244) 6,734,816
------------
RIGHTS AND WARRANTS -- 0.0%
SINGAPORE -- 0.0%
60,000 United Overseas Land Warrants, Expires 6/12/04* 15,870
------------
TOTAL RIGHTS AND WARRANTS (COST $18,235) 15,870
------------
</Table>
See accompanying notes to the financial statements.
10
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 4.0%
CASH EQUIVALENTS -- 4.0%
$ 19,000,000 Bank of Scotland Time Deposit, 1.31%, due 3/03/03 19,000,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $19,000,000) 19,000,000
------------
TOTAL INVESTMENTS -- 94.6%
(Cost $486,700,813) 452,458,217
Other Assets and Liabilities (net) -- 5.4% 25,599,194
------------
TOTAL NET ASSETS -- 100.0% $478,057,411
============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
144A - Securities exempt from registration under rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
REIT - Real Estate Investment Trust
SDR - Swedish Depository Receipt
* Non-income producing security.
+ Direct placement securities are restricted as to resale. They have been
valued at fair value by the Trustees after consideration of
restricitions as to resale, financial condition and prospects of the
issuer, general market conditions, and pertinent information in
accordance with the Fund's Prospectus and the Investment Company Act of
1940, as amended. The Fund has limited rights to registration under the
Securities Act of 1933 with respect to those restricted securities.
See accompanying notes to the financial statements. 11
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
Additional information on each restricted security is as follows:
<Table>
<Caption>
MARKET
VALUE AS A MARKET
PERCENTAGE VALUE AS OF
ACQUISITION ACQUISITION OF FUND'S FEBRUARY 28,
ISSUER, DESCRIPTION DATE COST NET ASSETS 2003
------------------------------------------------------------------------
Lihir Gold Ltd ADR 7/03/00 $47,302 0.02% $102,000
</Table>
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
12 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Industrials 19.2%
Consumer Discretionary 17.8
Financials 17.4
Materials 16.2
Consumer Staples 9.6
Information Technology 6.1
Health Care 5.5
Energy 4.1
Utilities 3.2
Telecommunication Services 0.9
-----
100.0%
=====
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $486,700,813) (Note 1) $452,458,217
Cash 20,772
Foreign currency, at value (cost $17,410,082) (Note 1) 17,416,886
Receivable for investments sold 2,451,630
Receivable for Fund shares sold 9,400,000
Dividends and interest receivable 709,990
Foreign taxes receivable 101,070
Receivable for expenses reimbursed by Manager (Note 2) 57,372
------------
Total assets 482,615,937
------------
LIABILITIES:
Payable for investments purchased 4,143,597
Payable to affiliate for (Note 2):
Management fee 263,617
Shareholder service fee 47,939
Accrued expenses 103,373
------------
Total liabilities 4,558,526
------------
NET ASSETS $478,057,411
============
NET ASSETS CONSIST OF:
Paid-in capital $520,604,847
Accumulated undistributed net investment income 1,430,051
Accumulated net realized loss (9,728,109)
Net unrealized depreciation (34,249,378)
------------
$478,057,411
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $275,738,628
============
Class IV shares $202,318,783
============
SHARES OUTSTANDING:
Class III 30,195,478
============
Class IV 22,152,446
============
NET ASSET VALUE PER SHARE:
Class III $ 9.13
============
Class IV $ 9.13
============
</Table>
14 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $878,800) $ 7,400,527
Interest 764,164
------------
Total income 8,164,691
------------
EXPENSES:
Management fee (Note 2) 2,538,475
Custodian fees 391,788
Audit fees 43,669
Legal fees 41,849
Transfer agent fees 38,419
Registration fees 9,739
Trustees fees and related expenses (Note 2) 9,379
Miscellaneous 4,021
Fees reimbursed by Manager (Note 2) (528,868)
------------
2,548,471
Shareholder service fee (Note 2) -- Class III 338,464
Shareholder service fee (Note 2) -- Class IV 136,998
------------
Net expenses 3,023,933
------------
Net investment income 5,140,758
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (8,424,533)
Foreign currency, forward contracts and foreign
currency related transactions 2,255,154
------------
Net realized loss (6,169,379)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (39,120,474)
Foreign currency, forward contracts and foreign
currency related transactions 43,465
------------
Net unrealized loss (39,077,009)
------------
Net realized and unrealized loss (45,246,388)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(40,105,630)
============
</Table>
See accompanying notes to the financial statements. 15
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 5,140,758 $ 1,412,935
Net realized gain (loss) (6,169,379) 135,673
Change in net unrealized appreciation (depreciation) (39,077,009) 3,585,081
------------ ------------
Net increase (decrease) in net assets from
operations (40,105,630) 5,133,689
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (2,916,437) (2,447,282)
Class IV (2,632,475) --
------------ ------------
Total distributions from net investment income (5,548,912) (2,447,282)
------------ ------------
Net share transactions (Note 5):
Class III 143,772,651 85,636,249
Class IV 230,373,020 --
------------ ------------
Increase in net assets resulting from net share
transactions 374,145,671 85,636,249
------------ ------------
Total increase in net assets 328,491,129 88,322,656
NET ASSETS:
Beginning of period 149,566,282 61,243,626
------------ ------------
End of period (including accumulated undistributed
net investment income of $1,430,051 and
distributions in excess of net investment income of
$396,068, respectively) $478,057,411 $149,566,282
============ ============
</Table>
16 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28,
------------------------------------
2003 2002 2001
-------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.59 $ 9.68 $ 10.00+
-------- -------- -------
Income from investment operations:
Net investment income 0.16(e) 0.15 0.06
Net realized and unrealized gain (loss)(b) (0.51) 0.00(c) (0.33)
-------- -------- -------
Total from investment operations (0.35) 0.15 (0.27)
-------- -------- -------
Less distributions to shareholders:
From net investment income (0.11) (0.24) (0.05)
-------- -------- -------
Total distributions (0.11) (0.24) (0.05)
-------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 9.13 $ 9.59 $ 9.68
======== ======== =======
TOTAL RETURN(a) (3.64)% 1.59% (2.64)%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $275,739 $149,566 $61,244
Net expenses to average daily net assets 0.85% 0.86%(d) 0.85%*
Net investment income to average daily net
assets 1.59% 1.48% 1.08%*
Portfolio turnover rate 24% 17% 16%
Fees and expenses reimbursed by the Manager to
average daily net assets: 0.15% 0.26% 0.43%*
</Table>
+ Period from June 30, 2000 (commencement of operations) to February 28,
2001.
* Annualized.
** Not annualized.
(a) Total return would have been lower had certain expenses not been
reimbursed during the period shown.
(b) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments due to
the timing of purchases and redemptions of Fund shares in relation to
fluctuating market values of the investments of the Fund.
(c) Net realized and unrealized loss was less than $0.01 per share
(d) Includes transfer taxes not reimbursed by the Manager, which approximate
.01% of average daily net assets.
(e) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 17
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
THE PERIOD FROM
JUNE 14, 2002
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 28, 2003
----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.60
--------
Income from investment operations:
Net investment income 0.08(b)
Net realized and unrealized loss (1.43)
--------
Total from investment operations (1.35)
--------
Less distributions to shareholders:
From net investment income (0.12)
--------
Total distributions (0.12)
--------
NET ASSET VALUE, END OF PERIOD $ 9.13
========
TOTAL RETURN(a) (12.76)%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $202,319
Net expenses to average daily net assets 0.80%*
Net investment income to average daily net assets 1.13%*
Portfolio turnover rate 24%
Fees and expenses reimbursed by the Manager to average
daily net assets: 0.14%*
</Table>
* Annualized.
** Not annualized.
(a) Total return would have been lower had certain expenses not been
reimbursed during the period shown.
(b) Computed using average shares outstanding throughout the period.
18 See accompanying notes to the financial statements.
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Foreign Small Companies Fund (the "Fund") is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high total return through investment in a diversified
portfolio of equity securities of non-U.S. issuers. The Fund's benchmark
is the Salomon Smith Barney EMI World Ex-U.S. Index.
Throughout the year ended February 28, 2003, the Fund had one class of
shares outstanding: Class III. Effective June 14, 2002, the Fund also had
Class IV shares outstanding. The principal economic difference between the
classes of shares is the level of shareholder service fees borne by the
classes. Eligibility for and automatic conversion between the classes of
shares is generally based on the total amount of assets invested in a
particular fund or with GMO, as more fully outlined in the Trust's
prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Shares of investment trusts and other Funds of the Trust
are valued at their net asset value as reported on each business day.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates fair value. Securities for
which quotations are not readily available or whose values the Manager has
determined to be unreliable are valued at fair value as determined in good
faith by the Trustees or
19
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
other persons acting at their direction. A security's value may be deemed
unreliable if, for example, the Manager becomes aware of information or
events occurring after the close of a foreign market that would materially
affect that security's value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. There were no forward foreign currency contracts
outstanding as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments.
20
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
In addition, the Fund maintains cash or securities in an amount that at
least equals the net amount payable in the event the Fund must deliver the
full amount of the contracts. Futures contracts are marked to market daily
and an appropriate payable or receivable for the change in value
("variation margin") is recorded by the Fund. The payable or receivable is
liquidated on the following business day. Gains or losses are recognized
but not considered realized until the contracts expire or are closed.
Futures contracts involve, to varying degrees, risk of loss in excess of
the variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. As of February 28,
2003, there were no outstanding futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
21
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003, there were no open swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the
22
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
investment of the collateral, the risk of delay in recovery or loss of
rights in the collateral should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities. At
February 28, 2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distrbutions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid were as follows: ordinary income --
$2,447,282 and $5,548,912, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $2,316,048 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to passive foreign investment company transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $506,847, $777,168 and $2,715,721 expiring in 2009, 2010 and 2011,
respectively. The Fund has elected to defer to March 1, 2003 post-October
capital losses of $5,516,486.
23
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions. The financial highlights exclude these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss
----------------- ---------------
$2,234,273 $(2,234,273)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
24
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .70% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .10% for Class IV shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $6,929. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003 aggregated
$416,643,042 and $80,485,774, respectively.
At February 28, 2003 the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$487,783,373 $25,516,131 $(60,841,287) $(35,325,156)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 46.3% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the outstanding
shares of the Fund. Investment activities of these shareholders may have a
material effect on the Fund.
25
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------- -----------------------
Shares Amount Shares Amount
Class III: ----------- ------------ ---------- -----------
Shares sold 17,915,318 $176,979,293 9,093,131 $84,040,770
Shares issued to shareholders
in reinvestment of distributions 260,420 2,437,533 173,775 1,595,479
Shares repurchased (3,571,567) (35,644,175) -- --
----------- ------------ ---------- -----------
Net increase 14,604,171 $143,772,651 9,266,906 $85,636,249
=========== ============ ========== ===========
</Table>
<Table>
<Caption>
Period from June 14, 2002
(commencement of
operations)
through February 28, 2003
--------------------------
Shares Amount
Class IV: ----------- -------------
Shares sold 21,937,294 $228,359,202
Shares issued to shareholders
in reinvestment of distributions 215,152 2,013,818
Shares repurchased -- --
---------- ------------
Net increase 22,152,446 $230,373,020
========== ============
</Table>
26
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO FOREIGN SMALL COMPANIES FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Foreign Small Companies Fund
(the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of
its operations, the changes in its net assets and the financial highlights for
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
27
<Page>
GMO FOREIGN SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$878,800 and recognized foreign source income of $8,279,327.
28
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
29
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
30
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Name, Address, Position(s) Term of Office(4) and Length Principal Occupation(s)
and Age Held with Fund of Time Served During Past Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
31
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Asset
Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Global (U.S.+) Equity Allocation Fund returned
- -10.8% for the fiscal year ended February 28, 2003. During the period, the
Fund's benchmark, the GMO Global Equity Index (75% S&P 500/25% MSCI ACWI [All
Country World Index] Free ex-US), returned -21.1%.
During the fiscal year, both asset allocation and portfolio implementation added
substantially to performance. Relative to the benchmark, the Fund was
underweight in U.S. stocks by 22% and overweight international stocks (including
emerging) by 14%. Within U.S. stocks, the portfolio was tilted towards the most
attractively valued sectors including small cap value stocks and REITs, where we
were overweight 7% and 9%, respectively. Both allocations added to performance,
as small cap value and REITs outperformed the S&P 500 by 6.1% and 23.5%,
respectively. Within international stocks, the portfolio was tilted towards the
small cap sector, which continued to offer the greatest value by outperforming
the MSCI EAFE index by 7.1%.
The value bias of the GMO International Intrinsic Value Fund and the GMO U.S.
Core Fund ensured their performance was again strong in a down market.
International Intrinsic Value outperformed its SSB PMI EPAC Value benchmark by
11.3%, while U.S. Core outperformed the S&P 500 Index by 1.1%. Strong
implementation within emerging market equities added 2.5% relative to the IFC
Composite benchmark. The GMO Small Cap Value Fund and the GMO Real Estate Fund
underperformed their benchmarks by 2.0% and 3.0%, respectively.
The Fund's 8% overweight to fixed income was allocated to inflation indexed
bonds, international fixed income, and to emerging bonds. While the last
outperformed its benchmark by a strong 3.8%, the other bond funds underperformed
due largely to exposure to certain asset-backed securities, which defaulted
during the period.
OUTLOOK
With U.S. equities remaining stubbornly overpriced relative to economic
fundamentals we continue to maintain a sizeable underweight to the S&P 500.
However, many of the Fund's bets now differ substantially from those of a year
ago. We have decreased our position in REITs in the face of increased risk and
somewhat less attractive valuations. A modest allocation to large developed
international equities, both value and growth, reflects our view that the asset
class is fairly valued. With help from a depreciating dollar, this and
overweights to the still cheap sectors of international small and emerging
markets are expected to add value. With yields at near record lows, the Fund now
has a relatively neutral weight in fixed income. Within fixed income we favor
the short end of the curve and the still attractively priced emerging country
debt asset class.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND CLASS III SHARES AND THE
S&P 500 INDEX (75%)/MSCI ALL COUNTRY WORLD FREE
EX-U.S. INDEX (25%) AS OF FEBRUARY 28, 2003
GMO GLOBAL (U.S.+)
EQUITY ALLOCATION FUND GMO GLOBAL EQUITY INDEX* S&P 500 INDEX
Nov 26, 96 $10,000 $10,000 $10,000
Dec 31, 96 $10,070 $9,820 $9,818
Mar 31, 97 $10,233 $10,018 $10,081
Jun 30, 97 $11,447 $11,656 $11,841
Sep 30, 97 $12,471 $12,281 $12,728
Dec 31, 97 $12,074 $12,272 $13,093
Mar 31, 98 $13,380 $13,976 $14,920
Jun 30, 98 $12,953 $14,270 $15,412
Sep 30, 98 $11,201 $12,671 $13,879
Dec 31, 98 $12,794 $15,343 $16,835
Mar 31, 99 $12,865 $16,009 $17,674
Jun 30, 99 $14,425 $17,043 $18,920
Sep 30, 99 $13,694 $16,381 $17,738
Dec 31, 99 $15,261 $18,955 $20,377
Mar 31, 2000 $15,714 $19,327 $20,845
Jun 30, 2000 $15,433 $18,746 $20,291
Sep 30, 2000 $15,813 $18,224 $20,094
Dec 31, 2000 $15,833 $16,958 $18,522
Mar 31, 2001 $15,178 $14,892 $16,326
Jun 30, 2001 $16,081 $15,531 $17,282
Sep 30, 2001 $14,531 $13,249 $14,745
Dec 31, 2001 $15,716 $14,606 $16,321
Mar 31, 2002 $16,712 $14,696 $16,366
Jun 30, 2002 $16,159 $13,106 $14,173
Sep 30, 2002 $13,848 $10,774 $11,725
Dec 31, 2002 $14,736 $11,642 $12,714
Feb 28, 2003 $14,243 $11,125 $12,195
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 11/26/96
Class III -10.84% 2.15% 5.81%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited. * The GMO Global Equity Index is a
composite benchmark computed by GMO and comprised 75% by S&P 500 and 25% by MSCI
AC World Free ex-U.S. Index.
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------------------------------
MUTUAL FUNDS -- 100.0%
380,914 GMO Currency Hedged International Equity Fund, Class III 2,110,264
244,077 GMO Emerging Countries Fund, Class III 2,084,414
299,592 GMO Emerging Country Debt Fund, Class III 2,852,115
934,223 GMO Emerging Markets Fund, Class III 8,239,843
5,829 GMO Growth Fund, Class III 83,290
62,667 GMO Inflation Indexed Bond Fund, Class III 734,460
124,381 GMO Value Fund, Class III 837,084
100,779 GMO Global Hedged Equity Fund, Class III 970,501
16,162 GMO Short-Term Income Fund, Class III 140,287
369,781 GMO International Growth Fund, Class III 6,223,412
633,689 GMO International Intrinsic Value Fund, Class III 10,221,407
638,948 GMO International Small Companies Fund, Class III 6,070,007
310,649 GMO Real Estate Fund, Class III 3,258,711
397,213 GMO Small Cap Value Fund, Class III 3,896,664
3,207,342 GMO U.S. Core Fund, Class III 32,009,271
------------------
TOTAL MUTUAL FUNDS (COST $91,358,115) 79,731,730
------------------
PRIVATE INVESTMENT FUND -- 0.0%
175 GMO SPV I, LLC*(a) 2,808
------------------
TOTAL PRIVATE INVESTMENT FUND (COST $3,505) 2,808
------------------
SHORT-TERM INVESTMENTS -- 0.0%
REPURCHASE AGREEMENT -- 0.0%
$ 9,419 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of $9,420 and
an effective yield of .36%, collateralized by a U.S.
Treasury Bond with a rate of 3.625%, maturity date of
3/31/04, and a market value, including accured interest
of $10,135. 9,419
------------------
TOTAL SHORT-TERM INVESTMENTS (COST $9,419) 9,419
------------------
TOTAL INVESTMENTS -- 100.0%
(Cost $91,371,039) 79,743,957
Other Assets and Liabilities (net) -- (0.0%) (7,679)
------------------
TOTAL NET ASSETS -- 100.0% $ 79,736,278
==================
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
<Table>
* Non-income producing security.
(a) Security valued at fair value using methods determined in
good faith by or at the direction of the Trustees (Note 1).
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $91,371,039) (Note 1) $ 79,743,957
Receivable for expenses reimbursed by Manager (Note 2) 6,468
----------------
Total assets 79,750,425
----------------
LIABILITIES:
Accrued expenses 14,147
----------------
Total liabilities 14,147
----------------
NET ASSETS $ 79,736,278
================
NET ASSETS CONSIST OF:
Paid-in capital $ 93,329,002
Accumulated undistributed net investment income 526,755
Accumulated net realized loss (2,492,397)
Net unrealized depreciation (11,627,082)
----------------
$ 79,736,278
================
NET ASSETS ATTRIBUTABLE TO:
Class III shares $ 79,736,278
================
SHARES OUTSTANDING:
Class III 10,617,012
================
NET ASSET VALUE PER SHARE:
Class III $ 7.51
================
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends from investment company shares $ 1,633,794
Interest 1,579
----------------
Total income 1,635,373
----------------
EXPENSES:
Audit fees 16,799
Custodian and transfer agent fees 9,620
Registration fees 5,046
Legal fees 2,504
Trustees fees and related expenses (Note 2) 1,953
Miscellaneous 1,099
Fees reimbursed by Manager (Note 2) (34,895)
----------------
2,126
----------------
Net expenses 2,126
----------------
Net investment income 1,633,247
----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (767,874)
Realized gains distributions from investment company
shares 724,648
----------------
Net realized loss on investments (43,226)
----------------
Change in net unrealized appreciation (depreciation) on
investments (6,859,717)
----------------
Net realized and unrealized loss (6,902,943)
----------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (5,269,696)
================
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,633,247 $ 1,132,202
Net realized loss (43,226) (1,055,568)
Change in net unrealized appreciation (depreciation) (6,859,717) 334,258
----------- -----------
Net increase (decrease) in net assets from operations (5,269,696) 410,892
----------- -----------
Distributions to shareholders from:
Net investment income
Class III (1,700,368) (647,084)
----------- -----------
Total distributions from net investment income (1,700,368) (647,084)
----------- -----------
Net realized gains
Class III -- (1,066,948)
----------- -----------
Total distributions from net realized gains -- (1,066,948)
----------- -----------
(1,700,368) (1,714,032)
----------- -----------
Net share transactions (Note 5):
Class III 46,581,994 (1,348,291)
----------- -----------
Increase (decrease) in net assets resulting from net
share transactions 46,581,994 (1,348,291)
----------- -----------
Total increase (decrease) in net assets 39,611,930 (2,651,431)
NET ASSETS:
Beginning of period 40,124,348 42,775,779
----------- -----------
End of period (including accumulated undistributed net
investment income of $526,755 and $551,020,
respectively) $79,736,278 $40,124,348
=========== ===========
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.66 $ 8.92 $ 9.49 $ 8.85 $ 10.48
------- ------- ------- ------- -------
Income from investment operations:
Net investment income(a) 0.15 0.23 0.24 0.25 0.16+
Net realized and unrealized gain
(loss) (1.07) (0.14) 0.39 1.45 (0.40)
------- ------- ------- ------- -------
Total from investment operations (0.92) 0.09 0.63 1.70 (0.24)
------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.23) (0.13) (0.51) (0.43) (0.56)
From net realized gains -- (0.22) (0.69) (0.63) (0.83)
------- ------- ------- ------- -------
Total distributions (0.23) (0.35) (1.20) (1.06) (1.39)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 7.51 $ 8.66 $ 8.92 $ 9.49 $ 8.85
======= ======= ======= ======= =======
TOTAL RETURN(b) (10.84)% 1.12% 6.57% 19.14% (2.84)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $79,736 $40,124 $42,776 $36,669 $32,474
Net expenses to average daily net
assets(c) 0.00%(d) 0.00%(d) 0.00% 0.00% 0.00%
Net investment income to average
daily net assets(a) 3.06% 2.73% 2.56% 2.63% 1.64%
Portfolio turnover rate 30% 13% 19% 18% 34%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.07% 0.07% 0.07% 0.09% 0.07%
</Table>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
(b) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
(See Note 2.)
(d) Net expenses to average daily net assets was less than 0.01%.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 5
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Global (U.S.+) Equity Allocation Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks total return greater than that of the
GMO Global Equity Index, a benchmark developed by the Manager, through
investment to varying extents in underlying funds of the Trust. The Fund
will pursue its objective by investing in Class III shares of domestic
equity, international equity, and fixed income funds of the Trust. The
financial statements of the underlying funds should be read in conjunction
with the Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates fair
value. Securities for which quotations are not readily available, or whose
values the Manager has determined to be unreliable, are valued at fair
value as determined in good faith by the Trustees or other persons acting
at their direction. A security's value may be deemed unreliable if, for
example, the Manager becomes aware of information or events occurring
after the close of a foreign market that would materially affect that
security's value.
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
6
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Certain investments in securities held by the underlying funds were valued
on the basis of a price provided by a principal market maker. The prices
provided by the principal market makers may differ from the value that
would be realized if the securities were sold and the differences could be
material to the financial statements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid was as follows: ordinary income --
$657,627 and $1,700,368 and long-term capital gains -- $1,056,405 and $0,
respectively.
For the year ended February 28, 2003, the components of distributable
earnings on a tax basis consisted of $526,752 of undistributed ordinary
income and $272,878 of undistributed long-term capital gains. These
temporary differences between book and tax basis distributable earnings
are primarily due to wash sale transactions.
7
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus U.S. GAAP. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Net
Investment Income Realized Loss
----------------- -------------
$42,856 $(42,856)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis.
Non-cash dividends, if any, are recorded at the fair market value of the
securities received. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur certain fees and expenses indirectly as
a shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in the underlying funds, some of which may invest in foreign securities.
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets. The risks described above apply to an even
8
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
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 securities markets of the U.S. and developed
foreign markets. Additionally, the investment risk associated with an
investment in the underlying funds may be more pronounced to the extent
that the underlying funds engage in derivative transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not directly charge an
advisory fee or shareholder service fee, but receives advisory and
shareholder service fees from the underlying funds in which the Fund
invests.
GMO has entered into a binding agreement, effective until at least
June 30, 2003, to reimburse the Fund for its total annual direct operating
expenses (excluding fees and expenses of the independent Trustees of the
Trust (including legal 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, interest expense and transfer
taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the
underlying funds. For the year ended February 28, 2003, shareholder
service fees incurred indirectly by the Fund were 0.15% of the Fund's
average daily net assets, indirect operating expenses (excluding
shareholder service fees and investment-related expenses) were 0.501% of
the Fund's average daily net assets, and indirect investment-related
expenses (including, but not limited to, interest expense, foreign audit
expense, and investment-related legal expense) were 0.009% of the Fund's
average daily net assets.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $1,630. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$63,267,663 and $16,030,221, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$94,136,314 $204,243 $(14,596,600) $(14,392,357)
</Table>
9
<Page>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 80.5% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ -----------------------
Shares Amount Shares Amount
Class III: --------- ----------- -------- -----------
Shares sold 6,144,908 $47,976,365 40,603 $ 350,000
Shares issued to shareholders
in reinvestment of distributions 63,094 494,347 132,919 1,152,336
Shares repurchased (226,927) (1,888,718) (330,893) (2,850,627)
--------- ----------- -------- -----------
Net increase (decrease) 5,981,075 $46,581,994 (157,371) $(1,348,291)
========= =========== ======== ===========
</Table>
10
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly in all
material respects, the financial position of GMO Global (U.S.+) Equity
Allocation Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and
the results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
11
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
12
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- ------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of September Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the 1985.
Boston, MA 02110 Trust President
Age: 64 from February
2002 -
October 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
13
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
14
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Global Bond Fund returned +17.8% for the fiscal
year ended February 28, 2003, compared to +24.0% for the J.P. Morgan Global
Government Bond Index. The Fund's exposure to various issues is achieved
directly and indirectly through its investment in the GMO Emerging Country Debt
Fund, the GMO Alpha LIBOR Fund (ALF), and the GMO Short-Duration Collateral
Fund.
The Fund underperformed the benchmark during the fiscal year by 6.2%. Bond
market, emerging debt, and currency selection added value during the fiscal
year, while issue selection underperformed. Issue selection dramatically hurt
performance in late 2002. Credit related spread widening in the assets
underlying the Fund's investment in ALF and the default of certain healthcare
receivable asset-backed bonds held by ALF, which were allegedly involved in a
massive fraud, contributed to the underperformance. National Century Financial
Enterprises, the sponsor of $3.35 billion of health care asset-backed
receivables allegedly violated the terms of the bonds' indentures by, among
other things, spending cash collateral, accepting collateral other than
permitted receivables, moving receivables between trusts to meet compliance
tests, and reimbursing healthcare providers for more than the value of
receivables purchased. National Century, its affiliated operations, the trusts,
and many healthcare providers have declared bankruptcy. This event had a
negative effect on the net asset value of ALF, and an indirect effect on GMO
Global Bond Fund of -7.1% (through February 28, 2003).
Overweight positions in Euro-member country bonds and the U.S. bond market as
well as an underweight position in Japanese government bonds added value during
the period. In addition, an underweight position in the U.S. dollar and
overweight positions in the Australian dollar and Swedish krona generated
significant gains.
OUTLOOK
The Fund is structured to benefit from outperformance in the Canadian,
Euro-member country, Swedish, U.S., and emerging bond markets. We expect the
Australian, Danish, Japanese, and Swiss bond markets to underperform. Strong
relative performance is expected from Canadian dollars, Swedish krona, Swiss
francs, and British gilt markets. The Danish krona, euro, Japanese yen, and
Australian and U.S. dollars are expected to underperform. At the end of the
period, 3.5% of the Fund was invested in the GMO Emerging Country Debt Fund.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO GLOBAL BOND FUND CLASS III SHARES AND THE J.P. MORGAN
GLOBAL GOVERNMENT BOND INDEX AS OF FEBRUARY 28, 2003 GMO GLOBAL BOND FUND J.P. MORGAN GLOBAL GOV'T. BOND INDEX
12/28/95 $10,000 $10,000
12/31/95 $10,000 $10,002
3/31/96 $9,830 $9,827
6/30/96 $10,270 $9,886
9/30/96 $10,766 $10,166
12/31/96 $11,307 $10,442
3/31/97 $10,936 $10,034
6/30/97 $11,351 $10,329
9/30/97 $11,887 $10,506
12/31/97 $12,027 $10,589
3/31/98 $12,219 $10,693
6/30/98 $12,340 $10,935
9/30/98 $12,978 $11,856
12/31/98 $13,260 $12,210
3/31/99 $12,599 $11,734
6/30/99 $12,193 $11,332
9/30/99 $12,587 $11,778
12/31/99 $12,525 $11,590
3/31/2000 $12,629 $11,633
6/30/2000 $12,577 $11,638
9/30/2000 $12,368 $11,351
12/31/2000 $13,073 $11,861
3/31/2001 $12,681 $11,526
6/30/2001 $12,407 $11,344
9/30/2001 $13,281 $12,153
12/31/2001 $12,992 $11,766
3/31/2002 $12,826 $11,589
6/30/2002 $14,529 $12,902
9/30/2002 $14,931 $13,439
12/31/2002 $14,721 $14,046
2/28/2003 $15,217 $14,434
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE INCEPTION
1 YEAR 5 YEAR 12/28/95
Class III 17.76% 4.51% 6.03%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE/
SHARES DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 4.3%
AUSTRIA -- 1.3%
USD 2,500,000 Bank Austria AG, 144A, 7.25%, due 02/15/17 3,043,500
------------
CANADA -- 0.8%
GBP 1,000,000 Province of Quebec, 8.63%, due 11/04/11 2,001,322
------------
UNITED STATES -- 2.2%
U.S. GOVERNMENT -- 2.2%
USD 1,075,300 U.S. Treasury Inflation Indexed Note, 4.25%, due
01/15/10 1,271,038
USD 3,309,420 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09(a) 3,809,970
------------
5,081,008
------------
TOTAL DEBT OBLIGATIONS (COST $9,342,671) 10,125,830
------------
MUTUAL FUNDS -- 93.5%
867,931 GMO Emerging Country Debt Fund, Class III 8,262,701
1,495,967 GMO Alpha LIBOR Fund 35,484,340
7,071,254 GMO Short-Duration Collateral Fund 176,852,053
------------
TOTAL MUTUAL FUNDS (COST $222,919,467) 220,599,094
------------
<Caption>
PRINCIPAL
AMOUNT
-------------
CALL OPTIONS PURCHASED -- 0.5%
CROSS CURRENCY OPTIONS -- 0.5%
GBP 15,300,000 GBP Call/JPY Put, Expires 01/23/04, Strike 184.00 637,241
GBP 9,600,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 404,102
USD 8,000,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 192,612
------------
1,233,955
------------
TOTAL CALL OPTIONS PURCHASED (COST $1,727,343) 1,233,955
------------
PUT OPTIONS PURCHASED -- 0.0%
CROSS CURRENCY OPTIONS -- 0.0%
GBP 17,600,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.428 5,544
------------
TOTAL PUT OPTIONS PURCHASED (COST $719,242) 5,544
------------
</Table>
See accompanying notes to the financial statements.
1
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 0.5%
CASH EQUIVALENTS -- 0.5%
USD 1,055,717 Merrimac Cash Fund 1,055,717
------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,055,717) 1,055,717
------------
TOTAL INVESTMENTS -- 98.8%
(Cost $235,764,440) 233,020,140
Other Assets and Liabilities (net) -- 1.2% 2,822,236
------------
TOTAL NET ASSETS -- 100.0% $235,842,376
============
</Table>
<Table>
<Caption>
NOTES TO SCHEDULE OF INVESTMENTS:
- ---------------------------------------------------------------------------------------
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
</Table>
(a) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
2 See accompanying notes to the financial statements.
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $235,764,440) (Note 1) $233,020,140
Foreign currency, at value (cost $23,881) (Note 1) 23,600
Interest receivable 713,812
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 3,586,706
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 290,230
Net receivable for open swap contracts (Notes 1 and 6) 939,070
Receivable for expenses reimbursed by Manager (Note 2) 16,574
------------
Total assets 238,590,132
------------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 34,399
Shareholder service fee 27,157
Payable for open forward foreign currency contracts
(Notes 1 and 6) 2,642,218
Accrued expenses 43,982
------------
Total liabilities 2,747,756
------------
NET ASSETS $235,842,376
============
NET ASSETS CONSIST OF:
Paid-in capital $221,711,850
Distributions in excess of net investment income (899,487)
Accumulated net realized gain 15,482,298
Net unrealized depreciation (452,285)
------------
$235,842,376
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $235,842,376
============
SHARES OUTSTANDING:
Class III 25,630,372
============
NET ASSET VALUE PER SHARE:
Class III $ 9.20
============
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends from investment company shares $ 2,906,249
Interest (including securities lending income of $1,534) 1,026,440
-----------
Total income 3,932,689
-----------
EXPENSES:
Management fee (Note 2) 525,898
Custodian and transfer agent fees 107,845
Audit fees 39,522
Legal fees 18,757
Trustees fees and related expenses (Note 2) 7,254
Registration fees 7,203
Miscellaneous 5,111
Fees reimbursed by Manager (Note 2) (173,297)
-----------
538,293
Indirectly incurred fees waived or borne by Manager
(Note 2) (38,880)
-----------
499,413
-----------
Shareholder service fee (Note 2) - Class III 415,182
Shareholder service fee waived (Note 2) - Class III (14,143)
-----------
401,039
-----------
Net expenses 900,452
-----------
Net investment income 3,032,237
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (20,465,947)
Realized gains distributions from investment company
shares 971,647
Closed futures contracts 9,732,187
Closed swap contracts 6,976,557
Written options 89,267
Foreign currency, forward contracts and foreign
currency related transactions 40,425,005
-----------
Net realized gain 37,728,716
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (237,563)
Open futures contracts 1,364,108
Open swap contracts 790,602
Foreign currency, forward contracts and foreign
currency related transactions 4,521,210
-----------
Net unrealized gain 6,438,357
-----------
Net realized and unrealized gain 44,167,073
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $47,199,310
===========
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,032,237 $ 14,901,012
Net realized gain (loss) 37,728,716 (6,033,954)
Change in net unrealized appreciation (depreciation) 6,438,357 (13,106,609)
------------ ------------
Net increase (decrease) in net assets from
operations 47,199,310 (4,239,551)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (37,454,172) (10,755,169)
------------ ------------
Total distributions from net investment income (37,454,172) (10,755,169)
------------ ------------
Net realized gains
Class III (4,977,299) (5,266,132)
------------ ------------
Total distributions from net realized gains (4,977,299) (5,266,132)
------------ ------------
(42,431,471) (16,021,301)
------------ ------------
Net share transactions (Note 5):
Class III (41,999,305) 2,222,393
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (41,999,305) 2,222,393
------------ ------------
Total decrease in net assets (37,231,466) (18,038,459)
NET ASSETS:
Beginning of period 273,073,842 291,112,301
------------ ------------
End of period (including distributions in excess of
net investment income of $899,487 and $2,591,841,
respectively) $235,842,376 $273,073,842
============ ============
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------------------------------
2003 2002 2001(D) 2000 1999
--------- ---------- ---------- ---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.33 $ 10.04 $ 9.41 $ 9.87 $ 10.15
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income 0.11(a)+ 0.53(a)+ 0.51(a)+ 0.51 0.55
Net realized and unrealized gain
(loss) 1.47 (0.66) 0.12 (0.71) (0.25)
--------- --------- --------- --------- ---------
Total from investment operations 1.58 (0.13) 0.63 (0.20) 0.30
--------- --------- --------- --------- ---------
Less distributions to shareholders:
From net investment income (1.51) (0.39) -- (0.26) (0.46)
From net realized gains (0.20) (0.19) -- -- (0.12)
--------- --------- --------- --------- ---------
Total distributions (1.71) (0.58) -- (0.26) (0.58)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.20 $ 9.33 $ 10.04 $ 9.41 $ 9.87
========= ========= ========= ========= =========
TOTAL RETURN(b) 17.76% (1.34)% 6.70% (2.07)% 2.69%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 235,842 $ 273,074 $ 291,112 $ 182,730 $ 163,210
Net operating expenses to average
daily net assets 0.33%(e) 0.32%(e) 0.33%(e) 0.34% 0.34%
Interest expense to average daily net
assets -- -- -- 0.16%(c) --
Total net expenses to average daily
net assets 0.33% 0.32% 0.33% 0.50% 0.34%
Net investment income to average
daily net assets 1.10%(a) 5.36%(a) 5.34%(a) 5.09% 5.86%
Portfolio turnover rate 50% 28% 35% 116% 75%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.08% 0.08% 0.08% 0.08% 0.28%
</Table>
+ Computed using average shares outstanding throughout the period.
(a) Net investment income is affected by the timing of the declaration of
dividends by other Funds of the Trust in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(c) Interest expense incurred as a result of entering into reverse
repurchase agreements is included in the Fund's net expenses. Income
earned on investing proceeds from reverse repurchase agreements is
included in interest income.
(d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
premium and discount on debt securities. The effect of this change on
net investment income and net realized and unrealized gains and losses
per share for the year ended February 28, 2001 was less than $0.01 per
share. The effect of this change decreased the ratio of net investment
income to average net assets from 5.36% to 5.34%. Per share and
ratio/supplemental data for periods prior to March 1, 2000 have not been
restated to reflect this change.
(e) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 2.
6 See accompanying notes to the financial statements.
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through direct and indirect investment in
global bond and currency markets. The Fund's benchmark is the J.P. Morgan
Global Government Bond Index.
At February 28, 2003, 75.0% of the Fund was invested in the GMO
Short-Duration Collateral Fund and 15.0% of the Fund was invested in the
GMO Alpha LIBOR Fund, separate funds of GMO Trust managed by GMO. Shares
of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are
not publicly available for direct purchase. At February 28, 2003, 3.5% of
the net assets of the Fund was invested in the GMO Emerging Country Debt
Fund, a separate fund of GMO Trust managed by GMO. The financial
statements of the GMO Alpha LIBOR Fund, the GMO Short-Duration Collateral
Fund and the GMO Emerging Country Debt Fund should be read in conjunction
with the Fund's financial statements.
The Fund invested a substantial portion of its assets in GMO Alpha LIBOR
Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In
November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds")
defaulted amid allegations of fraud and significant violations of the
bonds' indentures. Currently, no market exists for the NPF bonds, and they
are being valued at fair value by the trustees of GMO Trust or persons
acting at their direction. The devaluation of the NPF bonds had a negative
impact on the Fund's net asset value per share.
In late November 2002, Alpha LIBOR Fund undertook a reorganization
transaction with a new series of GMO Trust, GMO Short-Duration Collateral
Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR
Fund was transferred to SDCF in exchange for SDCF shares. The
reorganization was treated as a sale of the Alpha LIBOR Fund shares for
financial reporting purposes and a distribution by Alpha LIBOR Fund for
tax purposes. Accordingly, for financial reporting purposes, the Fund
recognized a loss on the sale of the Alpha LIBOR shares of approximately
$18,547,062. In addition, the Fund recognized for tax, but not for
financial reporting purposes, ordinary income of $7,989,124 and long-term
capital gains of $1,424,936 from Alpha LIBOR Fund. $27,961,122 was added
to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund.
7
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of other Funds of the Trust are valued at their net asset value as
reported on each business day. Portfolio securities listed on a securities
exchange for which market quotations are readily available are valued at
the last sale price or official closing price on each business day, or if
there is no such reported sale or official closing price, at the most
recent quoted bid price. Unlisted securities for which market quotations
are readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates fair value. Securities for which quotations are not
readily available or whose values the Manager has determined to be
unreliable are valued at fair value as determined in good faith by the
Trustees or other persons acting at their direction. A security's value
may be deemed unreliable if, for example, the Manager becomes aware of
information or events occurring after the close of a foreign market that
would materially affect that security's value.
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund, or underlying Funds in which it
invests, were valued on the basis of a price provided by a principal
market maker. The prices provided by the principal market makers may
differ from the value that would be realized if the securities were sold
and the differences could be material to the financial statements.
8
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. The value of the currencies the Fund has
committed to buy or sell is shown under Note 6 and represents the currency
exposure the Fund has acquired or hedged through forward currency
contracts as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In
9
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
addition, the Fund maintains cash or securities in an amount that at least
equals the net amount payable in the event the Fund must deliver the full
amount of the contracts. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. See Schedule of Investments for
all open purchased option contracts as of February 28, 2003.
10
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the "lender") that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into interest rate, total return, forward swap spread lock and
credit default swap agreements to manage its exposure to interest rates
and credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return, both based on notional amounts. To the extent the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty,
respectively. Forward swap spread lock swap agreements involve commitments
to pay or receive a settlement amount calculated as the difference between
the swap
11
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
spread and a fixed spread, multiplied by the notional amount times the
duration of the swap rate. The swap spread is the difference between the
benchmark swap rate (market rate) and the specific treasury rate. In a
credit default swap, one party makes a stream of payments to another party
in exchange for the right to receive a specified return in the event of a
default by a third party on its obligation. The Fund may use credit
default swaps to provide a measure of protection against defaults of
sovereign or corporate issuers (i.e., to reduce risk where the Fund owns
or has exposure to the issuer) or to take an active long or short position
with respect to the likelihood of a particular issuer's default. In
connection with these agreements, cash or securities may be set aside as
collateral by the Fund's custodian in accordance with the terms of the
swap agreement. The Fund earns interest on cash set aside as collateral.
Swaps are marked to market daily based upon quotations from market makers
and the change in value, if any, is recorded as unrealized gain or loss in
the Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Net payments of interest on interest rate swap agreements
are included as part of interest income. These financial instruments are
not actively traded on financial markets. The values assigned to these
instruments are based upon the best available information and because of
the uncertainty of the valuation, these values may differ significantly
from the values that would have been realized had a ready market for these
instruments existed, and the differences could be material. Entering into
these agreements involves, to varying degrees, elements of credit, legal,
market, and documentation risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform or
disagree as to the meaning of contractual terms in the agreements, or that
there may be unfavorable changes in interest rates. See Note 6 for a
summary of open swap agreements as of February 28, 2003.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
12
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund has sold may
decline below the price at which it is obligated to repurchase them under
the agreement. For the year ended February 28, 2003, the Fund did not
enter into any reverse repurchase agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003
the tax basis of distributions paid was as follows: ordinary income --
$10,755,169 and $37,467,269, respectively, and long-term capital gains --
$5,266,132 and $4,964,202, respectively.
13
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $19,001,248 of undistributed ordinary income. The
temporary difference between book and tax basis distributable earnings are
primarily due to foreign currency transactions.
The Fund elected to defer to March 1, 2003 post-October losses of
$3,238,674.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions and the GMO Alpha LIBOR Fund transaction (See Note 1). The
financial highlights exclude these adjustments.
<Table>
<Caption>
Distributions
In Excess of Net Accumulated Net
Investment Income Realized Gain Paid-in Capital
----------------- --------------- ---------------
$36,114,289 $(16,027,588) $(20,086,701)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the amortization of
premiums and of discounts. In determining the net gain or loss on
securities sold, the cost of securities is determined on the identified
cost basis. Dividend income, net of applicable withholding taxes, is
recorded on the ex-dividend date or non-cash dividends, if any, are
recorded at the fair market value of the securities received. Interest
income on inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of the securities is recorded as interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are
14
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
less liquid and at times may be more volatile than securities of
comparable U.S. companies and U.S. securities 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 securities markets of
the U.S. and developed foreign markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .19% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares. The Fund may invest in Class III shares of GMO Emerging Country
Debt Fund ("ECDF"). Like the management fee (as described below), the
Fund's shareholder service fee will be waived (but not below zero) to the
extent of the indirect shareholder service fees paid in connection with
the Fund's investment in ECDF. The Fund does not incur any indirect
shareholder service fees as a result of the Fund's investment in Alpha
LIBOR Fund and SDCF. For the year ended February 28, 2003, shareholder
service fees incurred indirectly by the Fund were 0.005% of the Fund's
average daily net assets.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes ("fund expenses")) and the amount of fees and
operating expenses (excluding shareholder service fees (ECDF only) and
fund expenses, as defined above) incurred indirectly by the Fund through
its investment in the underlying funds (including GMO Alpha LIBOR Fund,
GMO Short-Duration Collateral Fund, and ECDF) exceed the management fee.
For the year ended February 28, 2003, indirect operating expenses
(excluding shareholder service fees (GMO ECDF only) and investment-related
expenses) and indirect investment-related expenses (including, but not
limited to, interest expense, foreign audit expense, and
investment-related legal expense) incurred by the Fund through its
investment in underlying funds were 0.018% and 0.029% of the Fund's
average daily net assets, respectively.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 2003, was $5,267. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
15
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$131,349,105 and $156,740,187, respectively.
For the year ended February 28, 2003, the cost of purchases and proceeds
from sales of investments exclude the initial transfer of GMO Alpha LIBOR
Fund's investments in GMO Short-Duration Collateral Fund of $180,351,503.
(See Note 1)
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$255,924,143 $1,479,924 $(24,383,927) $(22,904,003)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 70.6% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- ------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ---------- ------------
Shares sold 6,930,581 $ 62,503,500 1,298,968 $ 12,839,268
Shares issued to shareholders in reinvestment
of distributions 4,515,798 39,648,710 1,624,503 15,156,606
Shares repurchased (15,099,456) (144,151,515) (2,644,157) (25,773,481)
----------- ------------- ---------- ------------
Net increase (decrease) (3,653,077) $ (41,999,305) 279,314 $ 2,222,393
=========== ============= ========== ============
</Table>
16
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Buys
3/25/03 AUD 64,200,000 $38,885,567 $ 1,107,082
4/01/03 CAD 49,700,000 33,318,571 848,546
3/04/03 CHF 82,700,000 60,988,201 1,266,357
4/29/03 CHF 52,000,000 38,392,640 44,558
4/22/03 EUR 75,000,000 80,697,026 (182,974)
4/15/03 GBP 6,700,000 10,524,533 (255,767)
3/18/03 JPY 9,940,000,000 84,120,031 (324,505)
-----------
$ 2,503,297
===========
Sales
3/25/03 AUD 46,700,000 $28,285,918 $ (897,787)
4/01/03 CAD 27,100,000 18,167,672 (390,819)
3/04/03 CHF 82,700,000 60,988,201 (535,494)
4/15/03 GBP 4,500,000 7,068,716 113,360
3/18/03 JPY 3,350,000,000 28,350,312 (54,872)
-----------
$(1,765,612)
===========
</Table>
FORWARD CROSS CURRENCY CONTRACTS
<Table>
<Caption>
Settlement Net Unrealized
Date Deliver/Units of Currency Receive/In Exchange For Appreciation
---------- -------------------------- ------------------------ --------------
3/11/03 CHF 36,653,400 EUR 25,200,000 $ 119,247
4/08/03 EUR 41,500,000 SEK 381,750,200 87,556
-----------
$ 206,803
===========
</Table>
17
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- ------------------------------------- --------------- ------------- --------------
Buys
149 Canadian Government Bond 10 Yr. June 2003 $10,675,433 $ 14,899
58 Euro BOBL March 2003 7,092,656 166,488
50 Euro BOBL June 2003 6,050,475 (864)
40 Euro Bund March 2003 5,029,877 82,655
198 Euro Bund June 2003 24,670,604 (647)
3 Japanese Government Bond 10 Yr. June 2003 3,630,117 3,865
112 U.S. Long Bond June 2003 12,820,500 189,419
35 U.S. Treasury Note 10 Yr. June 2003 4,038,125 20,228
24 UK Gilt Long Bond June 2003 4,592,992 (5,866)
---------
$ 470,177
=========
Sales
29 Australian Government Bond 10 Yr. March 2003 $ 1,887,172 $ (49,710)
57 Australian Government Bond 3 Yr. March 2003 3,607,383 (42,560)
11 Swiss Government Bond March 2003 1,067,308 (36,185)
6 U.S. Treasury Note 5 Yr. June 2003 682,219 (2,285)
---------
$(130,740)
=========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
WRITTEN OPTION TRANSACTIONS
<Table>
<Caption>
Puts Calls
------------------------------ --------------------------------
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- ------------ ---------------- --------------
Outstanding, beginning of period -- $ -- -- $ --
Options written -- -- 131,900 5,795,952
Options exercised -- -- (122,100) (5,706,685)
Options expired -- -- (9,800) (89,267)
----------- -------- ------------ -----------
Outstanding, end of period -- $ -- -- $ --
=========== ======== ============ ===========
</Table>
18
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<Table>
<Caption>
Net Unrealized
Expiration Appreciation
Notional Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
CREDIT DEFAULT SWAPS
85,188,610 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ 46,974
5/04/01 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount
times the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
56,110,669 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated (13,923)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount
times the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
INTEREST RATE SWAPS
15,000,000 EUR 3/21/05 Agreement with UBS AG dated 3/17/00 to receive the 925,293
notional amount multiplied by 5.222% and to pay
the notional amount multiplied by the 3 month
Floating Rate EURIBOR adjusted by a specified
spread.
14,900,000 SEK 9/25/07 Agreement with Citibank N.A. dated 9/24/02 to 46,610
receive the notional amount multiplied by 4.79%
and to pay the notional amount multiplied by the 3
month Floating Rate Swedish STIBOR adjusted by a
specified spread.
</Table>
19
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Expiration Appreciation
Notional Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
11,500,000 CHF 5/11/11 Agreement with Morgan Guaranty Trust Company dated $ (940,654)
5/09/01 to pay the notional amount multiplied by
3.73% and to receive the notional amount
multiplied by the 6 month Floating Rate Swiss
LIBOR adjusted by a specified spread.
21,500,000 SEK 9/25/12 Agreement with Citibank N.A. dated 9/24/02 to 70,933
receive the notional amount multiplied by 5.08%
and to pay the notional amount multiplied by the 3
month Floating Rate Swedish STIBOR adjusted by a
specified spread.
3,000,000 EUR 3/21/30 Agreement with UBS AG dated 3/17/00 to receive the 592,413
notional amount multiplied by 5.895% and to pay
the notional amount multiplied by the 3 month
Floating Rate EURIBOR adjusted by a specified
spread.
TOTAL RETURN SWAPS
30,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust Company dated 64,437
7/18/01 to receive (pay) the notional amount
multiplied by the return on the JP Morgan Non-U.S.
Traded Total Return Government Bond Index and to
pay the notional amount multiplied by the 1 month
LIBOR adjusted by a specified spread.
75,000,000 USD 9/24/03 Agreement with Morgan Guaranty Trust Company dated 215,100
9/20/01 to receive (pay) the notional amount
multiplied by the return on the JP Morgan Hedged
Government Bond Index and to pay the notional
amount multiplied by the 1 month LIBOR adjusted by
a specific spread.
----------
$1,007,183
==========
</Table>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
20
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO GLOBAL BOND FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Bond Fund (the "Fund")
(a series of GMO Trust) at February 28, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
21
<Page>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 2003, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 11.70% of the distributions as net capital gain
dividends.
22
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
23
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
24
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
25
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Global Hedged Equity Fund returned +7.6% for the
fiscal year ending February 28, 2003. During that period the Fund's benchmark,
the Salomon Smith Barney 3 Month T-Bill Index, returned +1.6%.
The Fund's objective is to outperform the Salomon Smith Barney 3 Month T-Bill
Index by adding the alpha (value added) of our U.S. and international equity
funds, as well as the value added of our asset allocation strategy, to a
short-term fixed income return. As of February 28, 2003, the Fund held 44% of
its assets in long U.S. equities, 36% in developed international equities, and
10% in emerging market equities. The long equity exposure is hedged, using S&P
500 futures and short EAFE futures, totaling approximately 100% of the value of
the long assets.
The Fund currently invests in GMO U.S. Core Fund, GMO Real Estate Fund, GMO
Small Cap Value Fund, GMO Emerging Markets Fund, GMO International Small
Companies Fund, GMO International Growth Fund, and GMO International Intrinsic
Value Fund.
The GMO Global Hedged Equity Fund's performance for the fiscal year was helped
by a combination of strong implementation across a variety of funds and good
performance from our asset allocation bets. Implementation was positive for the
two largest holdings in the fund -- the GMO U.S. Core and GMO International
Intrinsic Value Funds -- and was particularly strong for the latter. These
positions, which make up over a combined 57% of the Fund, outperformed their
benchmarks by 1.1% and 11.3%, respectively. The GMO International Growth Fund
and the GMO Emerging Markets Fund outperformed their benchmarks by 7.1% and
2.5%, respectively. The GMO Real Estate Fund and the GMO Small Cap Value Fund
underperformed their benchmarks.
Asset allocation was also a strong contributor to performance. Our bets within
the U.S., on small cap value stocks and REITs, beat the S&P 500 by 6.1% and
23.5%, respectively. Our bet in International, on the GMO International Small
Companies Fund, beat EAFE by 7.1%, and that in emerging markets on the GMO
Emerging Markets Fund beat EAFE by 5.9%. Our emerging markets position is hedged
50% with S&P 500 futures and 50% with EAFE futures. Against that blended
benchmark, our emerging markets outperformed by 8.5%.
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
GMO's global equity alpha is positioned to continue to benefit as the excesses
of the long bull market are corrected. Our expectation is that emerging equities
will significantly outperform developed markets, given their much cheaper
valuations. Long positions in global small value stocks and REITs (although less
attractive than in the past) also look likely to continue to add value relative
to overpriced large cap equities.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO GLOBAL HEDGED EQUITY FUND CLASS III SHARES AND THE
SALOMON SMITH BARNEY 3 MONTH T-BILL INDEX
AS OF FEBRUARY 28, 2003
GMO GLOBAL HEDGED SALOMON SMITH BARNEY
EQUITY FUND 3 MONTH T-BILL INDEX
7/29/94 $10,000 $10,000
9/30/94 $10,020 $10,075
12/31/94 $10,041 $10,206
3/31/95 $10,142 $10,349
6/30/95 $10,474 $10,500
9/30/95 $10,651 $10,648
12/31/95 $10,848 $10,793
3/31/96 $10,899 $10,932
6/30/96 $10,961 $11,071
9/30/96 $11,067 $11,215
12/31/96 $11,291 $11,360
3/31/97 $11,123 $11,504
6/30/97 $11,092 $11,653
9/30/97 $11,405 $11,803
12/31/97 $11,111 $11,957
3/31/98 $11,124 $12,111
6/30/98 $10,668 $12,265
9/30/98 $10,541 $12,420
12/31/98 $10,324 $12,562
3/31/99 $10,177 $12,700
6/30/99 $10,992 $12,843
9/30/99 $10,841 $12,995
12/31/99 $10,494 $13,157
3/31/2000 $10,646 $13,333
6/30/2000 $11,072 $13,525
9/30/2000 $11,611 $13,725
12/31/2000 $12,527 $13,941
3/31/2001 $13,453 $14,135
6/30/2001 $13,837 $14,287
9/30/2001 $14,358 $14,417
12/31/2001 $14,419 $14,511
3/31/2002 $15,135 $14,574
6/30/2002 $15,928 $14,638
9/30/2002 $16,197 $14,701
12/31/2002 $16,096 $14,758
2/28/2003 $16,163 $14,788
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEAR SINCE
INCEPTION
7/29/94
Class III 7.61% 7.93% 5.75%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
MUTUAL FUNDS -- 89.6%
UNITED STATES -- 89.6%
287,881 GMO Emerging Markets Fund, Class III 2,539,110
172,473 GMO International Growth Fund, Class III 2,902,728
325,225 GMO International Intrinsic Value Fund, Class III 5,245,878
141,352 GMO International Small Companies Fund, Class III 1,342,847
118,151 GMO Real Estate Fund, Class III 1,239,399
63,576 GMO Small Cap Value Fund, Class III 623,679
973,241 GMO U.S. Core Fund, Class III 9,712,943
------------
23,606,584
------------
TOTAL MUTUAL FUNDS (COST $24,736,461) 23,606,584
------------
COMMON STOCKS -- 0.0%
ITALY -- 0.0%
12,500 Grassetto SPA*(a) 135
------------
TOTAL COMMON STOCKS (COST $7,041) 135
------------
SHORT-TERM INVESTMENTS -- 13.0%
CASH EQUIVALENTS -- 5.3%
$ 100,000 Bank of Scotland Time Deposit, 1.31%, due 3/03/03 100,000
1,300,000 Royal Bank of Canada GC Time Deposit, 1.33%, due
3/03/03 1,300,000
------------
1,400,000
------------
U.S. GOVERNMENT -- 7.7%
2,020,000 U.S. Treasury Bill, 1.16%, due 4/24/03(b) 2,016,413
------------
TOTAL SHORT-TERM INVESTMENTS (COST $3,416,413) 3,416,413
------------
TOTAL INVESTMENTS -- 102.6%
(Cost $28,159,915) 27,023,132
Other Assets and Liabilities (net) -- (2.6%) (693,967)
------------
TOTAL NET ASSETS -- 100.0% $ 26,329,165
============
</Table>
<Table>
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) All or a portion of this security is held as collateral for open futures
contracts (Note 6).
See accompanying notes to the financial statements. 1
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $28,159,915) (Note 1) $27,023,132
Cash 79,866
Foreign currency, at value (cost $517) (Note 1) 523
Interest receivable 52
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 930,273
Receivable for expenses reimbursed by Manager (Note 2) 17,577
-----------
Total assets 28,051,423
-----------
LIABILITIES:
Payable for investments purchased 99,834
Payable to affiliate for (Note 2):
Management fee 9,784
Shareholder service fee 2,935
Payable for open forward foreign currency contracts
(Notes 1 and 6) 1,421,784
Payable for variation margin on open futures contracts
(Notes 1 and 6) 147,988
Accrued expenses 39,933
-----------
Total liabilities 1,722,258
-----------
NET ASSETS $26,329,165
===========
NET ASSETS CONSIST OF:
Paid-in capital $30,341,158
Accumulated undistributed net investment income 196,741
Accumulated net realized loss (3,847,079)
Net unrealized depreciation (361,655)
-----------
$26,329,165
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $26,329,165
===========
SHARES OUTSTANDING:
Class III 2,733,471
===========
NET ASSET VALUE PER SHARE:
Class III $ 9.63
===========
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends from investment company shares $ 402,405
Interest 37,153
----------
Total income 439,558
----------
EXPENSES:
Management fee (Note 2) 81,351
Custodian fees 86,221
Audit fees 30,696
Transfer agent fees 27,738
Registration fees 3,954
Trustees fees and related expenses (Note 2) 1,285
Legal fees 235
Miscellaneous 1,191
Fees reimbursed by Manager (Note 2) (63,763)
----------
168,908
Indirectly incurred fees waived or borne by Manager (Note
2) (67,837)
----------
101,071
----------
Shareholder service fee (Note 2) - Class III 24,405
Shareholder service fee waived (Note 2) - Class III (21,069)
----------
3,336
----------
Net expenses 104,407
----------
Net investment income 335,151
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (898,822)
Realized gains distributions from investment company
shares 103,312
Closed futures contracts 2,159,364
Foreign currency, forward contracts and foreign
currency related transactions (224,100)
----------
Net realized gain 1,139,754
----------
Change in net unrealized appreciation (depreciation) on:
Investments (700,929)
Open futures contracts 1,084,623
Foreign currency, forward contracts and foreign
currency related transactions (832,845)
----------
Net unrealized loss (449,151)
----------
Net realized and unrealized gain 690,603
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,025,754
==========
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 335,151 $ 483,321
Net realized gain 1,139,754 2,286,789
Change in net unrealized appreciation (depreciation) (449,151) (38,162)
----------- ------------
Net increase in net assets from operations 1,025,754 2,731,948
----------- ------------
Distributions to shareholders from:
Net investment income
Class III (525,883) (1,324,504)
----------- ------------
Total distributions from net investment income (525,883) (1,324,504)
----------- ------------
Net share transactions (Note 5):
Class III 9,201,261 (41,278,455)
----------- ------------
Increase (decrease) in net assets resulting from net
share transactions 9,201,261 (41,278,455)
----------- ------------
Total increase (decrease) in net assets 9,701,132 (39,871,011)
NET ASSETS:
Beginning of period 16,628,033 56,499,044
----------- ------------
End of period (including accumulated undistributed
net investment income of $196,741 and $187,536,
respectively) $26,329,165 $ 16,628,033
=========== ============
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28,
----------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.23 $ 8.73 $ 7.72 $ 7.59 $ 8.72
------- ------- ------- ------- -------
Income from investment operations:
Net investment income(d) 0.20(b) 0.17(b) 0.15 0.16 0.17(b)
Net realized and unrealized gain
(loss) 0.49 0.96 1.68 0.20 (0.88)
------- ------- ------- ------- -------
Total from investment operations 0.69 1.13 1.83 0.36 (0.71)
------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.29) (0.63) (0.82) (0.23) (0.42)
------- ------- ------- ------- -------
Total distributions (0.29) (0.63) (0.82) (0.23) (0.42)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.63 $ 9.23 $ 8.73 $ 7.72 $ 7.59
======= ======= ======= ======= =======
TOTAL RETURN(a) 7.61% 13.32% 24.84% 4.74% (8.13)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)(c) $26,329 $16,628 $56,499 $46,718 $50,671
Net expenses to average daily net
assets 0.64% 0.37% 0.25% 0.21% 0.17%
Net investment income to average
daily net assets(d) 2.06% 1.88% 1.80% 1.89% 1.99%
Portfolio turnover rate 111% 22% 15% 13% 21%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.94% 0.78% 0.64% 0.54% 0.61%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
(c) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 2.
(d) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
See accompanying notes to the financial statements. 5
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Global Hedged Equity Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks high total return consistent with
minimal exposure to general equity market risk. The Fund invests a
substantial portion of its assets in other Funds of the Trust ("underlying
funds"). The Fund's benchmark is the Salomon Smith Barney 3 Month T-Bill
Index.
The financial statements of the underlying funds should be read in
conjunction with the Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Shares of mutual funds are valued at their net asset value as reported on
each business day. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their
6
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if there are movements in
foreign currency values that are unfavorable to the Fund. The value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments.
7
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
In addition, the Fund maintains cash or securities in an amount that at
least equals the net amount payable in the event the Fund must deliver the
full amount of the contracts. Futures contracts are marked to market daily
and an appropriate payable or receivable for the change in value
("variation margin") is recorded by the Fund. The payable or receivable is
liquidated on the following business day. Gains or losses are recognized
but not considered realized until the contracts expire or are closed.
Futures contracts involve, to varying degrees, risk of loss in excess of
the variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
8
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003, there were no open swap agreements.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax
9
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
purposes. Therefore, no provision for U.S. federal income or excise tax is
necessary. Taxes on foreign interest and dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid was as follows: ordinary income --
$1,324,504 and $525,883, respectively.
As of Febrary 28, 2003, there were no distributable earnings on a tax
basis. The temporary differences between book and tax basis distributable
earnings are primarily due to foreign currency transactions and losses on
wash sale transactions.
At February 28, 2003, the Fund had a capital loss carryforward of
$4,421,884. However, restrictions on annual utilization of this
carryforward under the Code resulting from significant shareholder
activity are expected to limit maximum utilization to offset future
capital gains prior to expiration to approximately $2,094,980 of which
$1,571,235 expires in 2006 and $523,745 expires in 2007. The Fund has
elected to defer to March 1, 2003 post-October capital losses of $285,408.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions and limitations of capital loss carryovers. The financial
highlights exclude these adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
$199,937 $2,126,968 $(2,326,905)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
10
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. In
addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary. See Note 2.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares. The Fund will invest in Class III shares of each underlying fund
being offered. Like the management fee (as described below), the Fund's
shareholder service fee will be waived (but not below zero) to the extent
of the indirect shareholder service fees paid in connection with the
Fund's investment in shares of the underlying funds. For the year ended
February 28, 2003, shareholder service fees incurred indirectly by the
Fund were .129% of the Fund's average daily net assets.
11
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, custody
fees, fees and expenses of the independent Trustees of the Trust
(including legal 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, interest expense and transfer taxes ("fund expenses")) plus the
amount of fees and expenses (excluding shareholder service fees and fund
expenses) incurred indirectly by the Fund though investment in underlying
funds, exceed the management fee. Because GMO will not reimburse expenses
incurred indirectly by the Fund to the extent they exceed .50%, and
because the amount of fees and expenses incurred indirectly by the Fund
will vary, the operating expenses (excluding shareholder service fee and
fund expenses, as defined above) incurred indirectly by the Fund through
its investment in the underlying funds may exceed .50% of the Fund's
average daily net assets.
For the year ended February 28, 2003, indirect operating expenses
(excluding shareholder service fees and investment-related expenses) and
indirect investment-related expenses (including but not limited to
interest expense, foreign audit expense and investment-related legal
expense) incurred by the Fund were .438% and .001% of Class III's average
daily net assets, respectively.
As of February 28, 2003, substantially all of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 2003, was $1,216. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003 aggregated
$27,822,188 and $16,542,530, respectively.
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$29,194,569 $ -- $(2,171,437) $(2,171,437)
</Table>
12
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 60.3% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the outstanding
shares of the Fund. One of the shareholders is another Fund of GMO Trust.
Investment activities of these shareholders may have a material effect on
the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
Class III:
Shares sold 2,164,937 $ 20,773,802 158,832 $ 1,450,027
Shares issued to shareholders in reinvestment
of distributions 54,717 509,414 131,282 1,152,335
Shares repurchased (1,287,322) (12,081,955) (4,957,264) (43,880,817)
---------- ------------ ---------- ------------
Net increase (decrease) 932,332 $ 9,201,261 (4,667,150) $(41,278,455)
========== ============ ========== ============
</Table>
13
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Number of Appreciation
Contracts Type Expiration Date Contract Value (Depreciation)
--------- -------------- --------------- -------------- --------------
Sales
41 CAC40 March 2003 $ 1,216,987 $ (9,985)
11 DAX March 2003 753,288 148,192
63 FTSE 100 March 2003 3,603,089 213,004
3 HANG SENG March 2003 173,558 (376)
7 IBEX 35 March 2003 452,487 5,620
5 MIB30 March 2003 632,021 29,501
46 OMX March 2003 254,895 (768)
15 SPI 200 March 2003 635,827 42,832
61 S&P 500 March 2003 12,823,725 717,445
43 TSE TOPIX March 2003 2,971,538 121,168
----------
$1,266,633
==========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
14
<Page>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- --------------------------------------------- ----------------- ------------ --------------
Buys
4/28/03 AUD 263,639 $ 159,136 $ 15,453
3/28/03 CHF 1,904,130 1,404,915 119,088
3/28/03 DKK 1,549,792 224,623 21,158
3/28/03 EUR 5,207,923 5,607,924 538,166
3/28/03 GBP 2,397,349 3,770,015 79,779
4/28/03 HKD 2,574,662 330,069 529
4/28/03 JPY 337,535,500 2,861,012 130,486
3/28/03 SEK 2,156,180 252,976 21,750
4/28/03 SGD 341,715 196,651 3,864
-----------
$ 930,273
===========
Sales
4/28/03 AUD 1,232,366 $ 743,872 $ (52,173)
3/28/03 CHF 3,136,721 2,314,351 (188,895)
3/28/03 DKK 2,161,810 313,328 (30,128)
3/28/03 EUR 8,551,956 9,208,798 (784,290)
3/28/03 GBP 4,191,934 6,592,136 (95,875)
4/28/03 HKD 3,878,896 497,271 (767)
4/28/03 JPY 617,092,170 5,230,585 (218,187)
3/28/03 NOK 790,000 109,938 (6,802)
3/28/03 SEK 3,855,178 452,313 (40,649)
4/28/03 SGD 341,040 196,262 (4,018)
-----------
$(1,421,784)
===========
</Table>
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CHF - Swiss Franc
DKK - Danish Krona
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
SEK - Swedish Krona
SGD - Singapore Dollar
15
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO GLOBAL HEDGED EQUITY FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Hedged Equity Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
16
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) Occupation(s) Complex Other
Name, Address, Position(s) and Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
17
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
18
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
19
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Growth Fund returned -21.1% for the fiscal year
ended February 28, 2003, as compared to -25.6% for the Russell 1000 Growth
Index. Consistent with the Fund's investment objectives and policies, the Fund
was invested substantially in U.S. equity securities throughout the period.
U.S. equities were no place to be if one was looking to avoid the downward slide
of global equity markets in 2002 or the start 2003. Across the board, all
sectors posted negative absolute returns, and large capitalization growth stocks
fared worst of all. From accounting fraud to war anticipation anxiety, there was
no shortage of reasons to worry, and the markets reflected this both in
volatility and retrenchment towards companies with tangible products and
transparent processes.
The Fund's outperformance for the fiscal year came firmly on the back of stock
selection. The portfolio uses two momentum-based stock selection strategies,
price momentum and earnings revision momentum, and one value-based stock
selection strategy. All three stock selection strategies added value, with the
price momentum strategy leading the charge. By sector, stock selection was
strongest within technology, as well as within financial services and consumer
discretionary stocks. Selection was strong across the majority of sectors, with
the exception of utilities, within which selection detracted from relative
performance. In combination, stock selection contributed 3.4% to performance
versus the benchmark for the fiscal year.
Sector selection also contributed positively to relative performance for the
year through overweights in utilities, consumer staples and materials processing
sectors, all of which outperformed. These gains were somewhat dampened by an
underweight in technology during technology's October, November and February
gains. An underweight in healthcare stocks also detracted moderately from
performance. For the period, sector selection contributed 1.1% to performance
relative to the Russell 1000 Growth Index.
OUTLOOK
We believe that our process of stock selection that includes momentum
disciplines alongside an intrinsic value discipline in our large cap growth
portfolios is well suited to the continued choppy market environment that we
anticipate. The Fund currently maintains an overweight position in the producer
durables, financial services, and materials and processing sectors.
Underweighted sectors include healthcare and technology.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO GROWTH FUND CLASS III SHARES AND THE
RUSSELL 1000 GROWTH INDEX
AS OF FEBRUARY 28, 2003 GMO GROWTH FUND RUSSELL 1000 GROWTH INDEX
2/28/93 $10,000 $10,000
3/31/93 $10,264 $10,193
6/30/93 $9,944 $10,035
9/30/93 $10,218 $10,184
12/31/93 $10,690 $10,576
3/31/94 $9,910 $10,110
6/30/94 $10,011 $10,005
9/30/94 $10,822 $10,775
12/31/94 $10,869 $10,853
3/31/95 $11,907 $11,887
6/30/95 $12,987 $13,055
9/30/95 $14,420 $14,239
12/31/95 $15,201 $14,888
3/31/96 $15,848 $15,687
6/30/96 $16,977 $16,685
9/30/96 $17,452 $17,287
12/31/96 $18,301 $18,330
3/31/97 $18,413 $18,429
6/30/97 $21,536 $21,914
9/30/97 $24,420 $23,561
12/31/97 $23,673 $23,919
3/31/98 $27,227 $27,543
6/30/98 $28,234 $28,794
9/30/98 $25,500 $26,178
12/31/98 $32,502 $33,178
3/31/99 $34,382 $35,286
6/30/99 $36,703 $36,644
9/30/99 $35,667 $35,302
12/31/99 $45,191 $44,179
3/31/2000 $50,233 $47,327
6/30/2000 $49,501 $46,049
9/30/2000 $49,312 $43,572
12/31/2000 $39,673 $34,272
3/31/2001 $31,159 $27,109
6/30/2001 $34,068 $29,390
9/30/2001 $28,132 $23,686
12/31/2001 $31,502 $27,272
3/31/2002 $31,089 $26,567
6/30/2002 $26,758 $21,606
9/30/2002 $22,617 $18,355
12/31/2002 $24,388 $19,668
2/28/2003 $23,788 $19,102
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
Class III -21.13% -2.05% 9.05% N/A
9/11/2002
Class M N/A N/A N/A -6.31%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Performance for Class M may vary due to different
fees. Past performance is not indicative of future performance. Information is
unaudited.
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
COMMON STOCKS -- 98.2%
AUTO & TRANSPORTATION -- 2.1%
9,900 ArvinMeritor Inc 151,272
30,000 Expeditors International Washington Inc 1,025,700
4,900 FedEx Corp 251,860
7,100 Gentex Corp* 190,848
27,000 Harley Davidson Inc 1,068,930
2,400 Hunt (JB) Transportation Services Inc* 58,896
8,000 Tidewater Inc 244,960
63,600 United Parcel Service, Class B 3,659,544
------------
6,652,010
------------
CONSUMER DISCRETIONARY -- 16.4%
22,900 Abercrombie & Fitch Co, Class A* 629,750
8,200 Advance Auto Parts* 319,964
111,800 Amazon.com Inc* 2,460,718
48,100 American Eagle Outfitters Inc* 696,007
44,300 Apollo Group Inc, Class A* 2,052,862
19,100 Applebees International Inc 489,724
9,700 Autozone Inc* 638,260
23,900 Bed, Bath & Beyond Inc* 789,656
64,500 Big Lots Inc* 712,725
12,400 Black and Decker Corp 455,080
12,900 Blockbuster Inc 197,370
33,900 Callaway Golf Co 389,172
7,100 Career Education Corp* 330,150
12,800 Catalina Marketing Corp* 231,680
23,600 CDW Computer Centers Inc* 1,030,376
51,300 Cendant Corp* 631,503
27,700 Chicos FAS Inc* 500,539
28,600 Circuit City Stores Inc 126,412
17,700 Claire's Stores Inc 403,914
26,200 Clear Channel Communications Inc* 956,562
40,100 Coach Inc* 1,432,773
20,100 Columbia Sportswear Co* 718,575
35,200 Corinthian Colleges Inc* 1,319,296
9,400 Cox Radio Inc, Class A* 201,160
33,600 Dollar Tree Stores Inc* 693,840
2,600 E.W. Scripps Company 208,260
8,900 Eastman Kodak Co 263,440
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
31,800 eBay Inc* 2,493,756
26,200 Electronic Arts Inc* 1,383,360
12,200 Fisher Scientific International Inc* 350,506
18,600 Fox Entertainment Group Inc, Class A* 497,178
27,800 G TECH Holdings Corp* 808,980
7,300 Getty Images Inc* 214,255
9,000 Gillette Co 271,710
14,100 Harrahs Entertainment Inc* 463,044
34,700 Hilton Hotels Corp 381,353
9,300 Hollywood Entertainment Corp* 130,758
70,600 Home Depot Inc 1,655,570
40,500 Jones Apparel Group Inc* 1,148,580
10,000 Kimberly-Clark Corp 458,300
22,100 Kohls Corp* 1,080,690
18,980 Limited Brands Inc 225,482
49,600 Lowes Cos Inc 1,949,280
24,200 Mandalay Resort Group* 610,808
16,700 MGM Mirage* 427,854
1,200 Mohawk Industries Inc* 59,256
14,800 New York Times Co, Class A 687,608
48,200 Newell Rubbermaid Inc 1,359,240
15,100 Oakley Inc* 120,649
10,200 Outback Steakhouse Inc 328,440
23,400 Pier 1 Imports Inc 373,698
14,700 Pixar Inc* 793,653
2,200 Procurenet Inc(a)* 0
16,800 RadioShack Corp 329,952
16,800 Rent-A-Center Inc* 839,160
25,700 Ross Stores Inc 879,197
49,900 Service Corp International* 153,193
24,500 Staples Inc* 424,095
40,000 Starbucks Corp* 938,000
32,100 Take-Two Interactive Software* 671,211
7,300 Target Corp 209,145
108,000 The Gap Inc 1,408,320
10,200 Timberland Co* 391,680
41,200 Tribune Co 1,847,820
22,900 Viacom Inc, Class B* 850,277
74,900 Wal Mart Stores Inc 3,599,694
100 Washington Post Co, Class B 71,350
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
27,300 Weight Watchers International Inc* 1,142,505
9,600 Williams-Sonoma Inc* 223,488
80,300 Yahoo! Inc* 1,674,255
------------
52,807,118
------------
CONSUMER STAPLES -- 9.1%
195,584 Altria Group Inc 7,559,322
20,000 Anheuser Busch Cos Inc 930,000
8,900 Clorox Co 376,559
89,800 Coca Cola Co 3,611,756
117,800 Coca Cola Enterprises Inc 2,377,204
12,200 Colgate-Palmolive Co 613,782
9,000 Constellation Brands Inc, Class A* 221,670
77,500 CVS Corp 1,929,750
300 Dean Foods Co* 12,651
5,400 Dole Food Co 177,120
5,000 Dreyers Grand Ice Cream Inc 364,000
4,900 Hershey Foods Corp 316,589
7,900 Kraft Foods Inc 233,919
20,500 Pepsi Bottling Group Inc 476,625
38,900 PepsiCo Inc 1,490,648
63,000 Procter and Gamble Co 5,157,180
92,926 Safeway Inc* 1,848,298
10,100 Sara Lee Corp 199,980
11,000 The Dial Corp 200,090
39,300 Walgreen Co 1,105,902
19,100 Winn-Dixie Stores Inc 233,020
------------
29,436,065
------------
FINANCIAL SERVICES -- 15.9%
96,400 AFLAC Corp 3,012,500
42,800 Allstate Corp 1,353,764
117,500 American Express Co 3,945,650
7,000 Automatic Data Processing Inc 227,500
14,700 Bank of America Corp 1,017,828
32,100 Capital One Financial Corp 994,137
8,300 Charter One Financial Inc 239,953
55,300 Checkfree Corp* 1,160,194
22,800 Countrywide Financial Corp 1,217,292
7,200 Equifax Inc 138,096
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
218,800 Fannie Mae 14,025,080
30,700 Fidelity National Financial Inc 1,007,881
11,700 First American Financial Corp 270,270
129,300 Freddie Mac 7,066,245
15,300 General Growth Properties, REIT 799,731
4,400 Global Payments Inc 122,936
14,000 Golden West Financial Corp 1,013,600
8,200 Greater Bay Bancorp 131,282
5,000 Greenpoint Financial Corp 212,400
17,900 Household International Inc 499,947
42,900 Janus Capital Group Inc 507,507
2,200 M & T Bank Corp 173,844
15,800 MBNA Corp 218,830
19,500 Moody's Corp 859,950
7,900 National Processing Inc* 112,575
11,100 New York Community Bancorp Inc 317,571
7,900 North Fork Bancorp 254,696
27,800 Principal Financial Group 766,446
77,600 Providian Financial Corp* 473,360
11,900 Regions Financial Corp 385,322
5,300 Silicon Valley Bancshares* 91,955
6,300 Simon Property Group Inc, REIT 218,232
3,900 Total System Services Inc 61,425
20,100 Wachovia Corp 713,148
27,900 Washington Mutual Inc 963,387
147,000 Wells Fargo & Co 6,666,450
------------
51,240,984
------------
HEALTH CARE -- 24.9%
24,100 Abbott Laboratories 858,442
13,050 Accredo Health Inc* 309,937
17,900 Aetna Inc 753,948
1,600 AmerisourceBergen Corp 88,000
63,500 Amgen Inc* 3,469,640
32,400 Amylin Pharmaceuticals Inc* 497,016
31,500 Anthem Inc* 1,877,715
2,100 Bard (CR) 124,110
47,600 Boston Scientific Corp* 2,102,492
223,400 Bristol Myers Squibb Co 5,205,220
4,200 Cerner Corp* 139,524
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
HEALTH CARE -- CONTINUED
11,300 Charles River Laboratories International Inc* 337,983
4,400 Chiron Corp* 160,688
19,700 Coventry Health Care Inc* 558,101
10,000 Express Scripts Inc, Class A* 517,200
37,900 Forest Laboratories Inc* 1,887,420
26,000 Guidant Corp* 929,760
66,000 HCA - The Healthcare Company 2,721,840
16,500 Health Net Inc* 414,315
6,000 Idexx Laboratories Inc* 218,760
87,764 Johnson & Johnson 4,603,222
4,400 Lifepoint Hospital Inc* 93,324
19,300 Lilly (Eli) & Co 1,091,608
39,200 Lincare Holdings Inc* 1,172,080
7,100 Medtronic Inc 317,370
290,500 Merck & Co Inc 15,323,875
30,900 Mid Atlantic Medical Services Inc* 1,104,675
13,200 Oxford Health Plans Inc* 369,600
513,436 Pfizer Inc 15,310,662
5,000 Pharmaceutical Product Development Inc* 156,850
30,700 Pharmacia Corp 1,268,524
5,500 Renal Care Group Inc* 160,985
307,200 Schering Plough Corp 5,535,744
10,000 Scios Inc* 436,400
17,800 St Jude Medical Inc* 813,104
500 Stericycle Inc* 17,715
28,100 Steris Corp* 709,525
23,200 Stryker Corp 1,512,640
15,400 Tenet Healthcare Corp* 279,818
1,900 Triad Hospitals Inc* 49,381
32,900 UnitedHealth Group Inc 2,727,410
7,200 Universal Health Services, Class B* 279,648
22,500 Varian Medical Systems Inc* 1,137,375
11,900 Wellpoint Health Network Inc* 809,319
38,300 Zimmer Holdings Inc* 1,700,137
------------
80,153,102
------------
INTEGRATED OILS -- 0.3%
9,100 Amerada Hess Corp 405,223
21,400 Occidental Petroleum Corp 639,860
------------
1,045,083
------------
</Table>
See accompanying notes to the financial statements.
5
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 1.2%
3,500 AptarGroup Inc 106,050
3,900 Avery Dennison Corp 223,860
31,300 Crown Holdings Inc* 179,036
12,800 Eastman Chemical Co 412,032
10,200 Ecolab Inc 500,310
20,700 Energizer Holdings Inc* 549,585
3,700 Harsco Corp 111,629
10,900 IMC Global Inc 96,029
35,700 Sealed Air Corp* 1,294,839
5,400 Sigma Aldrich Corp 236,628
3,500 Valspar Corp 143,290
------------
3,853,288
------------
OTHER -- 3.0%
24,400 3 M Co 3,059,028
14,300 Fortune Brands Inc 626,912
143,600 General Electric Co 3,453,580
62,500 Honeywell International Inc 1,430,625
21,300 ITT Industries Inc 1,197,699
------------
9,767,844
------------
OTHER ENERGY -- 3.9%
26,800 Apache Corp 1,749,504
6,200 BJ Services Co* 213,094
13,300 Burlington Resources Inc 616,455
66,700 Chesapeake Energy Corp 541,604
10,500 Cooper Cameron Corp* 546,000
30,100 Devon Energy Corp 1,450,820
8,100 Enron Corp(b)* 478
21,700 Ensco International Inc 607,166
1,500 EOG Resources Inc 61,950
72,400 Halliburton Co 1,466,824
24,500 Nabors Industries Ltd* 971,425
11,300 Noble Corp* 410,190
13,200 Patterson-UTI Energy Inc* 437,448
22,000 Pioneer Natural Resources Co* 575,300
18,400 Pogo Producing Co 731,400
20,100 Rowan Cos Inc 394,563
23,900 Smith International Inc* 833,154
14,300 Weatherford International Ltd* 572,572
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
OTHER ENERGY -- CONTINUED
16,500 XTO Energy Inc 415,965
------------
12,595,912
------------
PRODUCER DURABLES -- 2.8%
51,500 Applied Materials Inc* 668,470
92,400 Boeing Co 2,546,544
4,500 Danaher Corp 292,590
17,900 DR Horton Inc 327,749
1,000 Kennametal Inc 29,920
6,900 Lexmark International Group Inc* 430,629
2,200 Mettler-Toledo International Inc* 65,692
7,960 Northrop Grumman Corp 690,132
17,500 Novellus System Inc* 510,125
1,700 NVR Inc* 564,315
7,200 Rockwell Collins 141,480
15,300 Toll Brothers Inc* 296,361
37,800 United Technologies Corp 2,214,324
13,400 Waters Corp* 310,478
------------
9,088,809
------------
TECHNOLOGY -- 15.9%
34,100 Acxiom Corp* 520,366
25,500 Adaptec Inc* 155,295
10,500 Applera Corp-Applied Biosystems Group 192,675
35,100 Autodesk Inc 508,599
38,400 BEA Systems Inc* 373,248
114,300 BMC Software Inc* 2,217,420
120,700 Ciena Corp* 654,194
373,900 Cisco Systems Inc* 5,227,122
28,100 Computer Associates International Inc 375,135
13,500 Compuware Corp* 49,815
109,100 Comverse Technology Inc* 1,112,820
87,300 Corning Inc* 429,516
28,200 Cree Inc* 479,964
214,600 Dell Computer Corp* 5,785,616
91,000 EMC Corp* 672,490
81,600 Foundry Networks Inc* 723,792
112,800 Gateway Inc* 245,904
29,600 IBM Corp 2,307,320
18,600 Imation Corp* 669,600
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
TECHNOLOGY -- CONTINUED
39,400 Ingram Micro Inc, Class A* 408,184
278,408 Intel Corp 4,805,322
15,800 Intuit Inc* 750,816
15,500 J.D. Edwards & Co* 185,845
9,500 Keane Inc* 76,095
6,700 L-3 Communications Holdings Inc* 242,004
6,500 Mercury Interactive Corp* 210,925
334,600 Microsoft Corp 7,930,020
18,800 NetScreen Technologies Inc* 367,164
732,300 Oracle Corp* 8,758,308
11,500 Perot Systems Corp* 115,115
7,000 QLogic Corp* 247,870
72,600 Qualcomm Inc* 2,510,508
7,000 Reynolds & Reynolds Inc, Class A 171,150
9,000 Sandisk Corp* 150,120
20,500 Silicon Laboratories Inc* 555,960
6,300 Symantec Co* 254,961
137,400 Tellabs Inc* 836,766
------------
51,278,024
------------
UTILITIES -- 2.7%
24,900 AT & T Wireless Services Inc* 147,159
11,800 Bellsouth Corp 255,706
3,200 Energen Corp 97,344
42,400 Exelon Corp 2,083,960
156,800 Level 3 Communications Inc* 774,592
102,200 Nextel Communications Inc, Class A* 1,438,976
11,200 PPL Corp 393,904
233,600 Qwest Communications International Inc* 836,288
57,200 SBC Communications Inc 1,189,760
44,300 Verizon Communications Inc 1,531,894
------------
8,749,583
------------
TOTAL COMMON STOCKS (COST $340,230,750) 316,667,822
------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 6.6%
CASH EQUIVALENTS -- 2.9%
4,031,076 Dreyfus Money Market Fund(c) 4,031,076
$ 2,848,526 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(c) 2,848,526
2,350,034 Merrimac Money Market Fund(c) 2,350,034
------------
9,229,636
------------
U.S. GOVERNMENT -- 0.4%
$ 1,215,000 U.S. Treasury Bill, 1.14%, due 4/24/03(d) 1,212,865
------------
REPURCHASE AGREEMENT -- 3.3%
$ 10,628,526 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of
$10,628,845, and an effective yield of 0.36%,
collateralized by a U.S. Treasury Note with a rate of
3.625%, maturity date of 3/31/04, and a market value,
including accrued interest of $11,436,076. 10,628,526
------------
TOTAL SHORT-TERM INVESTMENTS (COST $21,071,027) 21,071,027
------------
TOTAL INVESTMENTS -- 104.8%
(Cost $361,301,777) 337,738,849
Other Assets and Liabilities (net) -- (4.8%) (15,381,895)
------------
TOTAL NET ASSETS -- 100.0% $322,356,954
============
</Table>
<Table>
<Caption>
NOTES TO THE SCHEDULE OF INVESTMENTS:
- ------------------------------------------------------------------------------------
REIT - Real Estate Investment Trust
</Table>
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) Bankrupt issuer.
(c) Represents investment of security lending collateral (Note 1).
(d) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
See accompanying notes to the financial statements. 9
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$8,788,361 (cost $361,301,777) (Note 1) $337,738,849
Receivable for investments sold 7,699,033
Receivable for Fund shares sold 78,421
Dividends and interest receivable 273,724
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 3,375
Receivable for expenses reimbursed by Manager (Note 2) 33,348
------------
Total assets 345,826,750
------------
LIABILITIES:
Payable for investments purchased 14,006,185
Payable upon return of securities loaned (Note 1) 9,229,636
Payable for Fund shares repurchased 67,452
Payable to affiliate for (Note 2):
Management fee 78,243
Shareholder service fee 33,311
12b-1 fee -- Class M 7,897
Administration fee -- Class M 3,005
Accrued expenses 44,067
------------
Total liabilities 23,469,796
------------
NET ASSETS $322,356,954
============
NET ASSETS CONSIST OF:
Paid-in capital $392,053,583
Accumulated undistributed net investment income 360,430
Accumulated net realized loss (46,494,297)
Net unrealized depreciation (23,562,762)
------------
$322,356,954
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $302,050,743
============
Class M shares $ 20,306,211
============
SHARES OUTSTANDING:
Class III 21,140,175
============
Class M 1,424,928
============
NET ASSET VALUE PER SHARE:
Class III $ 14.29
============
Class M $ 14.25
============
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends $ 1,635,180
Interest (including securities lending income of $9,119) 57,636
------------
Total income 1,692,816
------------
EXPENSES:
Management fee (Note 2) 464,149
Custodian and transfer agent fees 56,111
Registration fees 32,880
Audit fees 32,040
Legal fees 6,468
Trustees fees and related expenses (Note 2) 3,481
Miscellaneous 2,560
Fees reimbursed by Manager (Note 2) (129,508)
------------
468,181
Shareholder service fee (Note 2) -- Class III 201,156
------------
12b-1 fee (Note 2) -- Class M 16,368
------------
Administration fee (Note 2) -- Class M 13,095
------------
Net expenses 698,800
------------
Net investment income 994,016
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments (13,312,604)
Closed futures contracts (561,489)
------------
Net realized loss (13,874,093)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (17,304,272)
Open futures contracts 18,828
------------
Net unrealized loss (17,285,444)
------------
Net realized and unrealized loss (31,159,537)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(30,165,521)
============
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 994,016 $ 611,554
Net realized loss (13,874,093) (28,648,788)
Change in net unrealized appreciation (depreciation) (17,285,444) 11,637,650
------------ ------------
Net decrease in net assets from operations (30,165,521) (16,399,584)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (676,350) (515,217)
Class M (53,573) --
------------ ------------
Total distributions from net investment income (729,923) (515,217)
------------ ------------
(729,923) (515,217)
------------ ------------
Net share transactions (Note 5):
Class III 216,475,101 18,232,801
Class M 20,471,432 --
------------ ------------
Increase in net assets resulting from net share
transactions 236,946,533 18,232,801
------------ ------------
Total increase in net assets 206,051,089 1,318,000
NET ASSETS:
Beginning of period 116,305,865 114,987,865
------------ ------------
End of period (including accumulated undistributed
net investment income of $360,430 and $96,337,
respectively) $322,356,954 $116,305,865
============ ============
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------------
2003 2002 2001* 2000* 1999*
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.23 $ 21.19 $ 54.45 $ 45.54 $ 48.18
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.10 0.10 0.14 0.22 0.33
Net realized and unrealized gain
(loss) (3.94) (2.97) (10.78) 18.84 9.79
-------- -------- -------- -------- --------
Total from investment operations (3.84) (2.87) (10.64) 19.06 10.12
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.10) (0.09) (0.15) (0.26) (0.33)
From net realized gains -- -- (22.47) (9.89) (12.43)
-------- -------- -------- -------- --------
Total distributions (0.10) (0.09) (22.62) (10.15) (12.76)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 14.29 $ 18.23 $ 21.19 $ 54.45 $ 45.54
======== ======== ======== ======== ========
TOTAL RETURN(a) (21.13)% (13.57)% (25.76)% 45.24% 22.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $302,051 $116,306 $114,988 $204,662 $158,084
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 0.72% 0.54% 0.27% 0.50% 0.64%
Portfolio turnover rate 72% 101% 111% 48% 50%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.09% 0.07% 0.07% 0.06% 0.23%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
* Amounts were restated to reflect a 1:11 reverse stock split effective
March 16, 2001.
See accompanying notes to the financial statements. 13
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS M SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM
SEPTEMBER 11, 2002
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 28, 2003
----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.27
-------
Income from investment operations:
Net investment income 0.04
Net realized and unrealized loss (1.01)
-------
Total from investment operations (0.97)
-------
Less distributions to shareholders:
From net investment income (0.05)
-------
Total distributions (0.05)
-------
NET ASSET VALUE, END OF PERIOD $ 14.25
=======
TOTAL RETURN(a) (6.31)%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $20,306
Net expenses to average daily net assets 0.78%*
Net investment income to average daily net assets 0.51%*
Portfolio turnover rate 72%
Fees and expenses reimbursed by the Manager to average
daily net assets: 0.09%*
</Table>
(a) The total return would have been lower had certain expenses not been
reimbursed during the period shown.
* Annualized.
++ Not annualized.
14 See accompanying notes to the financial statements.
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks long-term growth of capital. The Fund's benchmark is the
Russell 1000 Growth Index.
Effective September 11, 2002, the Fund had Class M shares outstanding.
Throughout the year ended February 28, 2003, the Fund also offered
Class III shares. Class M shares bear an administrative fee and a 12b-1
fee, while Class III shares bear a shareholder service fee. (See Note 2)
The principal economic difference between the classes of shares is the
level of fees borne by the classes.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
15
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a
16
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. As of
February 28, 2003, the Fund held no open swap agreements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $8,788,361 collateralized by cash in the amount of
$9,229,636 which was invested in short-term instruments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
17
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income were $515,217 and
$729,923, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $343,981 of undistributed ordinary income.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $29,677,991 expiring in 2010 and $10,843,791 expiring in 2011.
The Fund elected to defer to March 1, 2003 post-October losses of
$2,756,582.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost,
when the amount of the return of capital is conclusively determined.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service, 12b-1, and
administration fees, which are directly attributable to a class of shares,
are charged to that class' operations.
18
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
The Fund pays GMO an administrative fee monthly at the annual rate of .20%
of the average daily Class M net assets for support services provided to
Class M shareholders.
Fund Distributors, Inc. (the "Distributor") serves as the Fund's
distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the
Fund, Class M shares of the Fund pay a fee, at the annual rate of .25% of
average daily Class M net assets for any activities or expenses primarily
intended to result in the sale of Class M shares of the Fund. This fee may
be spent by the Distributor on personal services rendered to Class M
shareholders of the Fund and/or maintenance of Class M shareholder
accounts.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees (Class III
only), administrative fee (Class M only), 12b-1 fee (Class M only), fees
and expenses of the independent Trustees of the Trust (including legal
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, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $2,639. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
19
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$337,852,963 and $100,906,834, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Net
Gross Unrealized Gross Unrealized Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- ------------
$364,501,096 $5,597,536 $(32,359,783) $(26,762,247)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 64.5% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- ------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ --------- -----------
Shares sold 15,300,314 $224,944,617 1,047,429 $20,120,460
Shares issued to shareholders in
reinvestment of distributions 35,730 556,653 27,067 501,089
Shares repurchased (574,513) (9,026,169) (122,608) (2,388,748)
---------- ------------ --------- -----------
Net increase 14,761,531 $216,475,101 951,888 $18,232,801
========== ============ ========= ===========
</Table>
20
<Page>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Period from
September 11, 2002
(commencement of
operations) through
February 28, 2003
------------------------
Shares Amount
Class M: --------- -----------
Shares sold 1,537,897 $22,128,809
Shares issued to shareholders in reinvestment of
distributions 3,862 53,573
Shares repurchased (116,831) (1,710,950)
--------- -----------
Net increase 1,424,928 $20,471,432
========= ===========
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FUTURES CONTRACTS
<Table>
<Caption>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Appreciation
--------------------- ------------------------------ --------------- ---------- --------------
Buys
5 S&P 500 March 2003 $1,051,125 $166
====
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
21
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GROWTH FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Growth Fund (the "Fund") (a
series of GMO Trust) at February 28, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
22
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
23
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
24
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
25
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Inflation Indexed Bond Fund returned +16.7%
during the fiscal year that ended February 28, 2003, compared to +19.3% for the
Lehman Brothers U.S. Treasury Inflation Notes Index.
The Fund underperformed the benchmark by 2.6% during the fiscal year. Issue
selection dramatically hurt performance in late 2002. Value was lost due to
credit related spread widening in the assets underlying the Fund's investment in
the GMO Alpha LIBOR Fund (ALF), and the default of certain healthcare receivable
asset-backed bonds held by ALF. These bonds were allegedly involved in a massive
fraud. National Century Financial Enterprises, the sponsor of $3.35 billion of
healthcare asset-backed receivables, allegedly violated the terms of the bonds'
indentures by, among other things, spending cash collateral, accepting
collateral other than permitted receivables, moving receivables between trusts
to meet compliance tests, and reimbursing healthcare providers for more than the
value of receivables purchased. National Century, its affiliated operations, the
trusts, and many healthcare providers have declared bankruptcy. This event had a
negative effect on the net asset value of ALF, and an indirect effect on GMO
Inflation Indexed Bond Fund of -1.7% (through February 28, 2003).
Real (inflation-adjusted) yields on Treasury Inflation-Protected Securities
(TIPs) are currently 2.2%. In addition to inflation-indexed bonds issued by the
U.S. Treasury Department, the Fund holds inflation-indexed bonds issued by
various U.S. Government agencies. While the Fund is permitted to own securities
of foreign countries that are not in the benchmark, currently the portfolio is
entirely invested in the United States. In addition, the Fund maintains an
interest rate exposure quite similar to that of its benchmark. At fiscal year
end, approximately 97% of the portfolio is AAA-rated and the remaining 3% is
A-rated.
OUTLOOK
The real yields offered by inflation indexed-bonds provides a low-risk vehicle
for achieving stable real returns over the next 5 to 10 years.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO
& CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE.
THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INFLATION INDEXED BOND FUND CLASS III SHARES AND THE
LEHMAN BROTHERS U.S. TREASURY INFLATION NOTES INDEX
AS OF FEBRUARY 28, 2003
GMO INFLATION LEHMAN BROTHERS U.S.
INDEXED BOND FUND TREASURY INFLATION NOTES INDEX
3/31/97 $10,000 $10,000
6/30/97 $10,090 $10,083
9/30/97 $10,250 $10,230
12/31/97 $10,336 $10,349
3/31/98 $10,367 $10,385
6/30/98 $10,501 $10,524
9/30/98 $10,749 $10,810
12/31/98 $10,767 $10,758
3/31/99 $10,854 $10,805
6/30/99 $11,008 $10,959
9/30/99 $11,037 $11,016
12/31/99 $11,058 $11,015
3/31/2000 $11,507 $11,491
6/30/2000 $11,749 $11,760
9/30/2000 $12,034 $12,012
12/31/2000 $12,531 $12,467
3/31/2001 $13,171 $13,065
6/30/2001 $13,429 $13,278
9/30/2001 $13,723 $13,597
12/31/2001 $13,608 $13,451
3/31/2002 $13,761 $13,651
6/30/2002 $14,542 $14,448
9/30/2002 $15,669 $15,596
12/31/2002 $15,539 $15,680
2/28/2003 $16,145 $16,389
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 3/31/97
Class III 16.67% 9.24% 8.43%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 100.8%
UNITED STATES -- 100.8%
CORPORATE DEBT -- 2.6%
6,850,000 JP Morgan and Co. Series MTNA, Variable Rate, CPI +
4.00%, 6.01%,
due 02/15/12 7,158,250
------------
U.S. GOVERNMENT -- 92.4%
30,648,925 U.S. Treasury Inflation Indexed Bond, 3.88%, due
04/15/29 39,546,691
45,972,405 U.S. Treasury Inflation Indexed Bond, 3.63%, due
04/15/28 56,689,722
17,670,990 U.S. Treasury Inflation Indexed Bond, 3.50%, due
01/15/11 20,139,406
52,959,625 U.S. Treasury Inflation Indexed Note, 4.25%, due
01/15/10 62,599,934
24,908,901 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09 28,676,373
43,785,353 U.S. Treasury Inflation Indexed Note, 3.63%, due
01/15/08(a) 49,463,766
------------
257,115,892
------------
U.S. GOVERNMENT AGENCY -- 5.8%
14,844,440 Tennessee Valley Authority (Indexed Principal), 3.38%,
due 01/15/07 16,238,690
------------
TOTAL UNITED STATES 280,512,832
------------
TOTAL DEBT OBLIGATIONS (COST $254,709,059) 280,512,832
------------
MUTUAL FUNDS -- 18.0%
478,077 GMO Alpha LIBOR Fund 11,339,997
1,545,061 GMO Short-Duration Collateral Fund 38,641,966
------------
TOTAL MUTUAL FUNDS (COST $50,866,051) 49,981,963
------------
TOTAL INVESTMENTS -- 118.8%
(Cost $305,575,110) 330,494,795
Other Assets and Liabilities (net) -- (18.8%) (52,407,032)
------------
TOTAL NET ASSETS -- 100.0% $278,087,763
============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
<Table>
CPI - Consumer Price Index
Variable rates - The rates shown on variable rate notes are the
current interest rates at February 28, 2003, which are subject
to change based on the terms of the security.
</Table>
(a) All or a portion of this security has been segregated to cover
collateral requirements on reverse repurchase agreements (Note 6).
See accompanying notes to the financial statements. 1
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $305,575,110) (Note 1) $330,494,795
Cash 223,629
Receivable for Fund shares sold 100,000
Interest receivable 1,826,375
Receivable for expenses reimbursed by Manager (Note 2) 18,060
------------
Total assets 332,662,859
------------
LIABILITIES:
Payable for investments purchased 6,370,200
Payable for Fund shares repurchased 13,473,706
Payable to affiliate for (Note 2):
Management fee 21,097
Shareholder service fee 31,646
Payable for reverse repurchase agreements (Notes 1 and 6) 34,619,128
Accrued expenses and other liabilities 59,319
------------
Total liabilities 54,575,096
------------
NET ASSETS $278,087,763
============
NET ASSETS CONSIST OF:
Paid-in capital $248,658,016
Accumulated undistributed net investment income 670,597
Accumulated net realized gain 3,839,465
Net unrealized appreciation 24,919,685
------------
$278,087,763
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $278,087,763
============
SHARES OUTSTANDING:
Class III 23,719,547
============
NET ASSET VALUE PER SHARE:
Class III $ 11.72
============
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Interest $11,771,315
Dividends from investment company shares 194,237
-----------
Total income 11,965,552
-----------
EXPENSES:
Management fee (Note 2) 241,490
Interest expense (Notes 1 and 6) 368,160
Custodian and transfer agent fees 84,598
Audit fees 30,661
Legal fees 14,424
Registration fees 7,127
Trustees fees and related expenses (Note 2) 6,903
Miscellaneous 3,112
Fees reimbursed by Manager (Note 2) (135,718)
-----------
620,757
Shareholder service fee (Note 2) - Class III 362,235
-----------
Net expenses 982,992
-----------
Net investment income 10,982,560
-----------
REALIZED AND UNREALIZED GAIN:
Net realized gain on:
Investments 6,275,231
Realized gains distributions from investment company
shares 57,138
-----------
Net realized gain 6,332,369
-----------
Change in net unrealized appreciation (depreciation) on
investments 21,696,687
-----------
Net realized and unrealized gain 28,029,056
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $39,011,616
===========
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 10,982,560 $ 3,750,662
Net realized gain 6,332,369 1,199,410
Change in net unrealized appreciation (depreciation) 21,696,687 (758,918)
------------ ------------
Net increase in net assets from operations 39,011,616 4,191,154
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (12,116,397) (4,356,432)
------------ ------------
Total distributions from net investment income (12,116,397) (4,356,432)
------------ ------------
Net realized gains
Class III (6,220,182) (663,955)
------------ ------------
Total distributions from net realized gains (6,220,182) (663,955)
------------ ------------
(18,336,579) (5,020,387)
------------ ------------
Net share transactions (Note 5):
Class III 108,138,941 84,216,157
------------ ------------
Increase in net assets resulting from net share
transactions 108,138,941 84,216,157
------------ ------------
Total increase in net assets 128,813,978 83,386,924
NET ASSETS:
Beginning of period 149,273,785 65,886,861
------------ ------------
End of period (including undistributed net
investment income of $670,597 and $20,298,
respectively) $278,087,763 $149,273,785
============ ============
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net investment income $ 10,982,560
Net accretion (3,585,183)
------------
7,397,377
------------
Investments purchased (334,579,025)
Investments sold 193,252,990
------------
(141,326,035)
------------
Realized gain distributions from investment company
shares 57,138
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in interest receivable (690,757)
(Increase) decrease in receivable for fund shares sold (45,971)
(Increase) decrease in receivable for securities sold 75,000
(Increase) decrease in receivable for expenses reimbursed
by Manager (15,372)
Increase (decrease) in payable for Fund shares
repurchased 13,463,038
Increase (decrease) in payable for securities purchased 6,370,200
Increase (decrease) in payable to affiliate for:
Management fee 21,097
Shareholder service fee 14,719
Increase (decrease) in accrued expenses and other
liabilities 3,345
------------
NET CASH USED FOR OPERATING ACTIVITIES (114,676,221)
------------
CASH FLOWS FROM FINANCING ACTIVITIES*
Proceeds from shares sold 177,027,387
Shares redeemed (84,945,692)
Cash Distributions paid (2,279,333)
Increase (decrease) in payable for reverse repurchase
agreements 25,087,652
------------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES 114,890,014
------------
NET INCREASE IN CASH 213,793
Cash and cash equivalents, beginning of period 9,836
------------
Cash and cash equivalents, end of period $ 223,629
------------
*SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Reinvestment of dividends and distributions 16,057,246
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------
2003 2002 2001(C) 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81 $ 10.64 $ 9.72 $ 9.88 $ 10.04
-------- -------- ------- ------- -------
Income from investment operations:
Net investment income 0.51 0.30 0.71+ 0.65+ 0.61
Net realized and unrealized gain
(loss) 1.25 0.29 0.90 (0.30) (0.18)
-------- -------- ------- ------- -------
Total from investment operations 1.76 0.59 1.61 0.35 0.43
-------- -------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.56) (0.37) (0.69) (0.51) (0.59)
From net realized gains (0.29) (0.05) -- -- --
-------- -------- ------- ------- -------
Total distributions (0.85) (0.42) (0.69) (0.51) (0.59)
-------- -------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 11.72 $ 10.81 $ 10.64 $ 9.72 $ 9.88
======== ======== ======= ======= =======
TOTAL RETURN(a) 16.67% 5.66% 16.86% 3.57% 4.28%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $278,088 $149,274 $65,887 $51,951 $25,147
Net operating expenses to average
daily net assets 0.25% 0.25% 0.25% 0.25% 0.25%
Interest expense to average daily net
assets 0.15%(b) 0.17%(b) 0.37%(b) 0.45%(b) --
Total net expenses to average daily
net assets(d) 0.40% 0.42% 0.62% 0.70% 0.25%
Net investment income to average
daily net assets 4.55% 4.15% 6.87% 6.49% 4.93%
Portfolio turnover rate 75% 40% 32% 112% 94%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.06% 0.09% 0.11% 0.13% 0.30%
</Table>
+ Computed using average shares outstanding throughout the period.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Interest expense incurred as a result of entering into reverse
repurchase agreements is included in the Fund's net expenses. Income
earned on investing proceeds from reverse repurchase agreements is
included in interest income.
(c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
premium and discount on debt securities. The effect of this change for
the year ended February 28, 2001 was to decrease net investment income
per share by $0.001, increase net realized and unrealized gains and
losses per share by $0.001 and decrease the ratio of net investment
income to average net assets from 6.88% to 6.87%. Per share and
ratios/supplemental data for periods prior to March 1, 2000 have not
been restated to reflect this change.
(d) Net expenses exclude expenses incurred indirectly through investment in
GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund.
6 See accompanying notes to the financial statements.
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Inflation Indexed Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in government bonds
that are indexed or otherwise "linked" to general measures of inflation in
the country of issue ("inflation indexed bonds"). The Fund's benchmark is
the Lehman Brothers U.S. Treasury Inflation Notes Index.
Inflation indexed securities issued by the U.S. Treasury are fixed income
securities whose principal value is periodically adjusted according to the
rate of U.S. inflation. Inflation indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable local inflation
index.
At February 28, 2003, 4.1% of the Fund was invested in the GMO Alpha LIBOR
Fund and 13.9% of the Fund was invested in the GMO Short-Duration
Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the
GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not
publicly available for direct purchase. The financial statements of the
GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund should be
read in conjunction with the Fund's financial statements.
The Fund invested a substantial portion of its assets in GMO Alpha LIBOR
Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In
November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds")
defaulted amid allegations of fraud and significant violations of the
bonds' indentures. Currently, no market exists for the NPF bonds, and they
are being valued at fair value by the trustees of GMO Trust or persons
acting at their direction. The devaluation of the NPF bonds had a negative
impact on the Fund's net asset value per share.
In late November 2002, Alpha LIBOR Fund undertook a reorganization
transaction with a new series of GMO Trust, GMO Short-Duration Collateral
Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR
Fund was transferred to SDCF in exchange for SDCF shares. The
reorganization was treated as a sale of the Alpha LIBOR Fund shares for
financial reporting purposes and a distribution by Alpha LIBOR Fund for
tax purposes. Accordingly, for financial reporting purposes, the Fund
recognized a loss on the sale of the Alpha LIBOR shares of approximately
$3,434,839. In addition, the Fund recognized for tax, but not for
financial reporting
7
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
purposes, ordinary income of $1,831,077 and long-term capital gains of
$326,590 from Alpha LIBOR Fund. $5,592,506 was added to the tax cost basis
of the Fund's holdings of Alpha LIBOR Fund.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Shares of other GMO Funds are valued at their net asset value as reported
on each business day. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction. A security's value may be deemed
unreliable if, for example, the Manager becomes aware of information or
events occurring after the close of a foreign market that would materially
affect that security's value.
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
8
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Certain investments in securities held by the Fund were valued on the
basis of a price provided by a principal market maker. The prices provided
by the principal market makers may differ from the value that would be
realized if the securities were sold and the differences could be material
to the financial statements.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. At February 28, 2003, the Fund held no open
forward currency contracts.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by
9
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
another instrument. The Fund may enter into interest rate, total return
and forward swap spread lock swap agreements to manage its exposure to
interest rates. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return, both based on notional amounts. To the extent the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty,
respectively. Forward swap spread lock swap agreements involve commitments
to pay or receive a settlement amount calculated as the difference between
the swap spread and a fixed spread, multiplied by the notional amount
times the duration of the swap rate. The swap spread is the difference
between the benchmark swap rate (market rate) and the specific treasury
rate. In connection with these agreements, cash or securities may be set
aside as collateral by the Fund's custodian in accordance with the terms
of the swap agreement. The Fund earns interest on cash set aside as
collateral. Swaps are marked to market daily based upon quotations from
market makers and the change in value, if any, is recorded as unrealized
gain or loss in the Statement of Operations. Payments received or made at
the end of the measurement period are recorded as realized gain or loss in
the Statement of Operations. Net payments of interest on interest rate
swap agreements are included as part of interest income. These financial
instruments are not actively traded on financial markets. The values
assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in interest
rates. At February 28, 2003, the Fund held no open swap agreements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty.
10
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the collateral declines or if the seller enters
insolvency proceedings, recovery of cash by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund sold may decline
below the price at which it is obligated to repurchase them under the
agreement. At February 28, 2003, the Fund had entered into a reverse
repurchase agreement having a market value of $34,619,128, collateralized
by a security with a market value of $35,311,511. See Note 6 for a summary
of open reverse repurchase agreements as of February 28, 2003.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund had no securities on loan.
STATEMENT OF CASH FLOWS
The cash flow amount shown in the Statement of Cash Flows is the amount
reported as cash in the Fund's Statement of Assets and Liabilities and
represents cash on hand at its custodian at February 28, 2003.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
11
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. For the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid was as follows: ordinary income --
$4,512,657 and $14,060,204, respectively and long-term capital gains --
$507,730 and $4,276,375, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $2,316,810 and $2,237,878 of undistributed ordinary
income and undistributed long-term capital gains, respectively.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to the GMO Alpha LIBOR
Fund transaction. (See Note 3) The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
$1,824,732 $3,767,774 $(5,592,506)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the amortization of
premiums and discounts. Non-cash dividends, if any, are recorded at fair
market value of the securities received. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis. Interest income on U.S. Treasury inflation indexed
securities is accrued daily based upon the inflation adjusted principal.
Additionally, any increase in the principal or face amount of the
securities is recorded as interest income.
12
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .10% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha
LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended
February 28, 2003, indirect operating expenses (excluding
investment-related expenses) were 0.001% of the Fund's average daily net
assets, and indirect investment-related expenses (including, but not
limited to, interest expense, foreign audit expense, and
investment-related legal expense) were 0.003% of the Fund's average daily
net assets.
As of February 28, 2003, a signficant portion of the Fund's shares were
held by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $5,162. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
13
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 28, 2003, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<Table>
<Caption>
Purchases Sales
------------ ------------
U.S. Government securities $228,832,269 $120,546,952
Investments (non-U.S. Government securities) 105,746,756 72,706,038
</Table>
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
$311,165,888 $20,232,359 $(903,452) $19,328,907
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 42.8% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------- -------------------------
Shares Amount Shares Amount
Class III: ----------- ------------ ----------- ------------
Shares sold 15,785,072 $177,127,387 9,048,815 $ 99,841,544
Shares issued to shareholders in reinvestment
of distributions 1,440,111 16,057,246 435,023 4,642,847
Shares repurchased (7,316,454) (85,045,692) (1,865,029) (20,268,234)
----------- ------------ ----------- ------------
Net increase 9,908,729 $108,138,941 7,618,809 $ 84,216,157
=========== ============ =========== ============
</Table>
14
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
REVERSE REPURCHASE AGREEMENT
<Table>
<Caption>
Face Value Description Market Value
----------- ------------------------------------------------------- ------------
Barclays Bank, 1.24%, dated 2/21/03, to be repurchased
$34,619,128 on demand, at face value, plus accrued interest. $34,619,128
===========
</Table>
<Table>
Average balance outstanding $25,068,147
Average interest rate 1.53%
Maximum balance outstanding $72,119,500
Average shares outstanding 20,974,918
Average balance per share outstanding 1.20
</Table>
Average balance outstanding was calculated based on daily balances
outstanding during the period that the Fund had entered into reverse
repurchase agreements.
15
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INFLATION INDEXED BOND FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Inflation Indexed Bond Fund
(the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of
its operations, the changes in its net assets and the financial highlights for
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
16
<Page>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 2003, all of the Fund's
distributions are from investment company taxable income, except that the
Fund designated 23.32% of distributions as net capital gain dividends.
17
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
18
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
19
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------------------ -------------- -------------- --------------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present), Chief
c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member,
40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer of the Officer since
Age: 47 Trust October 2002;
Vice President
from August
1998 -
October 2002.
Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Financial Financial
40 Rowes Wharf Officer and Officer Since
Boston, MA 02110 Treasurer of February 2000;
Age: 45 the Trust Treasurer
since February
1998.
Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust Treasurer of September Otterloo & Co. LLC.
40 Rowes Wharf the Trust 1998.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting
c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 since March
Age: 37 2001; May
1999 - August
1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP
Boston, MA 02110 Secretary (1991 - 1999).
Age: 58 since March
2001.
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Laundering
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
20
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
Class III shares of GMO International Disciplined Equity Fund returned -8.3% for
the fiscal year ended February 28, 2003. This was +9.2% ahead of the MSCI EAFE
Index, which returned -17.5% over the same period.
International stocks, like the U.S. market, suffered their third straight year
of negative returns in 2002. World equity markets were hit by the continued
global economic slowdown which came on top of valuation levels that remained
high by historical standards. With the addition of corporate governance scandals
and a perilous geopolitical situation, these factors combined to produce the
worst bear market since 1974.
In U.S. dollar terms, foreign stocks fared slightly better than domestic
equities. The EAFE Index outperformed the S&P 500 (which returned -22.7%) solely
due to weakness in the dollar. Foreign investors have been slowing their inflows
on declining confidence in the U.S. economy. With the continued large U.S. trade
deficit and lower U.S. interest rates, this seems to have put an end to the long
post 1995 dollar rally.
In local currency terms, European markets fell even further than the U.S.
Germany led the way down, with that country's DAX index falling a Nasdaq-like
- -44% in calendar year 2002. Europe continued to suffer from the unraveling of
the "TMT" bubble in the technology, media, and telecommunications sectors. Faith
has all but vanished that 3rd generation mobile phone technology will deliver
pots of gold to these sectors. The insurance sector suffered from a brutal
combination of rising liabilities for natural (and unnatural) disasters with
deteriorating asset values as equity holdings declined in value. There were
questions about the viability of the Eurozone as a single currency region and
the appropriateness of its stability pact, which limits government deficits.
Adhering to this pact means, for example, that Germany has neither fiscal policy
nor monetary policy (now ceded to the ECB) available to stimulate its economy.
In Japan, frustration continued to mount over the lack of reform. GDP growth is
stagnant and some economic indicators forecast a return to recession in 2003.
The solvency of the financial sector remains a concern, and several big banks
have been forced to raise additional capital at the expense of current
shareholders. Prime Minister Koizumi appeared to practice business as usual with
the appointment of an establishment candidate to head the central bank. And the
strength of the yen against the U.S. dollar poses problems for exporters.
Despite the fact that the Nikkei 225 index hit a 20-year low, Japan was the best
performing major market. The MSCI Japan index fell "only" by 10%, as the decline
was at least somewhat anticipated in the prices.
Within this difficult environment, GMO's disciplined investment approach
produced strong relative performance. The focus on higher quality, reasonably
valued stocks helped ease the pain.
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
Generally the most defensive sectors performed strongest in these times of
uncertainty. Utility stocks led the way, and telecommunications stocks and
consumer staples also outperformed the benchmark (though all sectors fell in
absolute terms). Energy stocks outperformed only slightly despite a run up in
oil prices to nearly $40/barrel. The outperformance of the telecommunications
sector came after two dismal years, as share prices have fallen enough that the
basic revenue from the traditional business is providing some valuation support
even as hopes of future growth dissipate. Technology stocks performed the worst
of the major sectors. Sector allocation was a modest benefit to the portfolio,
predominantly from an overweight position in electric utilities.
Country allocation was also a positive, as the portfolio benefited from
overweights in some of the smaller markets that performed relatively well.
Austria was the most notable of these as overweighting that market, which
managed positive absolute return, added close to a percentage point of relative
return. Allocations to Canada and the Pacific region outside Japan were also
positive as those regions enjoyed relatively strong economic growth. Currency
allocation was also positive as the portfolio benefited not just in absolute
terms from not holding the U.S. dollar, but also in relative terms from
overweighting the euro and other continental currencies at the expense of the
pound and yen.
OUTLOOK
The silver lining to the pain of a tough bear market is that the bad news is now
out in the open. With lower stock prices, dividend yields are now meaningful and
there is a lower hurdle on earnings growth required to deliver capital gains.
Also, many CEOs have been replaced by a more prudent generation focused on
reducing debt and other more conservative means of enhancing shareholder value.
Lower valuations and continued dollar weakness position international equities
both to enjoy positive returns and to outperform the U.S. market.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL DISCIPLINED EQUITY FUND CLASS III SHARES
AND THE MSCI EAFE INDEX AS OF FEBRUARY 28, 2003 GMO INTERNATIONAL DISCIPLINED EQUITY FUND MSCI EAFE INDEX
1/29/2002 $10,000 $10,000
3/31/2002 $10,755 $10,592
6/30/2002 $11,085 $10,367
9/30/2002 $9,302 $8,321
12/31/2002 $9,796 $8,858
2/28/2003 $9,355 $8,294
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE INCEPTION
1 YEAR 1/29/2002
Class III -8.28% -5.97%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
COMMON STOCKS -- 94.6%
AUSTRALIA -- 4.2%
29,713 Australia and New Zealand Banking Group Ltd 296,074
11,485 Commonwealth Bank of Australia 171,036
34,371 CSR Ltd 135,577
98,743 General Property Trust Units 165,984
13,869 Leighton Holdings Ltd 75,663
42,800 National Australia Bank Ltd 750,625
33,234 Orica Ltd 165,983
66,141 Qantas Airways Ltd 123,624
16,314 St. George Bank Ltd 174,243
30,020 TABCORP Holdings Ltd 182,176
94,880 Telstra Corp Ltd 230,312
86,993 Westfield Trust Units 171,045
36,771 Woodside Petroleum Ltd 242,112
------------
2,884,454
------------
AUSTRIA -- 4.1%
10,500 Austrian Airlines* 72,428
1,600 Bau Holdings AG 118,127
2,800 Boehler Uddeholm (Bearer) 139,666
2,500 Brau Union AG 180,531
5,613 Erste Bank Der Oesterreichischen Sparkassen AG 375,686
3,600 Flughafen Wien AG 130,371
513 Generali Holding Vienna AG 86,254
3,800 Mayr-Melnhof Karton AG (Bearer) 297,425
2,900 Oesterreichische Brau Beteiligungs AG 237,078
5,474 OMV AG 591,463
18,737 Telekom Austria AG* 197,505
4,200 VA Technologie AG (Bearer) 65,638
927 Verbund-Oesterreichische Elektrizitaetswirtschafts AG 82,238
3,803 Voestalpine AG 90,790
8,900 Wienerberger AG 151,656
------------
2,816,856
------------
BELGIUM -- 2.1%
11,899 Almanij NV 383,075
1,988 Bekaert SA 70,172
1,284 Electrabel SA 322,448
10,186 Fortis B 139,427
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
BELGIUM -- CONTINUED
9,405 KBC Bancassurance Holding 284,233
3,547 Solvay Et Cie 210,263
------------
1,409,618
------------
CANADA -- 1.5%
11,000 Bank of Montreal 310,109
9,200 EnCana Corp 300,244
2,400 Magna International Inc 133,226
7,000 Royal Bank of Canada 272,990
------------
1,016,569
------------
DENMARK -- 0.3%
14 D/S 1912 95,465
5,125 Group 4 Falck A/S 80,676
------------
176,141
------------
FINLAND -- 0.4%
31,900 Sampo Oyj 199,415
3,500 UPM-Kymmene Oyj 100,343
------------
299,758
------------
FRANCE -- 4.3%
4,403 Assurances Generales de France 121,201
14,542 Axa 177,736
19,436 BNP Paribas 804,408
6,600 Cie de Saint-Gobain 199,391
4,221 Essilor International SA 163,778
6,180 L'Oreal SA 398,982
1,750 Pernod Ricard 135,520
3,061 Renault SA 129,392
11,900 Societe Generale Class A 638,726
442 Unibail 27,773
29,805 Wanadoo* 149,055
------------
2,945,962
------------
GERMANY -- 6.8%
2,900 Adidas-Salomon AG 231,296
87,200 Bankgesellschaft Berlin AG* 134,397
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
GERMANY -- CONTINUED
20,000 BASF AG 726,437
10,300 Bayerische Motoren Werke AG 288,080
15,000 Continental AG* 235,230
30,800 DaimlerChrysler AG (Registered) 939,454
5,400 Degussa AG 137,937
20,100 E. On AG 854,636
10,200 RWE AG 227,017
12,400 Siemens AG (Registered) 494,495
6,900 Sudzucker AG 108,578
26,100 Thyssen Krupp AG 248,674
------------
4,626,231
------------
HONG KONG -- 2.0%
81,500 CLP Holdings Ltd 334,398
115,000 Hang Lung Group Co Ltd 97,319
50,000 Henderson Land Development Co Ltd 141,683
109,000 Hong Kong Electric Holdings Ltd 415,785
45,000 Hong Kong Land Holdings 55,350
162,000 YUE Yuen Industrial Holdings* 301,189
------------
1,345,724
------------
IRELAND -- 0.8%
14,572 Allied Irish Banks Plc 184,856
22,299 Bank of Ireland 245,626
7,509 Irish Life & Permanent Plc 73,648
------------
504,130
------------
ITALY -- 3.2%
79,323 ENI-Ente Nazionale Idrocarburi SPA 1,177,257
19,153 RAS SPA 235,538
58,351 Telecom Italia Mobile SPA 262,883
37,378 Telecom Italia SPA 259,845
47,955 Telecom Italia SPA (Savings Shares) 235,171
------------
2,170,694
------------
JAPAN -- 21.3%
6,400 Acom Co Ltd 210,040
6,000 Alps Electric Co Ltd 73,284
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
17,000 Bridgestone Corp 191,964
39,000 Brother Industries Ltd 235,204
27,000 Canon Sales Co Inc 195,948
14,600 Chubu Electric Power Co Inc 267,981
10,100 Chugoku Electric Power Co Inc 154,458
44,000 Cosmo Oil Co Ltd 59,920
15,000 Daiichi Pharmaceuticals Co Ltd 200,973
26,000 Dainippon Printing Co Ltd 262,584
51,000 Daiwa House Industry Co Ltd 289,888
53 East Japan Railway Co 244,322
31,000 Fuji Heavy Industries Ltd 119,569
2,400 Hoya Corp 154,079
80,000 Itochu Corp 190,823
31 Japan Tobacco Inc 184,859
24,825 JFE Holdings Inc* 360,537
102,000 Kajima Corp 204,474
3,000 Kansai Electric Power 45,498
175,000 Kawasaki Heavy Industries Ltd* 152,463
20,000 Kirin Brewery Co Ltd 148,023
436,000 Kobe Steel Ltd* 265,528
29,000 Komatsu Ltd 111,364
6,100 Kyushu Electric Power Co Inc 89,675
22,000 Matsushita Electric Industrial Co Ltd 195,204
91,000 Mazda Motor Corp 192,430
23,000 Minolta Co Ltd* 112,836
41,000 Mitsubishi Corp 274,316
54,000 Mitsubishi Electric Corp* 144,335
17,000 Mitsubishi Estate Co Ltd 117,767
115,000 Mitsubishi Motors* 279,171
67 Mitsubishi Tokyo Finance Group Inc 296,959
170 Mizuho Holding Inc* 150,983
63,000 Nippon Express Co Ltd 248,856
117 Nippon Telegraph & Telephone Corp 423,565
64,000 Nissan Motor Co 480,169
9,000 Nitto Denko Corp 252,738
39,000 Nomura Holdings Inc 458,532
90 NTT Docomo Inc* 169,761
9,000 Ono Pharmaceutical Co Ltd 282,428
6,200 Promise Co 202,428
171,000 Resona Holdings Inc* 82,444
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
3,700 Rohm Co Ltd 424,064
14,000 Sankyo Co Ltd 186,864
76,000 Sekisui Chemical 190,281
11,000 Sekisui House Ltd 77,598
4,700 Shikoku Electric Power 72,552
63,000 Shimizu Corp 155,069
3,000 Shin-Etsu Chemical Co Ltd 98,203
14,000 Shiseido Co Ltd 162,351
3,000 Showa Shell Sekiyu 19,818
3,300 SMC Corp 252,612
19,000 Sony Corp 721,590
503,000 Sumitomo Metal Industries* 221,239
41 Sumitomo Mitsui Financial Group Inc* 95,716
13,000 Suzuki Motor Corp 148,446
113,000 Taiheiyo Cement Corp 188,293
122,000 Taisei Corp 229,089
17,000 Taisho Pharmaceutical Co Ltd 248,475
17,000 Takeda Chemical Industries Ltd 626,940
5,850 Takefuji Corp 289,964
5,800 Tohoku Electric Power Co Inc 84,038
11,000 Tokyo Electric Power 211,673
21,000 Tokyu Corp 68,742
17,000 Toppan Printing Co Ltd 117,048
91,000 Toshiba Corp* 264,783
16,000 Toyota Motor Corp 375,555
4,600 Uni-Charm Corp 174,701
------------
14,484,084
------------
NETHERLANDS -- 4.4%
49,510 ABN Amro Holdings NV 787,088
56,320 Aegon NV 603,982
2,876 DSM NV 105,547
24,769 Koninklijke Philips Electronics NV 413,254
125,111 Ron KPN NV* 829,294
4,532 Unilever NV 256,929
410 Wolters Kluwer NV 5,670
------------
3,001,764
------------
</Table>
See accompanying notes to the financial statements.
5
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
NEW ZEALAND -- 0.2%
55,263 Telecom Corp of New Zealand 129,497
------------
NORWAY -- 1.8%
37,500 DNB Holdings Class A 141,834
4,950 Elkem AS Class A 89,811
12,580 Norsk Hydro AS 481,952
6,800 Orkla ASA 94,905
56,100 Statoil ASA 430,632
------------
1,239,134
------------
PORTUGAL -- 0.3%
34,507 Electricidade de Portugal SA 52,812
25,337 Portugal Telecom SA 162,484
------------
215,296
------------
SINGAPORE -- 0.4%
3,000 Great Eastern Holdings Ltd 14,662
1,798 Haw Par Corp Ltd 3,577
28,000 Singapore Airlines Ltd 152,143
11,000 Singapore Press Holdings Ltd 115,114
------------
285,496
------------
SPAIN -- 3.6%
14,526 Altadis SA 344,278
14,600 CIA ESP Petroleos 298,982
32,270 Endesa SA 386,065
10,300 Gas Natural SDG SA 202,044
53,475 Repsol YPF SA 749,260
11,842 Telefonica Moviles SA* 75,942
39,174 Telefonica SA* 379,996
------------
2,436,567
------------
SWEDEN -- 1.2%
7,100 Electrolux AB 123,076
8,850 Hennes & Mauritz AB 186,693
41,500 Nordea AB 180,944
9,300 Sandvik AB 215,313
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SWEDEN -- CONTINUED
28,500 TeliaSonera AB 95,793
------------
801,819
------------
SWITZERLAND -- 7.8%
5,944 Logitech International SA* 199,229
54,257 Novartis AG 1,992,624
4,559 Roche Holding AG (Bearer) 438,753
24,083 Roche Holding AG (Genusschein) 1,446,578
4,035 Swiss Reinsurance Co 217,223
2,533 Swisscom AG 752,802
1,060 ZKB Finanz Vision AG* 86,379
2,076 Zurich Financial Services AG 176,062
------------
5,309,650
------------
UNITED KINGDOM -- 23.9%
52,100 Abbey National Plc 320,045
17,100 Alliance & Leicester Plc 208,740
6,340 Alliance Unichem Plc 39,196
34,330 Associated British Food 274,421
13,367 AstraZeneca Plc 431,193
52,239 Aviva Plc 325,630
23,632 BAA Plc 161,175
100,400 Barclays Plc 580,374
86,170 BG Group Plc 332,190
55,300 Boots Group Plc 472,098
31,934 BP Plc 201,197
66,267 British American Tobacco 647,138
317,374 BT Group Plc 817,330
125,500 Corus Group Plc* 34,593
43,400 Diageo Plc 430,664
20,721 Gallaher Group Plc 203,333
51,300 GUS Plc 410,073
55,023 HBOS Plc 573,734
59,715 HSBC Holdings Plc 643,351
37,869 Imperial Chemical Industries Plc 90,664
25,591 Imperial Tobacco Group Plc 399,255
145,055 Invensys Plc 36,556
123,552 Kingfisher Plc 445,163
16,492 Land Securities Group Plc 193,266
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
113,033 Lloyds TSB Group Plc 630,255
72,731 Marks & Spencer Group Plc 349,977
92,019 National Grid Transco Plc 591,352
23,272 Next Plc 293,246
10,750 Premier Farnell Plc 24,975
23,955 Reckitt Benckiser Plc 377,692
39,916 Reed Elsevier Plc 291,410
45,076 Rentokil Initial Plc 129,751
151,605 Rolls-Royce 189,840
137,106 Royal & Sun Alliance Insurance Group 154,408
25,932 Royal Bank of Scotland Group 593,485
25,368 Sainsbury (J) 92,701
31,204 Scottish & Newcastle Plc 165,142
40,276 Scottish & Southern Energy Plc 399,664
80,009 Scottish Power Plc 459,351
179,961 Shell Transport & Trading (Registered) 1,042,412
32,358 Six Continents Plc 315,486
34,888 Smith & Nephew Plc 201,125
47,200 Tate & Lyle 206,492
42,734 THUS Group Plc* 5,742
10,253 United Utilities 95,282
642,773 Vodafone Group Plc 1,151,641
5,818 Whitbread Plc 47,744
24,580 Wolseley 193,967
------------
16,274,519
------------
TOTAL COMMON STOCKS (COST $71,102,219) 64,373,963
------------
PREFERRED STOCKS -- 0.4%
AUSTRALIA -- 0.1%
20,806 News Corporation Ltd 0.93% 107,827
------------
GERMANY -- 0.3%
1,800 RWE AG 4.35% 36,473
5,300 Volkswagen AG 5.30% 155,376
------------
191,849
------------
TOTAL PREFERRED STOCKS (COST $342,604) 299,676
------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 3.3%
CASH EQUIVALENTS -- 2.1%
$ 1,400,000 Bank of Scotland Time Deposit, 1.31%, due 3/03/03 1,400,000
------------
U.S. GOVERNMENT -- 1.2%
850,000 U.S. Treasury Bill, 1.19%, due 4/24/03(a) 848,477
------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,248,477) 2,248,477
------------
TOTAL INVESTMENTS -- 98.3%
(Cost $73,693,300) 66,922,116
Other Assets and Liabilities (net) -- 1.7% 1,124,513
------------
TOTAL NET ASSETS -- 100.0% $ 68,046,629
============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
(a) All or a portion of this security is held as collateral for open futures
contracts (Note 6).
See accompanying notes to the financial statements. 9
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Financials 23.3%
Consumer Discretionary 13.9
Health Care 9.7
Telecommunication Services 9.5
Energy 9.2
Consumer Staples 8.8
Industrials 8.4
Utilities 8.3
Materials 6.1
Information Technology 2.8
-----
100.0%
=====
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $73,693,300) (Note 1) $66,922,116
Cash 71,266
Foreign currency, at value (cost $158,008) (Note 1) 157,463
Dividends and interest receivable 108,494
Foreign taxes receivable 59,541
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 1,918,959
Receivable for expenses reimbursed by Manager (Note 2) 4,564
-----------
Total assets 69,242,403
-----------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 21,117
Shareholder service fee 7,919
Payable for open forward foreign currency contracts
(Notes 1 and 6) 1,097,369
Payable for variation margin on open futures contracts
(Notes 1 and 6) 938
Accrued expenses 68,431
-----------
Total liabilities 1,195,774
-----------
NET ASSETS $68,046,629
===========
NET ASSETS CONSIST OF:
Paid-in capital $77,030,287
Accumulated undistributed net investment income 121,850
Accumulated net realized loss (3,112,728)
Net unrealized depreciation (5,992,780)
-----------
$68,046,629
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $68,046,629
===========
SHARES OUTSTANDING:
Class III 3,771,687
===========
NET ASSET VALUE PER SHARE:
Class III $ 18.04
===========
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $226,575) $ 1,670,938
Interest 45,532
-----------
Total income 1,716,470
-----------
EXPENSES:
Management fee (Note 2) 289,406
Custodian fees 208,105
Audit fees 33,112
Transfer agent fees 27,202
Registration fees 6,826
Legal fees 3,835
Trustees fees and related expenses (Note 2) 1,498
Miscellaneous 1,908
Fees reimbursed by Manager (Note 2) (280,639)
-----------
291,253
Shareholder service fee (Note 2) - Class III 108,527
-----------
Net expenses 399,780
-----------
Net investment income 1,316,690
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (2,401,540)
Closed futures contracts (652,489)
Foreign currency, forward contracts and foreign
currency related transactions 1,289,891
-----------
Net realized loss (1,764,138)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (7,666,311)
Open futures contracts (78,132)
Foreign currency, forward contracts and foreign
currency related transactions 812,539
-----------
Net unrealized loss (6,931,904)
-----------
Net realized and unrealized loss (8,696,042)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(7,379,352)
===========
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM JANUARY 29, 2002
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 28, 2003 THROUGH FEBRUARY 28, 2002
----------------- ----------------------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,316,690 $ 53,760
Net realized loss (1,764,138) (11,583)
Change in net unrealized appreciation (depreciation) (6,931,904) 939,124
----------- -----------
Net increase (decrease) in net assets from
operations (7,379,352) 981,301
----------- -----------
Distributions to shareholders from:
Net investment income
Class III (2,585,607) --
----------- -----------
Total distributions from net investment income (2,585,607) --
----------- -----------
Net share transactions: (Note 5)
Class III 30,930,287 46,100,000
----------- -----------
Increase in net assets resulting from net share
transactions 30,930,287 46,100,000
----------- -----------
Total increase in net assets 20,965,328 47,081,301
NET ASSETS:
Beginning of period 47,081,301 --
----------- -----------
End of period (including accumulated undistributed
net investment income of $121,850 and $68,232,
respectively) $68,046,629 $47,081,301
=========== ===========
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM
JANUARY 29, 2002
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) THROUGH
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- ----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.40 $ 20.00
------- --------
Income from investment operations:
Net investment income+ 0.37 0.02
Net realized and unrealized gain (loss) (2.03) 0.38
------- --------
Total from investment operations (1.66) 0.40
------- --------
Less distributions to shareholders:
From net investment income (0.70) --
------- --------
Total distributions (0.70) --
------- --------
NET ASSET VALUE, END OF PERIOD $ 18.04 $ 20.40
======= ========
TOTAL RETURN(a) (8.28)% 2.00%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $68,047 $ 47,081
Net expenses to average daily net assets 0.55% 0.55%*
Net investment income to average daily net assets 1.82% 1.56%*
Portfolio turnover rate 64% 0%(b)
Fees and expenses reimbursed by the Manager to
average daily net assets: 0.39% 1.89%*
</Table>
* Annualized.
** Not annualized.
+ Computed using average shares outstanding throughout the period.
(a) Total return would have been lower had certain expenses not been
reimbursed during the period shown.
(b) Portfolio turnover rate was less than 1%.
14 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Disciplined Equity Fund (the "Fund"), which commenced
operations on January 29, 2002, is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities
of non-U.S. issuers. The Fund's benchmark is the Morgan Stanley Capital
International ("MSCI") EAFE Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign
15
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if there are movements in
foreign currency values that are unfavorable to the Fund. The value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are
16
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by
17
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
another instrument. The Fund may enter into total return swap agreements,
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return, both based on notional amounts. To
the extent the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. The Fund may also enter into contracts for
differences in which the Fund agrees with the counterparty that its return
will be based on the relative performance of two different groups or
"baskets" of securities, adjusted by an interest rate payment. To the
extent that the relative performance of the two baskets of securities
exceeds or falls short of the offsetting interest rate obligation, the
Fund will receive a payment from or make a payment to the counterparty,
respectively. In connection with these agreements, cash or securities may
be set aside as collateral by the Fund's custodian in accordance with the
terms of the swap agreement. The Fund earns interest on cash set aside as
collateral. Swaps are marked to market daily based upon quotations from
market makers and the change in value, if any, is recorded as unrealized
gain or loss in the Statement of Operations. Payments received or made at
the end of the measurement period are recorded as realized gain or loss in
the Statement of Operations. These financial instruments are not actively
traded on financial markets. The values assigned to these instruments are
based upon the best available information and because of the uncertainty
of the valuation, these values may differ significantly from the values
that would have been realized had a ready market for these instruments
existed, and the differences could be material. Entering into these
agreements involves, to varying degrees, elements of credit, legal, market
and documentation risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform or
disagree as to the meaning of contractual terms in the agreements, or that
there may be unfavorable changes in the price of the security or index
underlying these transactions. At February 28, 2003, there were no open
swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of collateral, the risk of delay in recovery or
loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax
18
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
purposes. Therefore, no provision for U.S. federal income or excise tax is
necessary. Taxes on foreign interest and dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the year ended February 28, 2003, the tax basis of
distributions was paid as follows: ordinary income -- $2,585,607.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $761,388 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to foreign currency transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $1,686,686 expiring in 2011. The Fund has elected to defer to
March 1, 2003 post-October capital losses of $1,388,413.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions. The financial highlights exclude these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss
----------------- ---------------
$1,322,535 $(1,322,535)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
19
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .40% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, a significant portion of the Fund's shares were
held by accounts for which the Manager has investment discretion.
20
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $1,099. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003 aggregated
$73,179,416 and $43,335,678, respectively.
At February 28, 2003 the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$73,731,676 $2,825,624 $(9,635,184) $(6,809,560)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 95.4% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the outstanding
shares of the Fund. Investment activities of these shareholders may have a
material effect on the Fund.
21
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Period from January 29,
2002
(commencement of
operations)
Year Ended through February 28,
February 28, 2003 2002
---------------------- ------------------------
Shares Amount Shares Amount
--------- ----------- ---------- ------------
Class III:
Shares sold 1,412,193 $29,960,294 2,308,021 $46,100,000
Shares issued to shareholders in reinvestment
of distributions 51,473 969,993 -- --
Shares repurchased -- -- -- --
--------- ----------- --------- -----------
Net increase 1,463,666 $30,930,287 2,308,021 $46,100,000
========= =========== ========= ===========
</Table>
The Fund was formed on January 29, 2002 with a $12,023,655 purchase and an
initial taxable contribution of securities in-kind, which had a market
value of $34,076,345 on the date of contribution.
22
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Buys
4/28/03 AUD 1,457,195 $ 879,581 $ 85,410
4/28/03 CAD 1,130,513 756,759 25,251
3/28/03 CHF 2,007,345 1,481,070 126,083
3/28/03 DKK 15,328,120 2,221,621 209,261
3/28/03 EUR 9,008,260 9,700,149 869,512
3/28/03 GBP 776,204 1,220,640 16,720
4/28/03 HKD 8,969,748 1,149,914 1,820
4/28/03 JPY 188,308,400 1,596,136 51,934
3/28/03 NOK 11,558,250 1,608,472 78,575
4/28/03 NZD 1,659,012 917,100 112,909
3/28/03 SEK 34,332,240 4,028,068 335,244
4/28/03 SGD 2,267,526 1,304,919 6,240
-----------
$ 1,918,959
===========
Sales
4/28/03 CAD 1,329,797 $ 890,159 $ (48,257)
3/28/03 CHF 589,280 434,786 (34,786)
3/28/03 EUR 5,914,990 6,369,297 (443,628)
3/28/03 GBP 2,905,301 4,568,808 (72,825)
4/28/03 HKD 13,261,160 1,700,069 (2,611)
4/28/03 JPY 670,719,700 5,685,141 (220,495)
3/28/03 NOK 4,766,460 663,311 (39,633)
4/28/03 NZD 834,202 461,146 (66,318)
3/28/03 SEK 14,804,725 1,736,981 (136,904)
4/28/03 SGD 2,660,603 1,531,128 (31,912)
-----------
$(1,097,369)
===========
</Table>
23
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krona
EUR - Euro
GBP - British Pound
HKD - Hong Kond Dollar
JPY - Japanese Dollar
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Appreciation
Number of Contracts Type Expiration Date Contract Value (Depreciation)
------------------- ----------------- --------------- -------------- --------------
Buys
1 DAX March 2003 $ 68,481 $ (4,038)
3 FTSE 100 March 2003 171,576 (8,474)
3 MIB30 March 2003 379,213 2,126
12 TOPIX March 2003 829,266 (28,284)
34 MSCI March 2003 609,953 (11,825)
--------
$(50,495)
========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
24
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Disciplined
Equity Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
25
<Page>
GMO INTERNATIONAL DISCIPLINED EQUITY FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$226,575 and recognized foreign source income of $1,897,513.
26
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
27
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
28
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and
Name, Address, Position(s) Length of Principal Occupation(s) During
and Age Held with Fund Time Served Past Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti-Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
29
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Asset
Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the International Equity Allocation Fund returned -5.6%
for the fiscal year ended February 28, 2003. During the period, the Fund's
benchmark, the MSCI ACWI [All Country World Index] Free ex-US, returned -16.6%.
During the fiscal year, both asset allocation and implementation added to
performance. Relative to the benchmark, the Fund was underweight developed
international stocks by 28%, balanced by a 24% overweight to emerging market
equities and a 4% overweight to emerging country debt. Within international
stocks, the portfolio was tilted towards the most attractively valued sectors
including international small, where the Fund was overweight 7.9%. As the
value/growth spread returned to its historical par, we allocated 25% to the GMO
International Growth Fund. The allocation to international growth slightly
detracted value, while that to international small companies added to
performance.
The value bias of the GMO International Intrinsic Value Fund ensured another
year of strong performance in a down market, as it outperformed its SSB PMI EPAC
Value benchmark by 11.3%. In addition, the GMO International Small Companies
Fund, the GMO International Growth Fund, and the GMO Emerging Markets Fund all
outperformed their benchmarks by 4.1%, 7.1%, and 2.5% respectively. The GMO
Emerging Country Debt Fund outperformed its J.P. Morgan EMBI Global benchmark by
3.8%.
OUTLOOK
With large developed international equities -- both value and growth -- fairly
valued, and with help from a depreciating dollar, we expect attractive returns
over the rest of the current cycle. We continue to hold substantial overweights
to the still cheap sectors of international small and emerging markets. With
yields at near record lows, the Fund now has emerging country debt as its sole
fixed income bet.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL EQUITY ALLOCATION FUND CLASS III SHARES AND THE
MSCI ALL COUNTRY WORLD FREE EX-U.S. INDEX
AS OF FEBRUARY 28, 2003
GMO INTERNATIONAL EQUITY MSCI ALL COUNTRY WORLD FREE
ALLOCATION FUND EX-U.S. INDEX
10/11/96 $10,000 $10,000
12/31/96 $10,268 $10,187
3/31/97 $10,389 $10,162
6/30/97 $11,288 $11,481
9/30/97 $11,578 $11,375
12/31/97 $10,447 $10,395
3/31/98 $11,868 $11,815
6/30/98 $11,020 $11,640
9/30/98 $9,266 $9,880
12/31/98 $10,655 $11,898
3/31/99 $10,754 $12,180
6/30/99 $12,348 $12,749
9/30/99 $12,321 $13,181
12/31/99 $13,507 $15,575
3/31/2000 $13,199 $15,697
6/30/2000 $13,071 $15,057
9/30/2000 $12,454 $13,829
12/31/2000 $12,626 $13,225
3/31/2001 $11,887 $11,482
6/30/2001 $12,415 $11,447
9/30/2001 $11,063 $9,751
12/31/2001 $11,902 $10,617
3/31/2002 $12,931 $10,784
6/30/2002 $13,121 $10,481
9/30/2002 $11,140 $8,452
12/31/2002 $11,854 $9,030
2/28/2003 $11,532 $8,534
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 10/11/96
Class III -5.58% 0.55% 2.26%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
MUTUAL FUNDS -- 100.0%
929,666 GMO Emerging Countries Fund, Class III 7,939,351
451,842 GMO Emerging Country Debt Fund, Class III 4,301,534
1,583,874 GMO Emerging Markets Fund, Class III 13,969,773
1,545,176 GMO International Growth Fund, Class III 26,005,305
2,643,428 GMO International Intrinsic Value Fund, Class III 42,638,491
936,951 GMO International Small Companies Fund, Class III 8,901,034
-------------
TOTAL MUTUAL FUNDS (COST $113,383,931) 103,755,488
-------------
SHORT-TERM INVESTMENTS -- 0.0%
REPURCHASE AGREEMENT -- 0.0%
$ 17,458 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of $17,458
and an effective yield of 0.36%, collateralized by a
U.S. Treasury Bond with a rate of 3.625%, maturity date
of 3/31/04 and a market value, including accrued
interest of $18,783. 17,458
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $17,458) 17,458
-------------
TOTAL INVESTMENTS -- 100.0%
(Cost $113,401,389) 103,772,946
Other Assets and Liabilities (net) -- (0.0%) (5,007)
-------------
TOTAL NET ASSETS -- 100.0% $ 103,767,939
=============
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $113,401,389) (Note 1) $103,772,946
Receivable for expenses reimbursed by Manager (Note 2) 9,240
------------
Total assets 103,782,186
------------
LIABILITIES:
Accrued expenses 14,247
------------
Total liabilities 14,247
------------
NET ASSETS $103,767,939
============
NET ASSETS CONSIST OF:
Paid-in capital $120,845,107
Accumulated undistributed net investment income 2,507,690
Accumulated net realized loss (9,956,415)
Net unrealized depreciation (9,628,443)
------------
$103,767,939
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $103,767,939
============
SHARES OUTSTANDING:
Class III 12,610,843
============
NET ASSET VALUE PER SHARE:
Class III $ 8.23
============
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends from investment company shares $ 3,694,067
Interest 1,994
------------
Total income 3,696,061
------------
EXPENSES:
Audit fees 16,770
Custodian and transfer agent fees 13,773
Registration fees 10,050
Legal fees 4,180
Trustees fees and related expenses (Note 2) 2,889
Miscellaneous 1,465
Fees reimbursed by Manager (Note 2) (45,936)
------------
3,191
------------
Net expenses 3,191
------------
Net investment income 3,692,870
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (2,078,540)
Realized gains distributions from investment company
shares 73,520
------------
Net realized loss on investments (2,005,020)
------------
Change in net unrealized appreciation (depreciation) on
investments (8,571,150)
------------
Net realized and unrealized loss (10,576,170)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (6,883,300)
============
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,692,870 $ 1,880,452
Net realized loss (2,005,020) (4,468,470)
Change in net unrealized appreciation (depreciation) (8,571,150) (1,997,367)
------------ -----------
Net decrease in net assets from operations (6,883,300) (4,585,385)
------------ -----------
Distributions to shareholders from:
Net investment income
Class III (3,111,365) (1,638,687)
------------ -----------
Total distributions from net investment income (3,111,365) (1,638,687)
------------ -----------
Net share transactions (Note 5):
Class III 48,050,692 (1,039,236)
------------ -----------
Increase (decrease) in net assets resulting from net
share transactions 48,050,692 (1,039,236)
------------ -----------
Total increase (decrease) in net assets 38,056,027 (7,263,308)
NET ASSETS:
Beginning of period 65,711,912 72,975,220
------------ -----------
End of period (including accumulated undistributed
net investment income of $2,507,690 and $1,874,990,
respectively) $103,767,939 $65,711,912
============ ===========
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------
2003 2002 2001 2000 1999
-------- ------- ------- ------- -------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.02 $ 9.67 $ 9.87 $ 8.28 $ 10.18
-------- ------- ------- ------- -------
Income from investment operations:
Net investment income(a) 0.36+ 0.25+ 0.16+ 0.22+ 0.19+
Net realized and unrealized gain
(loss) (0.83) (0.66) (0.06) 1.73 (1.01)
-------- ------- ------- ------- -------
Total from investment operations (0.47) (0.41) 0.10 1.95 (0.82)
-------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.32) (0.24) (0.30) (0.08) (0.50)
From net realized gains -- -- -- (0.28) (0.58)
-------- ------- ------- ------- -------
Total distributions (0.32) (0.24) (0.30) (0.36) (1.08)
-------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.23 $ 9.02 $ 9.67 $ 9.87 $ 8.28
======== ======= ======= ======= =======
TOTAL RETURN(b) (5.58)% (4.26)% 0.87% 23.58% (8.77)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $103,768 $65,712 $72,975 $76,047 $90,161
Net expenses to average daily net
assets(c) 0.00%(d) 0.00%(d) 0.00% 0.00% 0.00%
Net investment income to average
daily net assets(a) 4.11% 2.83% 1.62% 2.24% 2.06%
Portfolio turnover rate 19% 50% 14% 8% 36%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.05% 0.05% 0.05% 0.04% 0.05%
</Table>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
(b) The total returns would have been lower had cetain expenses not been
reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 2.
(d) Net expenses to average daily net assets was less than 0.01%.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 5
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Equity Allocation Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks total return greater than the return
of the MSCI All Country World Free ex-U.S. Index through investment to
varying extents in underlying funds of the Trust. The Fund will pursue its
objective by investing in Class III shares of international equity and
fixed income funds of the Trust. The financial statements of the
underlying funds should be read in conjunction with the Fund's financial
statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates fair
value. Securities for which quotations are not readily available or whose
values the manager has determined to be unreliable are valued at fair
value as determined in good faith by the Trustees or other persons acting
at their direction. A security's value may be deemed unreliable if, for
example, the manager becomes aware of information or events occurring
after the close of a foreign market that would materially affect that
security's value.
Securities held by the underlying funds may be valued by independent
pricing services which use prices provided by market makers or estimates
of market values obtained from yield data relating to investments or
securities with similar characteristics.
6
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Certain investments in securities held by the underlying funds were valued
on the basis of a price provided by a principal market maker. The prices
provided by the principal market makers may differ from the value that
would be realized if the securities were sold and the differences could be
material to the financial statements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid for ordinary income were $1,638,687
and $3,111,365, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $2,507,690 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to wash sale transactions.
7
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the Fund had capital loss carryforwards available to
offset future capital gains, if any, to the extent permitted by the Code,
of $180,039, $3,610,151 and $1,731,139 expiring in 2008, 2010 and 2011,
respectively. The Fund elected to defer to March 1, 2003 post-October
losses of $492,503.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus U.S. GAAP. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Net
Investment Income Realized Loss
----------------- -----------------
$51,195 $(51,195)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Non-cash dividends, if any, are recorded at fair market
value of the securities received. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur certain fees and expenses indirectly as
a shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in the underlying funds, some of which may invest in foreign securities.
There are certain additional risks involved in
8
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
investing in foreign securities that are not inherent in investments in
domestic securities. These risks may involve adverse political and
economic developments, including the possible imposition of capital
controls or other foreign governmental laws or restrictions. In addition,
the securities of some foreign companies and securities markets are less
liquid and at times more volatile than securities of comparable U.S.
companies and U.S. securities 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 securities markets of the U.S. and
developed foreign markets. Additionally, the investment risk associated
with an investment in the underlying funds may be more pronounced to the
extent that the underlying funds engage in derivative transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not directly charge an
advisory fee or shareholder service fee, but receives advisory and
shareholder service fees from the underlying funds in which the Fund
invests.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund for its total annual operating
expenses (excluding fees and expenses of the independent Trustees of the
Trust (including legal 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, interest expense and transfer
taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the
underlying funds. For the year ended February 28, 2003, shareholder
service fees incurred indirectly by the Fund were 0.15% of the Fund's
average daily net assets, indirect operating expenses (excluding
shareholder service fees and investment-related expenses) were 0.651% of
the Fund's average daily net assets, and indirect investment-related
expenses (including, but not limited to, interest expense, foreign audit
expense, and investment-related legal expense) were 0.007% of the Fund's
average daily net assets.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $2,271. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$66,054,117 and $17,351,351, respectively.
9
<Page>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$117,343,973 $1,575,093 $(15,146,120) $(13,571,027)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 24.8% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
----------------------- ------------------------
Shares Amount Shares Amount
Class III: ---------- ----------- ---------- ------------
Shares sold 5,969,247 $53,418,077 1,898,333 $ 17,425,743
Shares issued to shareholders
in reinvestment of distributions 314,940 2,836,415 179,905 1,624,546
Shares repurchased (959,472) (8,203,800) (2,340,194) (20,089,525)
---------- ----------- ---------- ------------
Net increase (decrease) 5,324,715 $48,050,692 (261,956) $ (1,039,236)
========== =========== ========== ============
</Table>
10
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTERNATIONAL EQUITY ALLOCATION FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Equity Allocation
Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
11
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
12
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
13
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) Held with and Length of During Past
and Age Fund Time Served Five Years
-------------------------- --------------------- ----------------- --------------------------------------------------
Scott Eston President and Chief President and Chief Financial Officer (1997 - present), Chief
c/o GMO Trust Executive Officer of Chief Executive Operating Officer (2000 - present) and Member,
40 Rowes Wharf the Trust Officer since Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 October 2002;
Age: 47 Vice President
from August
1998 - October
2002.
Susan Randall Harbert Chief Financial Chief Financial Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Officer and Treasurer Officer Since
40 Rowes Wharf of the Trust February 2000;
Boston, MA 02110 Treasurer since
Age: 45 February 1998.
Brent Arvidson Assistant Treasurer Since September Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust of the Trust 1998. Otterloo & Co. LLC.
40 Rowes Wharf
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Vice President General Counsel, Anti- Money Laundering Reporting
c/o GMO Trust Clerk of the Trust since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf 1997; Clerk since Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 March 2001; May
Age: 37 1999 - August
1999.
Elaine M. Hartnett, Esq. Vice President and Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust Secretary of the since August Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf Trust 1999; Secretary Associate/Junior Partner, Hale and Dorr LLP
Boston, MA 02110 since March 2001. (1991 - 1999).
Age: 58
Julie Perniola Vice President and Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust Anti- Money 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Laundering Compliance Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer
Age: 32
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
14
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of GMO International Growth Fund returned -11.4% for the
fiscal year ended February 28, 2003. This was +6.1% ahead of the MSCI EAFE
Index, which returned -17.5% over the same period, and +7.1% ahead of the
Salomon Smith Barney PMI Europac Growth Index, which returned -18.5%.
International stocks, like the U.S. market, suffered their third straight year
of negative returns in 2002. World equity markets were hit by the continued
global economic slowdown which came on top of valuation levels that remained
high by historical standards. With the addition of corporate governance scandals
and a perilous geopolitical situation, these factors combined to produce the
worst bear market since 1974.
In U.S. dollar terms, foreign stocks fared slightly better than domestic
equities. The MSCI EAFE Index outperformed the S&P 500 (which returned -22.7%)
solely due to weakness in the dollar. Foreign investors have been slowing their
inflows on declining confidence in the U.S. economy. With the continued large
U.S. trade deficit and lower U.S. interest rates, this seems to have put an end
to the long post 1995 dollar rally.
In local currency terms, European markets fell even further than the U.S.
Germany led the way down, with that country's DAX index falling a Nasdaq-like
- -44% in calendar year 2002. European and particularly growth stocks continued to
suffer from the unraveling of the "TMT" bubble in the technology, media, and
telecommunications sectors. Faith has all but vanished that third generation
mobile phone technology will deliver pots of gold to investors in these sectors.
The insurance sector suffered from a brutal combination of rising liabilities
for natural (and unnatural) disasters with deteriorating asset values as equity
holdings declined in value. There were questions about the viability of the
Eurozone as a single currency region and the appropriateness of its stability
pact, which limits government deficits. Adhering to this pact means, for
example, that Germany has neither fiscal policy nor monetary policy (now ceded
to the ECB) available to stimulate its economy.
In Japan, frustration continued to mount over the lack of reform. GDP growth is
stagnant and some economic indicators forecast a return to recession in 2003.
The solvency of the financial sector remains a concern, and several big banks
have been forced to raise additional capital at the expense of current
shareholders. Prime Minister Koizumi appeared to practice business as usual with
the appointment of an establishment candidate to head the central bank. And the
strength of the Yen against the dollar poses problems for exporters. Despite the
fact that the Nikkei 225 index hit a 20-year low, Japan was the best performing
major market. The MSCI Japan index fell "only" by 10%, as the decline was at
least somewhat anticipated in the prices.
Within this difficult environment, GMO's disciplined investment approach
produced strong relative performance. The focus on higher quality, reasonably
valued growth stocks helped ease the pain.
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
Generally, the most defensive sectors performed strongest in these times of
uncertainty, particularly within the growth universe. The portfolio's biggest
overweight was in utility stocks, which were the best performers.
Telecommunications stocks and consumer staples also outperformed the benchmark
(though all sectors fell in absolute terms). Energy stocks outperformed only
slightly despite a run up in oil prices to nearly $40/barrel. The outperformance
of the telecommunications sector came after 2 dismal years, as share prices have
fallen enough that the basic revenue from the traditional business is providing
some valuation support even as hopes of future growth dissipate. Technology
stocks, which were underweight in the portfolio, performed the worst of the
major sectors.
Country allocation was also a positive, as the portfolio benefited from
overweights in some of the smaller markets that enjoyed relatively strong
economic growth and stock market performance. Allocations to Canada and
Australia, where combined the portfolio has about 1/10 of the assets invested,
were the biggest contributors. Overweighting the Austrian market also helped
performance. These gains were partially offset by the allocation to the
disastrous German market. Currency allocation was also positive as the portfolio
benefited not just in absolute terms from not holding the U.S. dollar, but also
in relative terms from overweighting the euro and other continental currencies
at the expense of the pound and yen.
OUTLOOK
The silver lining to the pain of a tough bear market is that the bad news is now
out in the open. With lower stock prices, dividend yields are now meaningful and
there is a lower hurdle on earnings growth required to deliver capital gains.
Also, many CEOs have been replaced by a more prudent generation focused on
reducing debt and other more conservative means of enhancing shareholder value.
Lower valuations and continued dollar weakness position international equities
both to enjoy positive returns and to outperform the U.S. market. Growth stocks
in particular have returned to roughly their normal valuation level relative to
value stocks. While it is not at all impossible that they shoot through fair
value on the downside, the case for investing in international growth stocks is
much stronger than it was a year or two ago.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL GROWTH FUND CLASS III SHARES AND THE MSCI EAFE INDEX
AS OF FEBRUARY 28, 2003
GMO SALOMON
INTERNATIONAL MSCI SMITH BARNEY
GROWTH FUND EAFE INDEX PMI GROWTH EPAC INDEX
11/30/2001 $10,000 $10,000 $10,000
12/31/2001 $10,220 $10,059 $10,106
3/31/2002 $10,250 $10,111 $9,949
6/30/2002 $10,190 $9,896 $9,501
9/30/2002 $8,515 $7,943 $7,674
12/31/2002 $9,145 $8,456 $8,293
2/28/2003 $8,705 $7,917 $7,717
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 11/30/2001
Class III -11.40% -10.50%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
COMMON STOCKS -- 94.4%
AUSTRALIA -- 7.0%
65,925 Australia and New Zealand Banking Group Ltd 656,908
191,820 Australian Gas Light Co Ltd 1,259,513
348,322 AXA Asia Pacific Holdings Ltd 454,465
42,781 Commonwealth Bank of Australia 637,099
31,282 CSL Ltd 265,579
164,726 Foster's Group Ltd 431,844
58,044 Lend Lease Corp Ltd 306,801
321,360 Lihir Gold Ltd* 271,074
79,753 National Australia Bank Ltd 1,398,705
67,433 Orica Ltd 336,786
65,991 Patrick Corp Ltd 453,328
137,571 Qantas Airways Ltd 257,134
130,616 QBE Insurance Group Ltd 642,041
231,007 Santos Ltd 820,092
153,226 Stockland Trust Group Units 451,908
100,298 TABCORP Holdings Ltd 608,658
267,876 Telstra Corp Ltd 650,242
31,054 Wesfarmers Ltd 479,985
62,825 Westfield Holdings Ltd 478,473
67,062 Westpac Banking Corp 571,787
132,358 Woodside Petroleum Ltd 871,488
43,609 Woolworths Ltd 306,190
-------------
12,610,100
-------------
AUSTRIA -- 1.8%
2,645 Bau Holdings AG 195,278
2,241 Brau Union AG 161,828
12,241 Erste Bank Der Oesterreichischen Sparkassen AG 819,307
6,062 Mayr-Melnhof Karton AG (Bearer) 474,472
4,652 Oesterreichische Brau Beteiligungs AG 380,306
8,274 OMV AG 894,001
16,870 Wienerberger AG 287,465
-------------
3,212,657
-------------
BELGIUM -- 1.5%
18,804 Almanij NV 605,374
30,798 Dexia 281,154
1,438 Electrabel SA 361,121
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
BELGIUM -- CONTINUED
49,039 Fortis B 671,249
15,406 KBC Bancassurance Holding 465,593
12,245 UCB SA 279,922
-------------
2,664,413
-------------
CANADA -- 5.3%
37,800 Bank of Nova Scotia 1,335,864
33,100 Canadian Natural Resources 1,136,438
15,500 Cognos Inc* 375,795
28,500 EnCana Corp 930,105
19,600 Imperial Oil Ltd 623,600
24,900 Investors Group Inc 436,059
9,400 Loblaw Cos Ltd 353,336
19,800 MDS Inc 282,155
17,600 Molson Inc 369,295
25,400 Onex Corp 236,985
22,200 Petro-Canada 790,664
7,900 Precision Drilling Corp* 285,764
14,000 Royal Bank of Canada 545,979
12,800 Shell Canada Ltd 412,404
10,200 Sobeys Inc 272,630
17,900 Suncor Energy Inc 324,406
18,700 Talisman Energy Inc 743,080
-------------
9,454,559
-------------
DENMARK -- 0.2%
20,700 Danske Bank A/S 325,852
-------------
FINLAND -- 1.1%
110,700 Nokia Oyj 1,479,474
82,600 Sampo Oyj 516,352
-------------
1,995,826
-------------
FRANCE -- 2.9%
15,776 BNP Paribas 652,929
13,192 Carrefour SA 499,775
12,834 L'Oreal SA 828,566
7,495 Peugeot SA 331,203
10,450 Publicis Groupe 188,318
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FRANCE -- CONTINUED
37,176 Renault SA 1,571,478
5,634 Sanofi-Synthelabo SA 301,309
10,112 Societe Generale Class A 542,756
2,659 Total Fina Elf SA 351,356
-------------
5,267,690
-------------
GERMANY -- 6.4%
5,700 Adidas-Salomon AG 454,616
4,900 Allianz AG (Registered) 351,201
5,800 Altana AG 237,547
55,400 BASF AG 2,012,231
14,000 Bayerische Motoren Werke AG 391,565
12,900 DaimlerChrysler AG (Registered) 393,472
10,300 Deutsche Bank AG 419,631
68,500 E. On AG 2,912,566
14,000 RWE AG 311,592
9,900 SAP AG 823,741
7,300 Schering AG 270,657
55,800 Siemens AG (Registered) 2,225,226
33,900 T-Online International* 206,802
9,800 Volkswagen AG 392,395
-------------
11,403,242
-------------
GREECE -- 0.1%
22,890 National Bank of Greece SA 271,379
-------------
HONG KONG -- 2.3%
320,400 Bank of East Asia 597,738
155,000 CLP Holdings Ltd 635,971
143,000 Esprit Holdings Ltd 278,699
26,400 Hang Seng Bank Ltd 288,572
312,500 Hong Kong Electric Holdings Ltd 1,192,045
56,000 Hutchison Whampoa Ltd 336,039
45,600 KMB Holdings Ltd 191,776
354,000 Li & Fung Ltd 356,310
142,000 YUE Yuen Industrial Holdings* 264,005
-------------
4,141,155
-------------
</Table>
See accompanying notes to the financial statements.
3
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
IRELAND -- 2.7%
142,724 Allied Irish Banks Plc 1,810,555
241,562 Bank of Ireland 2,660,833
42,766 Ryanair Holdings Plc* 272,872
-------------
4,744,260
-------------
ITALY -- 4.1%
630,338 Banca Intesa SPA 1,460,663
254,400 Banca Intesa SPA 424,998
175,770 ENI-Ente Nazionale Idrocarburi SPA 2,608,656
34,325 Mediaset Spa 249,350
428,805 Olivetti and Co SPA* 413,176
493,292 Telecom Italia Mobile SPA 2,222,381
-------------
7,379,224
-------------
JAPAN -- 18.4%
37,000 Alps Electric Co Ltd 451,918
26,000 Banyu Pharmaceutical Co Ltd 307,008
67,000 Bridgestone Corp 756,566
11,000 Canon Inc 397,293
26,700 Chubu Electric Power Co Inc 490,074
35,000 Daiichi Pharmaceuticals Co Ltd 468,936
12,700 Daito Trust Construction Co Ltd 247,608
25,000 Denso Corp 374,075
127 East Japan Railway Co 585,451
22,900 FamilyMart 371,901
14,000 Fanuc Ltd 609,854
97,000 Fuji Heavy Industries Ltd 374,134
19,000 Fuji Photo Film Co Ltd 602,664
115,000 Furukawa Electric Co Ltd 263,608
13,000 Honda Motor Co Ltd 475,026
57 Japan Telecom Co Ltd 169,228
42 Japan Tobacco Inc 250,455
18,000 Kao Corp 379,869
245 KDDI Corp 768,831
3,500 Keyence Corp 568,704
49,900 Konami Corp 1,027,756
140,000 Mitsubishi Electric Corp* 374,202
5,600 Nidec Corp 308,835
31,000 Nikon Corp* 239,924
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
JAPAN -- CONTINUED
116,000 Nippon Express Co Ltd 458,211
418 Nippon Telegraph & Telephone Corp 1,513,250
14,800 Nissin Food Products 296,688
14,000 Nitto Denko Corp 393,149
53,000 Nomura Holdings Inc 623,134
375 NTT Docomo Inc* 707,338
26,000 Ono Pharmaceutical Co Ltd 815,902
190,000 Osaka Gas Co Ltd 483,739
10,300 Rohm Co Ltd 1,180,503
57,000 Sankyo Co Ltd 760,804
5,700 SMC Corp 436,329
53,500 Sony Corp 2,031,846
16,000 Stanley Electric Co Ltd 197,589
32,000 Suzuki Motor Corp 365,405
41,000 Taisho Pharmaceutical Co Ltd 599,264
74,100 Takeda Chemical Industries Ltd 2,732,721
10,840 Takefuji Corp 537,301
8,600 TDK Corp 365,896
33,800 Terumo Corp 523,761
48,500 Tohoku Electric Power Co Inc 702,732
13,900 Tokyo Electric Power 267,477
17,900 Tokyo Electron Ltd 816,079
73,000 Tokyu Corp 238,960
124,500 Toyota Motor Corp 2,922,288
16,800 Uni-Charm Corp 638,038
19 Yahoo Japan Corp* 327,849
47,000 Yamaha Motor Co 368,526
28,000 Yamanouchi Pharmaceutical Co Ltd 762,614
-------------
32,931,313
-------------
NETHERLANDS -- 2.3%
23,706 ABN Amro Holdings NV 376,867
14,936 DSM NV 548,138
108,091 ING Groep NV 1,462,081
28,723 Koninklijke Ahold NV 108,352
44,113 Koninklijke Philips Electronics NV 735,996
35,423 Numico NV 187,077
15,979 Royal Dutch Petroleum 632,915
-------------
4,051,426
-------------
</Table>
See accompanying notes to the financial statements.
5
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
NEW ZEALAND -- 0.7%
520,277 Telecom Corp of New Zealand 1,219,158
-------------
NORWAY -- 0.4%
53,600 Statoil ASA 411,442
52,500 Tandberg ASA* 249,126
-------------
660,568
-------------
PORTUGAL -- 0.2%
55,628 Portugal Telecom SA 356,737
-------------
SINGAPORE -- 2.7%
493,000 Chartered Semiconductor Manufacturing Ltd* 201,265
71,600 Creative Technology Ltd 452,865
127,000 DBS Group Holdings Ltd 701,032
3,311 Haw Par Corp Ltd 6,587
189,000 Keppel Corp Ltd 449,909
51,000 Oversea-Chinese Banking Corp 258,057
114,000 Singapore Airlines Ltd 619,441
51,000 Singapore Press Holdings Ltd 533,709
715,000 Singapore Telecom 534,456
81,000 United Overseas Bank 484,375
70,000 Venture Corp Ltd 539,344
-------------
4,781,040
-------------
SPAIN -- 5.6%
8,560 ACS Actividades Cons y Serv 295,415
38,767 Altadis SA 918,810
17,353 CIA ESP Petroleos 355,358
108,276 Endesa SA 1,295,369
42,589 Gas Natural SDG SA 835,424
25,550 Metrovacesa SA 695,329
311,402 Repsol YPF SA 4,363,178
29,287 Union Fenosa SA 370,264
85,489 Vallehermoso SA 837,553
-------------
9,966,700
-------------
SWEDEN -- 2.1%
72,350 Hennes & Mauritz AB 1,526,246
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
SWEDEN -- CONTINUED
125,500 Swedish Match AB 943,942
32,500 Tele2 AB Class B* 937,684
91,216 TeliaSonera AB 306,590
-------------
3,714,462
-------------
SWITZERLAND -- 5.9%
8,970 Adecco SA 270,555
2,215 Givaudan 908,215
11,771 Logitech International SA* 394,537
1,411 Nestle SA 284,073
44,920 Novartis AG 1,649,717
11,112 Roche Holding AG (Bearer) 1,069,407
64,178 Roche Holding AG (Genusschein) 3,854,940
5,830 Swiss Reinsurance Co 313,857
5,545 Swisscom AG 1,647,961
5,460 UBS AG* 229,111
-------------
10,622,373
-------------
UNITED KINGDOM -- 20.7%
167,668 Abbey National Plc 1,029,966
37,347 Alliance & Leicester Plc 455,896
47,666 AstraZeneca Plc 1,537,612
157,686 Barclays Plc 911,522
43,272 Barratt Development 279,447
103,262 BG Group Plc 398,081
213,055 British American Tobacco 2,080,614
109,679 BT Group Plc 282,455
40,461 Cadbury Schweppes Plc 204,574
58,011 Cattle's Plc 243,509
254,048 Centrica Plc 564,213
31,505 Daily Mail & General Trust Plc 240,178
21,921 Diageo Plc 217,525
190,355 Dixons Group Plc (New Shares) 275,842
36,583 Exel Plc 324,699
89,718 Gallaher Group Plc 880,391
19,943 GlaxoSmithKline Plc 350,560
56,283 GUS Plc 449,906
44,301 HBOS Plc 461,934
173,380 Imperial Tobacco Group Plc 2,704,965
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
350,727 Kingfisher Plc 1,263,684
150,743 Lloyds TSB Group Plc 840,521
315,608 Morrison Supermarkets 790,411
795,671 National Grid Transco Plc 5,113,306
87,944 Next Plc 1,108,165
79,979 Northern Rock Plc 849,071
43,637 Pearson Plc 329,917
47,599 Provident Financial Plc 430,721
61,688 Royal Bank of Scotland Group 1,411,804
106,779 Scottish & Southern Energy Plc 1,059,582
97,589 Scottish Power Plc 560,282
108,383 Smiths Group Plc 1,031,113
257,775 Tesco 657,755
137,679 Tomkins Plc 407,693
23,332 Travis Perkins Plc 353,353
38,832 Unilever Plc 346,190
3,059,410 Vodafone Group Plc 5,481,472
92,454 Wimpey (George) 394,642
40,922 Wolseley 322,926
69,599 WPP Group Plc 428,361
-------------
37,074,858
-------------
TOTAL COMMON STOCKS (COST $179,953,384) 168,848,992
-------------
PREFERRED STOCKS -- 0.6%
GERMANY -- 0.6%
1,400 Porsche AG (Non Voting) 0.83% 452,676
21,800 Volkswagen AG 5.30% 639,092
-------------
1,091,768
-------------
TOTAL PREFERRED STOCKS (COST $1,272,363) 1,091,768
-------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------- ------------------------------------------------------- -------------
SHORT-TERM INVESTMENTS -- 4.0%
CASH EQUIVALENTS -- 3.0%
$ 5,300,000 Bank of Scotland Time Deposit, 1.31%, due 3/03/03 5,300,000
-------------
U.S. GOVERNMENT -- 1.0%
1,800,000 U.S. Treasury Bill, 1.17%, due 4/24/03(a) 1,796,867
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $7,096,867) 7,096,867
-------------
TOTAL INVESTMENTS -- 99.0%
(Cost $188,322,614) 177,037,627
Other Assets and Liabilities (net) -- 1.0% 1,766,412
-------------
TOTAL NET ASSETS -- 100.0% $ 178,804,039
=============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
(a) All or a portion of this security is held as collateral for open futures
contracts (Note 6).
See accompanying notes to the financial statements. 9
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Financials 20.4%
Consumer Discretionary 14.3
Utilities 10.8
Health Care 10.1
Telecommunication Services 10.1
Energy 10.0
Consumer Staples 9.3
Industrials 6.4
Information Technology 5.7
Materials 2.9
-----
100.0%
=====
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $188,322,614) (Note 1) $177,037,627
Cash 58,539
Foreign currency, at value (cost $154,763) (Note 1) 156,788
Receivable for Fund shares sold 50,000
Dividends and interest receivable 215,224
Foreign taxes receivable 114,457
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 5,020,982
Receivable for expenses reimbursed by Manager (Note 2) 35,924
------------
Total assets 182,689,541
------------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 74,487
Shareholder service fee 20,692
Payable for open forward foreign currency contracts
(Notes 1 and 6) 3,677,815
Payable for variation margin on open futures contracts
(Notes 1 and 6) 35,572
Accrued expenses 76,936
------------
Total liabilities 3,885,502
------------
NET ASSETS $178,804,039
============
NET ASSETS CONSIST OF:
Paid-in capital $203,828,410
Distributions in excess of net investment income (65,113)
Accumulated net realized loss (14,652,240)
Net unrealized depreciation (10,307,018)
------------
$178,804,039
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $178,804,039
============
SHARES OUTSTANDING:
Class III 10,621,652
============
NET ASSET VALUE PER SHARE:
Class III $ 16.83
============
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $349,892) $ 2,891,078
Interest 146,243
------------
Total income 3,037,321
------------
EXPENSES:
Management fee (Note 2) 813,201
Custodian fees 257,774
Audit fees 31,090
Transfer agent fees 27,646
Registration fees 7,082
Legal fees 5,757
Trustees fees and related expenses (Note 2) 3,639
Miscellaneous 3,176
Fees reimbursed by Manager (Note 2) (332,051)
------------
817,314
Shareholder service fee (Note 2)
Class III 225,890
------------
Net expenses 1,043,204
------------
Net investment income 1,994,117
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (13,690,497)
Closed futures contracts (623,360)
Foreign currency, forward contracts and foreign
currency related transactions 3,147,019
------------
Net realized loss (11,166,838)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (8,209,800)
Open futures contracts (366,298)
Foreign currency, forward contracts and foreign
currency related transactions 1,287,819
------------
Net unrealized loss (7,288,279)
------------
Net realized and unrealized loss (18,455,117)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(16,461,000)
============
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM NOVEMBER 30, 2001
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 28, 2003 THROUGH FEBRUARY 28, 2002
----------------- -----------------------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,994,117 $ 52,612
Net realized loss (11,166,838) (332,890)
Change in net unrealized appreciation (depreciation) (7,288,279) (1,056,739)
------------ -----------
Net decrease in net assets from operations (16,461,000) (1,337,017)
------------ -----------
Distributions to shareholders from:
Net investment income
Class III (5,264,354) --
------------ -----------
Total distributions from net investment income (5,264,354) --
------------ -----------
Net share transactions (Note 5):
Class III 115,645,427 86,220,983
------------ -----------
Increase in net assets resulting from net share
transactions 115,645,427 86,220,983
------------ -----------
Total increase in net assets 93,920,073 84,883,966
NET ASSETS:
Beginning of period 84,883,966 --
------------ -----------
End of period (including distributions in excess of
net investment income of $65,113 and accumulated
undistributed net investment income of $58,107,
respectively) $178,804,039 $84,883,966
============ ===========
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28,
------------------------
2003 2002(1)
---------- ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 19.65 $ 20.00
--------- --------
Income from investment operations:
Net investment income(b) 0.25 0.01
Net realized and unrealized loss (2.46) (0.36)
--------- --------
Total from investment operations (2.21) (0.35)
--------- --------
Less distributions to shareholders:
From net investment income (0.61) --
--------- --------
Total distributions (0.61) --
--------- --------
NET ASSET VALUE, END OF PERIOD $ 16.83 $ 19.65
========= ========
TOTAL RETURN(a) (11.40)% (1.75)%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 178,804 $ 84,884
Net expenses to average daily net assets 0.69% 0.69%*
Net investment income to average daily net assets 1.32% 0.36%*
Portfolio turnover rate 78% 15%
Fees and expenses reimbursed by the Manager to
average daily net assets: 0.22% 0.65%*
</Table>
(1) Period from November 30, 2001 (commencement of operations) through
February 28, 2002.
* Annualized.
** Not Annualized.
(a) The total return would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
14 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Growth Fund (the "Fund"), which commenced operations on
November 30, 2001, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund seeks a high total return through investing primarily in equity
securities of non-U.S. issuers. The Fund's benchmark is the Salomon Smith
Barney PMI Europac Growth Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America and which are consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial
statements in accordance with accounting principles generally accepted in
the United States of America requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign
15
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. The value of the currencies the Fund has
committed to buy or sell is shown under Note 6 and represents the currency
exposure the Fund has acquired or hedged through currency contracts as of
February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business
16
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from the changes in
the value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
17
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003, there were no open swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund had no securities on loan.
18
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distrbutions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the year ended February 28, 2003, the tax basis of
distributions paid was as follows: ordinary income -- $5,264,354.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $648,975 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to foreign currency transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset any future capital gains, if any, to the extent permitted by the
Code of $2,281,901 expiring in 2011. The Fund has elected to defer to
March 1, 2003 post-October capital losses of $11,113,912.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of
19
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under U.S. federal
tax rules versus U.S. GAAP. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Distributions in
Excess of Net Accumulated Net
Investment Income Realized Loss
----------------- ---------------
$3,147,017 $(3,147,017)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments of domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder
20
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets at the annual rate
of .15% for Class III shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, a significant portion of the Fund's shares were
held by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $2,553. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003 aggregated
$224,634,409 and $107,875,263 respectively.
At February 28, 2003 the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$189,584,421 $4,703,502 $(17,250,296) $(12,546,794)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 37.4% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the
outstanding shares of the Fund. One of the shareholders is another fund of
GMO Trust. Investment activities of these shareholders may have a material
effect on the Fund.
21
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Period from
November 30, 2001
(commencement of
Year Ended operations) through
February 28, 2003 February 28, 2002*
------------------------ ----------------------
Shares Amount Shares Amount
Class III: ---------- ------------ --------- -----------
Shares sold 9,766,373 $179,023,615 4,406,481 $87,915,983
Shares issued to shareholders in reinvestment
of distributions 196,825 3,476,163 -- --
Shares repurchased (3,661,941) (66,854,351) (86,086) (1,695,000)
---------- ------------ --------- -----------
Net increase 6,301,257 $115,645,427 4,320,395 $86,220,983
========== ============ ========= ===========
</Table>
* The Fund was formed with an initial tax-free contribution of securities
in-kind, which had a market value of $41,670,412, including unrealized
loss of $1,962,000, on the date of contribution.
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Buys
4/28/03 AUD 1,777,073 $ 1,072,663 $ 72,663
4/28/03 CAD 3,131,321 2,096,089 96,089
3/28/03 CHF 4,868,537 3,592,129 305,840
3/28/03 DKK 46,072,939 6,677,703 625,671
3/28/03 EUR 28,286,969 30,459,581 2,474,379
3/28/03 GBP 5,442,557 8,558,835 31,694
</Table>
22
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
4/28/03 HKD 7,021,428 $ 900,141 $ 484
4/28/03 JPY 1,218,587,600 10,328,969 277,397
3/28/03 NOK 48,870,535 6,800,934 368,080
4/28/03 NZD 2,825,602 1,561,990 176,176
3/28/03 SEK 60,987,650 7,155,444 569,679
4/28/03 SGD 1,953,010 1,123,921 22,830
-----------
$ 5,020,982
===========
Sales
4/28/03 AUD 6,449,829 $ 3,893,198 $ (377,654)
4/28/03 CAD 13,536,550 9,061,292 (440,167)
3/28/03 CHF 599,040 441,987 (38,539)
3/28/03 EUR 18,800,073 20,244,033 (1,519,884)
3/28/03 GBP 4,673,988 7,350,203 (57,507)
4/28/03 HKD 25,351,810 3,250,079 (3,691)
4/28/03 JPY 2,633,036,200 22,318,090 (880,624)
3/28/03 NOK 10,492,130 1,460,109 (43,226)
4/28/03 NZD 1,370,716 757,730 (108,569)
3/28/03 SEK 24,404,340 2,863,266 (197,748)
4/28/03 SGD 866,150 498,453 (10,206)
-----------
$(3,677,815)
===========
</Table>
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krona
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
23
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Appreciation
Number of Contracts Type Expiration Date Contract Value (Depreciation)
------------------- --------------------------- --------------- -------------- --------------
Buys
4 DAX March 2003 $ 273,923 $ (20,549)
20 MIB30 March 2003 2,528,088 (50,551)
100 MSCI March 2003 1,793,980 (34,779)
2 S&P Toronto 60 March 2003 99,852 (1,793)
87 SPI 200 March 2003 3,687,797 (264,370)
---------
$(372,042)
=========
Sales
32 FTSE 100 March 2003 $1,830,140 $ (6,556)
163 OMX March 2003 903,214 (2,722)
---------
$ (9,278)
=========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
24
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTERNATIONAL GROWTH FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Growth Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
25
<Page>
GMO INTERNATIONAL GROWTH FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$349,892 and recognized foreign source income of $3,240,970.
26
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------- --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
27
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Five Overseen Directorships
and Age Held with Fund Time Served Years by Trustee Held by Trustee
------------------------- --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
28
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------------- --------------- ----------------------------------- -----------------------------------
Scott Eston President and President and Chief Executive Chief Financial Officer (1997 -
c/o GMO Trust Chief Executive Officer since October 2002; Vice present), Chief Operating Officer
40 Rowes Wharf Officer of the President from August 1998 - (2000 - present) and Member,
Boston, MA 02110 Trust October 2002. Grantham, Mayo, Van Otterloo & Co.
Age: 47 LLC.
Susan Randall Harbert Chief Financial Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Officer and February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf Treasurer of February 1998.
Boston, MA 02110 the Trust
Age: 45
Brent Arvidson Assistant Since September 1998. Senior Fund Administrator,
c/o GMO Trust Treasurer of Grantham, Mayo, Van Otterloo & Co.
40 Rowes Wharf the Trust LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President since February 1997; General Counsel, Anti- Money
c/o GMO Trust and Clerk of Clerk since March 2001; May 1999 - Laundering Reporting Officer (July
40 Rowes Wharf the Trust August 1999. 2002 - February 2003) and Member,
Boston, MA 02110 Grantham, Mayo, Van Otterloo & Co.
Age: 37 LLC.
Elaine M. Hartnett, Esq. Vice President Vice President since August 1999; Associate General Counsel,
c/o GMO Trust and Secretary Secretary since March 2001. Grantham, Mayo, Van Otterloo & Co.
40 Rowes Wharf of the Trust LLC (June 1999 - present);
Boston, MA 02110 Associate/ Junior Partner, Hale and
Age: 58 Dorr LLP (1991 - 1999).
Julie Perniola Vice President Since February 2003. Anti-Money Laundering Reporting
c/o GMO Trust and Anti- Money Officer (February 2003 - present)
40 Rowes Wharf Laundering and Compliance Officer, Grantham,
Boston, MA 02110 Compliance Mayo, Van Otterloo & Co. LLC.
Age: 32 Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
29
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
Class III shares of GMO International Intrinsic Value Fund returned -4.1% for
the fiscal year ended February 28, 2003. This is +13.4% ahead of the MSCI EAFE
Index, which returned -17.5% over the same period, and +11.3% ahead of the
Salomon Smith Barney PMI Europac Value Index, which returned -15.4%.
International stocks, like the U.S. market, suffered their third straight year
of negative returns in 2002. World equity markets were hit by the continued
global economic slowdown which came on top of valuation levels that remained
high by historical standards. With the addition of corporate governance scandals
and a perilous geopolitical situation, this combined to produce the worst bear
market since 1974.
In U.S. dollar terms, foreign stocks fared slightly better than domestic
equities. The EAFE Index outperformed the S&P 500 (which returned -22.7%) solely
due to weakness in the dollar. Foreign investors have been slowing their inflows
on declining confidence in the U.S. economy. With the continued large U.S. trade
deficit and lower U.S. interest rates, this seems to have put an end to the long
post 1995 dollar rally.
In local currency terms, European markets fell even further than the U.S.
Germany led the way down, with that country's DAX index falling a Nasdaq-like
- -44% in calendar year 2002. Europe continued to suffer from the unraveling of
the "TMT" bubble in the technology, media, and telecommunications sectors. Faith
has all but vanished that third generation mobile phone technology will deliver
pots of gold to investors in those sectors. The insurance industry suffered from
a brutal combination of rising liabilities for natural (and unnatural) disasters
with deteriorating asset values as equity holdings declined in value. There were
questions about the viability of the Eurozone as a single currency region and
the appropriateness of its stability pact, which limits government deficits.
Adhering to this pact means, for example, that Germany has neither fiscal policy
nor monetary policy (now ceded to the ECB) available to stimulate its economy.
In Japan, frustration continued to mount over the lack of reform. GDP growth is
stagnant and some economic indicators forecast a return to recession in 2003.
The solvency of the financial sector remains a concern, and several big banks
have been forced to raise additional capital at the expense of current
shareholders. Prime Minister Koizumi appeared to practice business as usual with
the appointment of an establishment candidate to head the central bank.
Additionally, the strength of the yen against the dollar poses problems for
exporters. Despite the fact that the Nikkei 225 index hit a 20-year low, Japan
was the best performing major market. The MSCI Japan index fell "only" by 10%,
as the decline was at least somewhat anticipated in the prices.
Within this difficult environment, GMO's disciplined valuation based investment
approach produced strong relative performance. GMO's stock selection process,
which involves the application of quantitative techniques to forecast returns
based upon an evaluation of stock valuation, dividend yield, price momentum, and
other factors, performed well in the fiscal year.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
The portfolio's sector allocation contributed about 2.0% of value added against
MSCI EAFE and +1.0% against the Fund's benchmark. It was generally the most
defensive sectors that performed strongest in these times of uncertainty.
Utility stocks led the way and were the portfolio's largest overweight, boosting
relative performance. Telecommunications stocks and consumer staples also
outperformed the benchmark (all sectors fell in absolute terms). Energy stocks
outperformed only slightly despite a run up in oil prices to nearly $40/barrel.
The outperformance of the telecommunications sector came after two dismal years,
as share prices have fallen enough that the basic revenue from the traditional
business is providing some valuation support even as hopes of future growth
dissipate. Technology stocks where the portfolio remains underweight were the
worst performers of the major sectors.
Country allocation was also a positive, as the portfolio benefited from
overweights in some of the smaller markets that performed relatively well.
Austria was the most notable of these as overweighting that market, which
managed positive absolute return, added close to a percentage point of relative
return. Allocations to Canada and the Pacific region outside Japan were also
positive as those regions enjoyed relatively strong growth. Currency allocation
was also positive as the portfolio benefited not just in absolute terms from not
holding the U.S. dollar, but also in relative terms from overweighting the euro
and other continental currencies at the expense of the pound and yen.
OUTLOOK
The silver lining to the pain of a tough bear market is that the bad news is now
out in the open. With lower stock prices, dividend yields are now meaningful and
there is a lower hurdle on earnings growth required to deliver capital gains.
Also, many CEOs have been replaced by a more prudent generation focused on
reducing debt and other more conservative means of enhancing shareholder value.
Lower valuations and continued dollar weakness position international equities
both to enjoy positive returns and to outperform the U.S. market. This one note
of caution for this strategy is that the significant outperformance of value
stocks (or rather their relatively moderate declines) versus growth stocks now
leaves value stocks at roughly fair value versus growth. Hence while the outlook
for international stocks in general is improved, the outlook for this strategy's
outperformance within that universe has moderated.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL INTRINSIC VALUE FUND CLASS III SHARES AND THE MSCI EAFE INDEX
AS OF FEBRUARY 28, 2003
GMO INTERNATIONAL
INTRINSIC VALUE FUND MSCI EAFE INDEX
2/28/93 $10,000 $10,000
3/31/93 $10,767 $10,872
6/30/93 $11,371 $11,965
9/30/93 $12,312 $12,759
12/31/93 $13,346 $12,869
3/31/94 $13,857 $13,319
6/30/94 $14,102 $13,999
9/30/94 $14,176 $14,013
12/31/94 $13,900 $13,870
3/31/95 $13,870 $14,128
6/30/95 $14,478 $14,231
9/30/95 $14,827 $14,824
12/31/95 $15,334 $15,424
3/31/96 $15,676 $15,870
6/30/96 $15,966 $16,121
9/30/96 $15,948 $16,101
12/31/96 $16,798 $16,357
3/31/97 $16,546 $16,101
6/30/97 $17,813 $18,190
9/30/97 $18,236 $18,062
12/31/97 $16,953 $16,648
3/31/98 $19,784 $19,097
6/30/98 $19,704 $19,300
9/30/98 $16,722 $16,556
12/31/98 $19,259 $19,977
3/31/99 $18,969 $20,255
6/30/99 $20,497 $20,770
9/30/99 $21,286 $21,681
12/31/99 $22,074 $25,364
3/31/2000 $20,863 $25,337
6/30/2000 $21,655 $24,333
9/30/2000 $20,640 $22,370
12/31/2000 $21,766 $21,770
3/31/2001 $19,885 $18,786
6/30/2001 $20,600 $18,590
9/30/2001 $18,493 $15,987
12/31/2001 $19,130 $17,102
3/31/2002 $20,158 $17,189
6/30/2002 $21,371 $16,825
9/30/2002 $18,197 $13,505
12/31/2002 $19,016 $14,376
2/28/2003 $18,356 $13,460
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL INTRINSIC VALUE FUND CLASS III SHARES AND THE MSCI EAFE INDEX
AS OF FEBRUARY 28, 2003
SALOMON SMITH BARNEY
PMI VALUE EPAC INDEX
2/28/93 $10,000
3/31/93 $11,142
6/30/93 $12,093
9/30/93 $12,968
12/31/93 $13,115
3/31/94 $13,695
6/30/94 $14,544
9/30/94 $14,591
12/31/94 $14,450
3/31/95 $14,722
6/30/95 $14,857
9/30/95 $15,543
12/31/95 $16,254
3/31/96 $16,660
6/30/96 $17,080
9/30/96 $17,228
12/31/96 $17,654
3/31/97 $17,306
6/30/97 $19,669
9/30/97 $19,732
12/31/97 $18,174
3/31/98 $21,068
6/30/98 $21,369
9/30/98 $17,834
12/31/98 $21,236
3/31/99 $21,913
6/30/99 $22,724
9/30/99 $23,822
12/31/99 $26,194
3/31/2000 $25,341
6/30/2000 $25,572
9/30/2000 $24,238
12/31/2000 $24,422
3/31/2001 $21,679
6/30/2001 $22,038
9/30/2001 $19,077
12/31/2001 $19,992
3/31/2002 $20,413
6/30/2002 $20,478
9/30/2002 $16,546
12/31/2002 $17,378
2/28/2003 $16,347
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 10 YEAR 9/29/96
Class II -4.11% -0.29% n/a 2.19%
Class III -4.05% -0.21% 6.26% n/a
1/9/98
Class IV -4.02% -0.14% n/a 2.18%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Performance for Classes II and IV may vary due to
different shareholder servicing fees. Past performance is not indicative of
future performance. Information is unaudited.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
COMMON STOCKS -- 92.8%
AUSTRALIA -- 3.7%
803,581 AMP Diversified Property Trust 1,263,022
497,077 Australia and New Zealand Banking Group Ltd 4,953,112
417,234 Boral Ltd 1,124,201
450,834 Caltex Australia Ltd* 547,177
422,054 CSR Ltd 1,664,803
1,655,325 General Property Trust Units 2,782,559
1,954,422 Goodman Fielder Ltd 2,099,293
190,981 Lion Nathan Ltd 606,140
916,718 National Australia Bank Ltd 16,077,368
1,200 National Australia Bank Ltd ADR 106,188
307,848 Orica Ltd 1,537,509
695,087 Santos Ltd 2,467,609
72,241 St. George Bank Ltd 771,574
915,173 Telstra Corp Ltd 2,221,491
1,612,968 Westfield Trust Units 3,171,408
144,243 Westpac Banking Corp 1,229,851
493,257 Woodside Petroleum Ltd 3,247,763
--------------
45,871,068
--------------
AUSTRIA -- 4.5%
140,909 Austrian Airlines* 971,979
17,385 Bau Holdings AG 1,283,522
136,603 Boehler Uddeholm (Bearer) 6,813,837
74,192 Brau Union AG 5,357,597
101,309 Erste Bank Der Oesterreichischen Sparkassen AG 6,780,751
86,357 Flughafen Wien AG 3,127,339
9,535 Generali Holding Vienna AG 1,603,184
51,744 Mayr-Melnhof Karton AG (Bearer) 4,049,994
41,457 Oesterreichische Brau Beteiligungs AG 3,389,157
125,062 OMV AG 13,512,880
176,031 RHI AG* 1,555,755
81,913 VA Technologie AG (Bearer) 1,280,145
202,280 Voestalpine AG 4,829,085
117,486 Wienerberger AG 2,001,964
--------------
56,557,189
--------------
BELGIUM -- 2.7%
95,681 AGFA-Gevaert NV 2,061,468
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
BELGIUM -- CONTINUED
153,251 Almanij NV 4,933,745
23,648 Bekaert SA 834,726
50,354 Delhaize Group 767,400
32,885 Electrabel SA 8,258,325
395,867 Fortis B 5,418,651
290,195 KBC Bancassurance Holding 8,770,132
37,080 Solvay Et Cie 2,198,065
--------------
33,242,512
--------------
CANADA -- 2.8%
123,100 Bank of Montreal 3,470,399
275,500 Bank of Nova Scotia 9,736,257
44,000 Canadian Natural Resources 1,510,673
39,300 CP Ships Ltd 489,338
291,300 EnCana Corp 9,506,649
27,400 Magna International Inc 1,520,996
144,900 National Bank of Canada 3,160,995
97,000 Quebecor Inc* 1,208,431
100,100 Royal Bank of Canada 3,903,752
26,500 Shell Canada Ltd 853,806
--------------
35,361,296
--------------
FINLAND -- 1.2%
53,700 Finnair Class A 211,254
656,400 Fortum Oyj 4,315,554
132,800 Kesko Oyj 1,477,121
78,554 Rautaruukki Oyj 300,563
585,800 Sampo Oyj 3,661,976
38,100 Stockmann AB Class A 562,579
22,100 Stockmann AB Class B 327,516
162,500 Stora Enso Oyj 1,592,045
65,100 UPM-Kymmene Oyj 1,866,383
23,400 Wartsila Oyj ABP 315,257
--------------
14,630,248
--------------
FRANCE -- 4.6%
38,037 Assurances Generales de France 1,047,045
428,453 BNP Paribas 17,732,607
33,896 Bongrain SA 1,369,992
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
FRANCE -- CONTINUED
27,858 Carrefour SA 1,055,391
188,174 Cie de Saint-Gobain 5,684,875
78,334 Credit Agricole SA 1,169,333
19,143 Danone 2,265,429
62,846 Eurazeo 3,298,715
187,768 France Telecom SA 4,160,858
5,470 Fromageries Bel Vache qui Rit 672,095
6,821 Imerys SA 726,345
85,019 Renault SA 3,593,865
278,267 Societe Generale Class A 14,935,825
--------------
57,712,375
--------------
GERMANY -- 6.2%
38,826 AGIV Real Estate AG* 79,509
167,700 Bankgesellschaft Berlin AG* 258,468
199,800 BASF AG 7,257,108
1,300 BASF AG ADR 47,554
157,880 Bewag AG Class A 2,263,169
142,400 Commerzbank AG 897,851
150,256 Continental AG* 2,356,313
732,650 DaimlerChrysler AG (Registered) 22,347,100
38,530 Degussa AG 984,205
308,800 Deutsche Telekom 3,547,911
42,800 Douglas Holdings AG 636,592
478,940 E. On AG 20,364,150
5,300 Gehe AG 198,789
59,297 HeidelbergCement AG 1,412,418
41,650 MAN AG 601,531
84,600 Schwarz Pharma AG 3,122,979
49,723 Sudzucker AG 782,435
417,908 Thyssen Krupp AG 3,981,724
168,100 Volkswagen AG 6,730,769
--------------
77,870,575
--------------
HONG KONG -- 2.7%
539,000 Cheung Kong Infrastructure Holdings Ltd 977,914
1,386,598 CLP Holdings Ltd 5,689,264
623,409 Great Eagle Holdings Ltd 361,699
170,000 Guoco Group 983,062
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
HONG KONG -- CONTINUED
2,153,511 Hang Lung Development Co Ltd 1,822,412
542,815 Henderson Land Development Co Ltd 1,538,153
1,039,900 Hong Kong Aircraft Engineering Co Ltd 3,020,058
2,094,469 Hong Kong Electric Holdings Ltd 7,989,441
588,700 Hong Kong Ferry Co Ltd 430,253
361,000 Hong Kong Land Holdings 444,030
636,562 Jardine Matheson Holdings Ltd 3,628,403
1,593,911 Jardine Strategic Holdings Ltd 4,016,656
1,882,862 Mandarin Oriental* 771,973
808,400 YUE Yuen Industrial Holdings* 1,502,968
--------------
33,176,286
--------------
IRELAND -- 0.7%
342,470 Allied Irish Banks Plc 4,344,474
342,294 Bank of Ireland 3,770,408
--------------
8,114,882
--------------
ITALY -- 4.1%
186,458 Banca Popolare di Bergamo Credit 3,340,029
1,069,100 Banca Popolare di Milano* 4,159,716
1,548,839 ENI-Ente Nazionale Idrocarburi SPA 22,986,794
134,676 Fiat SPA (Savings Shares) 634,322
588,000 Grassetto SPA*(a) 6,337
258,850 IFIL Finanziaria di Partecipazioni SPA 771,403
361,425 IFIL Finanziaria di Partecipazioni SPA (Savings Shares) 808,304
153,302 Italcementi SPA 831,101
29,437 Italmobiliare SPA 996,234
38,400 Natuzzi SPA ADR 345,600
651,535 Parmalat Finanziaria SPA 1,074,403
168,155 RAS SPA 2,067,919
248,331 Saipem SPA 1,547,024
982,472 SMI (Societa Metallurgica Italy) 357,911
1,233,798 Telecom Italia Mobile SPA 5,558,512
484,369 Telecom Italia SPA 3,367,241
547,722 Telecom Italia SPA (Savings Shares) 2,686,023
--------------
51,538,873
--------------
JAPAN -- 22.0%
78,200 Acom Co Ltd 2,566,428
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
JAPAN -- CONTINUED
159,000 Alps Electric Co Ltd 1,942,026
480,000 Ashikaga Bank Ltd* 511,567
45,800 Autobacs Seven 980,114
198,000 Bank of Yokohama 726,851
72,000 Best Denki Co Ltd 213,153
301,000 Brother Industries Ltd 1,815,293
244,000 Canon Sales Co Inc 1,770,793
400,000 Chiba Bank 1,245,084
240,100 Chubu Electric Power Co Inc 4,406,995
53,000 Chudenko Corp 569,338
192,700 Chugoku Electric Power Co Inc 2,946,937
1,493,000 Cosmo Oil Co Ltd 2,033,182
275,000 Daicel Chemical Industries Ltd 895,538
665,000 Daido Steel Co Ltd 933,728
202,000 Daiichi Pharmaceuticals Co Ltd 2,706,433
306,000 Dainippon Printing Co Ltd 3,090,412
101,000 Daio Paper Corp 733,846
31,900 Daito Trust Construction Co Ltd 621,945
931,000 Daiwa House Industry Co Ltd 5,291,876
192,000 Daiwa Kosho Lease Co Ltd 469,342
138,000 Denso Corp 2,064,893
1,018 East Japan Railway Co 4,692,831
271,000 Ezaki Glico Co Ltd 1,379,928
50,500 FamilyMart 820,131
51,300 Fast Retailing Co Ltd 1,366,843
489,000 Fuji Heavy Industries Ltd 1,886,099
136,400 Fuji Photo Film Co Ltd 4,326,496
208,000 Fukuyama Transporting Co Ltd 774,117
155,000 Gunze Ltd 567,689
38,200 Heiwa Corp 520,211
289,000 Hino Motors 1,141,578
106,000 Hitachi Kokusai Electric Inc* 312,015
88,000 Hitachi Metals Ltd 227,025
203,300 Hokkaido Electric Power 2,844,222
209,000 House Foods Corp 1,997,632
1,558,000 Itochu Corp 3,716,270
184,000 Itoham Foods Inc 522,935
29,000 Japan Airport Terminal Co Ltd 165,574
199,000 Japan Securities Finance Co 664,876
454 Japan Tobacco Inc 2,707,295
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
JAPAN -- CONTINUED
408,175 JFE Holdings Inc* 5,927,989
1,182,000 Kajima Corp 2,369,499
336,000 Kamigumi Co Ltd 1,560,279
242,000 Kandenko Co 749,182
255,100 Kansai Electric Power 3,868,846
2,643,000 Kawasaki Heavy Industries Ltd* 2,302,635
206,000 Kawasaki Kisen Kaisha Ltd 454,777
903 KDDI Corp 2,833,690
199,000 Keio Electric Railway Co Ltd 924,094
159,000 Kinden Corp 554,096
496,000 Kirin Brewery Co Ltd 3,670,966
159,000 Kissei Pharmaceutical Co Ltd 2,103,413
4,169,000 Kobe Steel Ltd* 2,538,955
456,000 Komatsu Ltd 1,751,102
34,300 Konami Corp 706,454
268,000 Kyushu Electric Power Co Inc 3,939,810
125,700 Lopro Corp 510,349
465,000 Maeda Corp 1,408,078
132,000 Maeda Road Construction 455,538
102,000 Makita Corp 681,582
53,000 Maruichi Steel Tube 589,063
1,229,000 Mazda Motor Corp 2,598,858
306 Millea Holdings Inc* 2,119,805
440,000 Minolta Co Ltd* 2,158,596
155,000 Mitsubishi Corp 1,037,048
1,204,000 Mitsubishi Electric Corp* 3,218,135
1,662,000 Mitsubishi Material* 1,855,648
1,077,000 Mitsubishi Motors* 2,614,498
1 Mitsubishi Tokyo Finance Group Inc 886
396,000 Mitsui Chemicals Inc 1,520,694
4,189 Mizuho Holding Inc* 3,720,406
4,161,000 Mizuho Trust & Banking Co Ltd* 1,794,976
79,000 Nagase & Co 340,123
670,000 Nippon Express Co Ltd 2,646,564
113,000 Nippon Hodo Co 523,781
1,221,000 Nippon Light Metal 1,136,054
845,000 Nippon Shinpan Co 1,050,666
621,000 Nippon Suisan Kaisha Ltd 1,386,712
1,978 Nippon Telegraph & Telephone Corp 7,160,787
1 Nippon Unipac Holding 1,587
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
JAPAN -- CONTINUED
597,000 Nishimatsu Construction 1,732,045
828,000 Nissan Motor Co 6,212,189
290,000 Nisshin Oillio Group Ltd 694,185
1,228,000 Nisshin Steel Co Ltd* 830,958
206,000 Nisshinbo Industries Inc 768,416
2,403,000 Nissho Iwai Corp* 752,049
136,000 Nomura Holdings Inc 1,598,985
723,000 Obayashi Corp 1,724,559
389,000 Okumura Corp 1,437,877
102,000 Olympus Optical Co Ltd 1,647,875
133,000 Ono Pharmaceutical Co Ltd 4,173,652
63,000 PanaHome Corp 232,870
121,050 Promise Co 3,952,235
5,079,000 Resona Holdings Inc* 2,448,746
29,400 Rinnai Corp 610,505
142,000 Royal Co Ltd 882,808
93,000 Ryosan Co 921,150
524,000 Sankyo Co Ltd 6,994,054
242,000 Sanwa Shutter Corp 824,919
346,000 Seino Transportation Co Ltd 2,165,701
828,000 Sekisui Chemical 2,073,064
295,000 Sekisui House Ltd 2,081,032
191,600 Shikoku Electric Power 2,957,665
662,000 Shimizu Corp 1,629,452
213,000 Shiseido Co Ltd 2,470,061
157,000 Showa Shell Sekiyu 1,037,150
190,400 Sony Corp 7,231,093
158,000 Sumitomo Forestry Co Ltd 772,459
4,853,000 Sumitomo Metal Industries* 2,134,540
201,000 Suzuki Motor Corp 2,295,200
1,188,000 Taiheiyo Cement Corp 1,979,581
1,253,000 Taisei Corp 2,352,853
260,000 Taisho Pharmaceutical Co Ltd 3,800,211
202,700 Takeda Chemical Industries Ltd 7,475,339
118,960 Takefuji Corp 5,896,431
78,000 Takuma Corp 438,740
197,000 Toagosei Co Ltd 269,943
528,700 Tohoku Electric Power Co Inc 7,660,504
207,900 Tokyo Electric Power 4,000,613
328,000 Tokyo Gas Co 993,225
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
JAPAN -- CONTINUED
514,000 TonenGeneral Sekiyu KK 3,121,607
423,000 Toppan Printing Co Ltd 2,912,430
1,446,000 Toshiba Corp* 4,207,435
407,000 Toshiba TEC Corp* 998,351
211,000 Toyo Ink Manufacturing Co Ltd 613,948
123,000 Toyo Seikan Kaisha 1,362,910
251,300 Toyota Motor Corp 5,898,562
2,138 UFJ Holdings Inc 2,513,698
44,300 Uni-Charm Corp 1,682,444
83,000 Victor Co of Japan Ltd* 605,168
108,000 Wacoal Corp 818,507
187,000 Yamaha Corp 2,105,282
179,000 Yamazaki Baking Co Ltd 1,009,879
--------------
273,960,917
--------------
MALAYSIA -- 0.0%
511,000 MBF Holdings Berhad*(a) 6,724
751,000 Promet Berhad*(a)(b) 1,976
234,000 Saship Holdings*(a)(b) 616
45,821 Silverstone Corp BHD* 2,231
--------------
11,547
--------------
NETHERLANDS -- 5.0%
1,551,040 ABN Amro Holdings NV 24,657,736
174,626 Aegon NV 1,872,708
74,051 Corio NV 2,130,985
71,434 DSM NV 2,621,563
13,872 Gamma Holdings NV 388,732
274,036 ING Groep NV 3,706,718
99,509 KLM-Koninklijke Luchtvaart Mij NV 691,768
47,757 Koninklijke Volker Wessels 772,087
317,439 Koninklijke Wessanen NV 1,649,094
161,837 Numico NV 854,697
287,653 OCE NV 2,594,971
1,887,396 Ron KPN NV* 12,510,548
123,914 Unilever NV 7,024,967
25,754 Wereldhave NV 1,472,544
--------------
62,949,118
--------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
NEW ZEALAND -- 0.5%
544,100 BIL International Ltd (New Zealand Exchange)* 143,913
284,457 BIL International Ltd (Singapore Exchange)* 74,415
2,786,983 Telecom Corp of New Zealand 6,530,698
--------------
6,749,026
--------------
NORWAY -- 2.7%
74,844 Bergesen D.Y. ASA Class A 1,441,507
34,350 Bergesen D.Y. ASA Class B 556,116
1,455,929 DNB Holdings Class A 5,506,685
50,360 Elkem AS Class A 913,713
303,428 Fred Olsen Energy* 343,022
114,400 Frontline Ltd 1,213,446
49,950 Gjensidige NOR ASA 1,254,841
2,245,504 Kvaerner ASA* 908,851
193,277 Norsk Hydro AS 7,404,629
215,514 Norske Skogindustrier AS Class A 2,752,183
240,304 Orkla ASA 3,353,836
109,750 Smedvig ASA Class A 473,308
938,133 Statoil ASA 7,201,250
206,542 Tandberg Data ASA* 90,803
--------------
33,414,190
--------------
PORTUGAL -- 0.0%
43,637 Banco Espirito Santo SA 569,087
--------------
SINGAPORE -- 1.9%
68,000 Cerebos Pacific Ltd 81,327
4,035,500 Comfort Group 2,088,348
150,800 Creative Technology Ltd 953,799
491,000 DBS Group Holdings Ltd 2,710,290
278,000 Fraser & Neave Ltd 1,278,786
744,193 Haw Par Corp Ltd 1,480,555
1,030,104 Hotel Properties Ltd 571,573
1,244,000 Keppel Corp Ltd 2,961,309
436,000 Singapore Airlines Ltd 2,369,088
179,000 Singapore Land Ltd 331,415
3,918,000 Singapore Telecom 2,928,672
2,053,201 Straits Trading Co Ltd 1,664,614
1,409,960 United Industrial Corp Ltd 567,503
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
SINGAPORE -- CONTINUED
573,000 United Overseas Bank 3,426,501
--------------
23,413,780
--------------
SPAIN -- 3.2%
74,534 Altadis SA 1,766,517
158,449 CIA ESP Petroleos 3,244,750
467,917 Endesa SA 5,597,962
5,800 Endesa SA ADR 69,890
110,882 Iberdrola SA 1,699,413
1,857,344 Repsol YPF SA 26,023,990
3,200 Repsol YPF SA ADR 44,864
125,859 Vallehermoso SA 1,233,066
--------------
39,680,452
--------------
SWEDEN -- 1.0%
369,632 Gambro AB Class A 1,546,468
255,180 Gambro AB Class B 1,064,625
94,900 Holmen AB Class B 2,319,803
473,300 Nordea AB 2,063,630
114,317 SAS AB* 424,541
21,600 SKF AB Series A 571,160
1,122,304 TeliaSonera AB 3,772,229
36,100 Volvo AB Class A 604,566
--------------
12,367,022
--------------
SWITZERLAND -- 4.6%
3,584 Bqe Cant Vaudoise* 202,855
64,076 Micronas Semiconductor Hold* 1,370,357
1,282 Pargesa Holdings SA (Bearer) 2,306,844
46,268 Roche Holding AG (Bearer) 4,452,783
420,640 Roche Holding AG (Genusschein) 25,266,319
7,715 SIG Holding AG 645,761
2,632 Sika AG 656,059
52,685 Swisscom AG 15,657,858
7,014 Valora Holding AG 1,161,241
15,522 ZKB Finanz Vision AG* 1,264,883
9,981 ZKB Pharma Vision AG* 748,943
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
SWITZERLAND -- CONTINUED
38,325 Zurich Financial Services AG 3,250,277
--------------
56,984,180
--------------
UNITED KINGDOM -- 18.7%
1,539,738 Abbey National Plc 9,458,441
1,200 Abbey National Plc ADR 14,280
301,563 Alliance & Leicester Plc 3,681,187
362,397 Associated British Food 2,896,868
849,547 Aviva Plc 5,295,616
270,630 AWG Plc* 2,242,177
427,309 BAA Plc 2,914,326
1,737,181 Barclays Plc 10,041,978
225,035 Barratt Development 1,453,256
1,068,772 Boots Group Plc 9,124,151
171,469 BP Plc 1,080,323
678,717 British American Tobacco 6,628,092
229,372 British Energy Plc 16,258
511,082 British Energy Plc (Deferred Shares)*(a) --
6,655,017 BT Group Plc 17,138,589
1,300 BT Group Plc ADR 33,215
505,481 Coats 431,929
384,741 Diageo Plc 3,817,835
1,320,215 Friends Provident Plc 1,840,332
221,843 Gallaher Group Plc 2,176,917
284,956 Great Portland Estates Plc 987,435
734,599 GUS Plc 5,872,114
919,526 HBOS Plc 9,588,047
928,084 HSBC Holdings Plc 9,998,884
164,588 Inchcape Plc 1,849,696
417,994 Kelda Group Plc 2,699,368
1,922,941 Kingfisher Plc 6,928,436
298,645 Land Securities Group Plc 3,499,744
3,304,903 Lloyds TSB Group Plc 18,427,657
2,807,074 mmO2 Plc* 2,100,176
1,678,611 National Grid Transco Plc 10,787,439
252,746 Next Plc 3,184,802
871,898 Northern Foods Plc 1,593,059
179,065 Northern Rock Plc 1,900,985
129,172 Pennon Group Plc 1,357,070
368,554 Rank Group Plc 1,355,489
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
233,015 RMC Group 1,350,641
1,443,403 Rolls-Royce 1,807,436
2,547,957 Royal & Sun Alliance Insurance Group 2,869,500
195,780 Royal Bank of Scotland Group 4,480,661
786,938 Sainsbury (J) 2,875,654
526,700 Scottish & Newcastle Plc 2,787,473
701,296 Scottish & Southern Energy Plc 6,959,051
1,461,906 Scottish Power Plc 8,393,152
2,650 Scottish Power Plc ADR 60,712
263,168 Severn Trent Plc 2,918,192
1,133,312 Shell Transport & Trading (Registered) 6,564,631
828,004 Six Continents Plc 8,072,931
1,092,180 Somerfield Plc 1,359,031
193,822 Standard Chartered Plc 2,127,865
309,748 Tate & Lyle 1,355,098
864,575 Taylor Woodrow Plc 2,458,035
45,173 TDG Plc 112,776
298,763 Tomkins Plc 884,693
507,898 United Utilities 4,719,942
316,054 Whitbread Plc 2,593,625
206,745 Wilson (Connolly) Holdings 527,543
601,731 Wimpey (George) 2,568,501
442,349 Wolseley 3,490,687
--------------
233,754,001
--------------
TOTAL COMMON STOCKS (COST $1,374,404,858) 1,157,928,624
--------------
PREFERRED STOCKS -- 0.6%
GERMANY -- 0.5%
89,446 RWE AG 4.35% 1,812,412
9,000 Villeroy & Boch AG (Non Voting) 5.78% 77,602
132,450 Volkswagen AG 5.30% 3,882,925
--------------
5,772,939
--------------
ITALY -- 0.1%
135,802 Fiat SPA 4.95% 644,017
100,961 Fondiaria-Sai SPA 8.00% 566,930
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
ITALY -- CONTINUED
86,700 IFI Istituto Finanziario Industries 4.82% 747,562
--------------
1,958,509
--------------
TOTAL PREFERRED STOCKS (COST $12,685,824) 7,731,448
--------------
RIGHTS AND WARRANTS -- 0.0%
FRANCE -- 0.0%
1,252,228 Eurotunnel SA Paris Warrants, Expires 10/31/03* 13,497
42,538 Wendel Investissement Warrants, Expires 3/27/03* 458
--------------
13,955
--------------
UNITED KINGDOM -- 0.0%
2,311,000 Eurotunnel SA Warrants, Expires 10/31/03* 4,732
--------------
TOTAL RIGHTS AND WARRANTS (COST $220,431) 18,687
--------------
SHORT-TERM INVESTMENTS -- 10.7%
CASH EQUIVALENTS -- 9.9%
$ 46,200,000 Dresdner GC Time Deposit, 1.31%, due 3/03/03 46,200,000
77,550,313 The Boston Global Investment Trust(c) 77,550,313
--------------
123,750,313
--------------
</Table>
See accompanying notes to the financial statements.
13
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
U.S. GOVERNMENT -- 0.8%
10,200,000 U.S. Treasury Bill, 1.22%, due 4/24/03(d) 10,181,596
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $133,931,909) 133,931,909
--------------
TOTAL INVESTMENTS -- 104.1%
(Cost $1,521,243,022) 1,299,610,668
Other Assets and Liabilities (net) -- (4.1%) (51,477,440)
--------------
TOTAL NET ASSETS -- 100.0% $1,248,133,228
==============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
<Table>
ADR - American Depositary Receipt
</Table>
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) Bankrupt issuer.
(c) Represents investment of security lending collateral (Note 1).
(d) All or a portion of this security is held as collateral for open futures
contracts (Note 6).
14 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Financials 28.6%
Consumer Discretionary 12.5
Utilities 11.0
Energy 10.4
Telecommunication Services 7.9
Industrials 7.8
Consumer Staples 7.7
Materials 6.8
Health Care 5.6
Information Technology 1.7
-----
100.0%
=====
</Table>
See accompanying notes to the financial statements.
15
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$71,232,218 (cost $1,521,243,022) (Note 1) $1,299,610,668
Cash 81,174
Foreign currency, at value (cost $968,379) (Note 1) 946,633
Receivable for investments sold 559,322
Receivable for Fund shares sold 18,478,354
Dividends and interest receivable 2,375,730
Foreign taxes receivable 932,931
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 49,428,337
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 626,649
Receivable for expenses reimbursed by Manager (Note 2) 58,688
--------------
Total assets 1,373,098,486
--------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 77,550,313
Payable for Fund shares repurchased 7,776,543
Payable to affiliate for (Note 2):
Management fee 514,201
Shareholder service fee 130,231
Payable for open forward foreign currency contracts
(Notes 1 and 6) 38,789,439
Accrued expenses 204,531
--------------
Total liabilities 124,965,258
--------------
NET ASSETS $1,248,133,228
==============
NET ASSETS CONSIST OF:
Paid-in capital $1,653,019,080
Accumulated undistributed net investment income 1,858,662
Accumulated net realized loss (191,183,697)
Net unrealized depreciation (215,560,817)
--------------
$1,248,133,228
==============
NET ASSETS ATTRIBUTABLE TO:
Class II shares $ 67,896,039
==============
Class III shares $ 845,997,198
==============
Class IV shares $ 334,239,991
==============
SHARES OUTSTANDING:
Class II 4,232,529
==============
Class III 52,454,814
==============
Class IV 20,733,449
==============
NET ASSET VALUE PER SHARE:
Class II $ 16.04
==============
Class III $ 16.13
==============
Class IV $ 16.12
==============
</Table>
16 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $4,415,303) $ 35,599,214
Interest (including securities lending income of
$946,187) 1,952,974
------------
Total income 37,552,188
------------
EXPENSES:
Management fee (Note 2) 7,000,434
Custodian fees 995,820
Legal fees 74,101
Audit fees 66,697
Transfer agent fees 55,918
Trustees fees and related expenses (Note 2) 27,807
Registration fees 26,651
Miscellaneous 32,805
Fees reimbursed by Manager (Note 2) (1,246,654)
------------
7,033,579
Shareholder service fee (Note 2) - Class II 113,654
Shareholder service fee (Note 2) - Class III 1,387,501
Shareholder service fee (Note 2) - Class IV 287,744
------------
Net expenses 8,822,478
------------
Net investment income 28,729,710
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (53,382,257)
Closed futures contracts (9,464,665)
Foreign currency, forward contracts and foreign
currency related transactions 22,329,444
------------
Net realized loss (40,517,478)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (37,994,430)
Open futures contracts (4,540,769)
Foreign currency, forward contracts and foreign
currency related transactions 9,363,228
------------
Net unrealized loss (33,171,971)
------------
Net realized and unrealized loss (73,689,449)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(44,959,739)
============
</Table>
See accompanying notes to the financial statements. 17
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 28,729,710 $ 32,221,106
Net realized loss (40,517,478) (103,502,172)
Change in net unrealized appreciation (depreciation) (33,171,971) (84,795,934)
-------------- --------------
Net decrease in net assets from operations (44,959,739) (156,077,000)
-------------- --------------
Distributions to shareholders from:
Net investment income
Class II (2,069,691) (1,302,950)
Class III (34,394,773) (45,392,797)
Class IV (13,242,397) (9,503,029)
-------------- --------------
Total distributions from net investment income (49,706,861) (56,198,776)
-------------- --------------
Net share transactions (Note 5):
Class II 30,892,601 29,909,052
Class III (148,543,077) (50,856,645)
Class IV 116,271,839 125,957,168
-------------- --------------
Increase (decrease) in net assets resulting from net
share transactions (1,378,637) 105,009,575
-------------- --------------
Total decrease in net assets (96,045,237) (107,266,201)
NET ASSETS:
Beginning of period 1,344,178,465 1,451,444,666
-------------- --------------
End of period (including accumulated undistributed
net investment income of $1,858,662 and
distributions in excess of net investment income of
$176,685, respectively) $1,248,133,228 $1,344,178,465
============== ==============
</Table>
18 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.41 $ 20.30 $ 20.85 $ 20.33 $ 23.16
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(b) 0.37 0.28 0.40 0.41 0.39
Net realized and unrealized gain
(loss) (1.05) (2.44) 1.11 1.33 (0.46)
-------- -------- -------- -------- --------
Total from investment operations (0.68) (2.16) 1.51 1.74 (0.07)
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.69) (0.73) (0.22) (0.56) (0.48)
From net realized gains -- -- (1.84) (0.66) (2.28)
-------- -------- -------- -------- --------
Total distributions (0.69) (0.73) (2.06) (1.22) (2.76)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 16.04 $ 17.41 $ 20.30 $ 20.85 $ 20.33
======== ======== ======== ======== ========
TOTAL RETURN(a) (4.11)% (10.71)% 7.25% 8.09% (0.76)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 67,896 $ 42,495 $ 15,284 $ 21,162 $ 18,295
Net expenses to average daily net
assets 0.76% 0.76% 0.76% 0.76% 0.76%
Net investment income to average
daily net assets 2.06% 1.56% 1.88% 1.84% 1.71%
Portfolio turnover rate 51% 51% 31% 53% 60%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.10% 0.10% 0.08% 0.09% 0.28%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 19
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- ----------- ----------- ----------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.50 $ 20.37 $ 20.91 $ 20.38 $ 23.20
-------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income(b) 0.40 0.44 0.44 0.47 0.42
Net realized and unrealized gain
(loss) (1.08) (2.59) 1.09 1.28 (0.47)
-------- ---------- ---------- ---------- ----------
Total from investment operations (0.68) (2.15) 1.53 1.75 (0.05)
-------- ---------- ---------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.69) (0.72) (0.23) (0.56) (0.49)
From net realized gains -- -- (1.84) (0.66) (2.28)
-------- ---------- ---------- ---------- ----------
Total distributions (0.69) (0.72) (2.07) (1.22) (2.77)
-------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 16.13 $ 17.50 $ 20.37 $ 20.91 $ 20.38
======== ========== ========== ========== ==========
TOTAL RETURN(a) (4.05)% (10.60)% 7.32% 8.20% (0.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $845,997 $1,053,104 $1,280,603 $1,799,929 $1,998,447
Net expenses to average daily net
assets 0.69% 0.69% 0.69% 0.69% 0.69%
Net investment income to average
daily net assets 2.26% 2.37% 2.07% 2.09% 1.84%
Portfolio turnover rate 51% 51% 31% 53% 60%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.10% 0.10% 0.08% 0.09% 0.28%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
20 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.50 $ 20.37 $ 20.90 $ 20.37 $ 23.19
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(b) 0.38 0.36 0.50 0.55 0.42
Net realized and unrealized gain
(loss) (1.05) (2.49) 1.05 1.21 (0.46)
-------- -------- -------- -------- --------
Total from investment operations (0.67) (2.13) 1.55 1.76 (0.04)
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.71) (0.74) (0.24) (0.57) (0.50)
From net realized gains -- -- (1.84) (0.66) (2.28)
-------- -------- -------- -------- --------
Total distributions (0.71) (0.74) (2.08) (1.23) (2.78)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 16.12 $ 17.50 $ 20.37 $ 20.90 $ 20.37
======== ======== ======== ======== ========
TOTAL RETURN(a) (4.02)% (10.52)% 7.45% 8.18% (0.60)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $334,240 $248,579 $155,558 $291,894 $567,219
Net expenses to average daily net
assets 0.63% 0.63% 0.63% 0.63% 0.63%
Net investment income to average
daily net assets 2.13% 1.97% 2.34% 2.47% 1.85%
Portfolio turnover rate 51% 51% 31% 53% 60%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.10% 0.10% 0.08% 0.09% 0.28%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 21
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Intrinsic Value Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high total return through investment in equity securities
of non-U.S. issuers. The Fund's benchmark is the SSB PMI Value EPAC Index.
Throughout the year ended February 28, 2003, the Fund had three classes of
shares outstanding: Class II, Class III and Class IV. The principal
economic difference among the classes of shares is the level of
shareholder service fees borne by the classes. Eligibility for and
automatic conversion among the various classes of shares is generally
based on the total amount of assets invested in a particular fund or with
GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Shares of mutual funds are valued at their net asset value
as reported on each business day. Short-term investments with a remaining
maturity of sixty days or less are valued at amortized cost which
approximates fair value. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their
22
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. The value of the currencies the Fund has
committed to buy or sell is shown under Note 6 and represents the currency
exposure the Fund has acquired or hedged through currency contracts as of
February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures
23
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
tends to decrease the Fund's exposure to the underlying instrument or
hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. In addition, the Fund maintains cash or securities
in an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency
24
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
transaction to determine the realized gain or loss. The risk associated
with purchasing put and call options is limited to the premium paid. At
February 28, 2003, there were no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003, there were no open swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities
25
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
on loan. As with other extensions of credit, the Fund may bear the risk of
loss with respect to the investment of the collateral, the risk of delay
in recovery or loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 28, 2003, the Fund loaned securities having a
market value of $71,232,218 collateralized by cash in the amount of
$77,550,313 which was invested in a short-term instrument.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid were as follows: ordinary income --
$56,198,776 and $49,706,861, respectively.
As of February 28, 2003, the components of distributable earning on a tax
basis consisted of $8,687,165 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to passive foreign investment company transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $63,430,844 and $95,091,208 expiring in 2010 and 2011,
respectively. The Fund has elected to defer to March 1, 2003 post-October
capital losses of $22,379,754.
26
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus U.S. GAAP. The net gains resulting from
redemption in-kind transactions were $2,219,910. The financial highlights
exclude these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss Paid-in Capital
----------------- ----------------- ---------------
$23,012,498 $(20,788,733) $(2,223,765)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later.
Interest income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental
27
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
laws or restrictions. In addition, the securities of some foreign
companies and securities markets are less liquid and at times may be more
volatile than securities of comparable U.S. companies and U.S. securities
markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .22%
for Class II shares, .15% for Class III shares, and .09% for Class IV
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal fees),
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain unusual
expenses (including taxes), securities lending fees and expenses, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, a significant portion of the Fund's shares were
held by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $18,700. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$633,408,241 and $684,181,036, respectively.
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$1,532,342,278 $56,548,944 $(289,280,554) $(232,731,610)
</Table>
28
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 10.8% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder may
have a material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
---------------------------- ----------------------------
Shares Amount Shares Amount
Class II: ------------ -------------- ------------ --------------
Shares sold 2,552,285 $ 45,282,901 1,624,477 $ 28,823,075
Shares issued to shareholders in reinvestment
of distributions 98,783 1,661,781 68,492 1,192,782
Shares repurchased (858,945) (16,052,081) (5,596) (106,805)
------------ -------------- ------------ --------------
Net increase 1,792,123 $ 30,892,601 1,687,373 $ 29,909,052
============ ============== ============ ==============
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
---------------------------- ----------------------------
Shares Amount Shares Amount
Class III: ------------ -------------- ------------ --------------
Shares sold 18,150,851 $ 313,632,458 9,555,643 $ 172,725,472
Shares issued to shareholders in reinvestment
of distributions 1,458,645 24,738,029 1,736,570 31,031,226
Shares repurchased (27,340,396) (486,913,564) (13,971,133) (254,613,343)
------------ -------------- ------------ --------------
Net decrease (7,730,900) $ (148,543,077) (2,678,920) $ (50,856,645)
============ ============== ============ ==============
</Table>
29
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
---------------------------- ----------------------------
Shares Amount Shares Amount
Class IV: ------------ -------------- ------------ --------------
Shares sold 13,102,251 $ 231,497,089 7,356,392 $ 140,727,918
Shares issued to shareholders in reinvestment
of distributions 684,808 11,576,480 387,104 6,911,650
Shares repurchased (7,261,462) (126,801,730) (1,170,451) (21,682,400)
------------ -------------- ------------ --------------
Net increase 6,525,597 $ 116,271,839 6,573,045 $ 125,957,168
============ ============== ============ ==============
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Buys
4/28/03 AUD 66,865,325 $ 40,360,746 $ 3,339,441
4/28/03 CAD 44,922,277 30,070,726 1,557,600
3/28/03 CHF 67,940,165 50,127,966 4,275,518
3/28/03 DKK 479,996,536 69,569,559 6,617,618
3/28/03 EUR 221,161,729 238,148,296 21,741,317
3/28/03 GBP 33,856,474 53,241,889 1,020,297
4/28/03 HKD 286,309,942 36,704,677 58,976
4/28/03 JPY 1,430,401,280 12,124,340 589,857
3/28/03 NOK 399,424,353 55,584,797 2,493,308
4/28/03 NZD 27,898,318 15,422,167 1,936,522
3/28/03 SEK 625,980,000 73,443,797 5,514,461
4/28/03 SGD 37,244,950 21,433,784 283,422
------------
$ 49,428,337
============
</Table>
30
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- ---------------- ----------------- ------------ --------------
Sales
4/28/03 AUD 30,147,105 $ 18,197,169 $ (1,770,370)
4/28/03 CAD 69,127,408 46,273,508 (2,295,966)
3/28/03 CHF 42,830,710 31,601,577 (2,713,236)
3/28/03 DKK 131,779,680 19,099,834 (1,082,989)
3/28/03 EUR 203,483,762 219,112,554 (19,936,152)
3/28/03 GBP 47,468,937 74,648,525 (830,446)
4/28/03 HKD 456,865,869 58,569,794 (89,426)
4/28/03 JPY 11,339,545,913 96,116,038 (4,216,056)
3/28/03 NOK 273,413,005 38,048,773 (2,268,485)
4/28/03 NZD 14,391,524 7,955,623 (1,137,487)
3/28/03 SEK 222,337,736 26,086,021 (2,383,251)
4/28/03 SGD 5,269,740 3,032,639 (65,575)
------------
$(38,789,439)
============
</Table>
CURRENCY ABBREVIATIONS:
<Table>
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krona
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
</Table>
31
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- ---------------------- --------------- ------------ --------------
Buys
223 DAX March 2003 $15,271,201 $(2,636,573)
356 FTSE 100 March 2003 20,360,309 (1,464,928)
24 MIB30 March 2003 3,033,705 (36,986)
599 MSCI March 2003 10,745,939 (208,324)
193 TSE TOPIX March 2003 13,337,365 (565,532)
-----------
$(4,912,343)
===========
Sales
217 S&P Toronto 60 March 2003 $10,833,977 $ (89,517)
142 SPI 200 March 2003 6,019,163 210,813
-----------
$ 121,296
===========
</Table>
At February 28, 2003 , the Fund had sufficient cash and/or securities to
cover any commitments of margin requirements of the relevant broker or
exchange.
32
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTERNATIONAL INTRINSIC VALUE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Intrinsic Value
Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
33
<Page>
GMO INTERNATIONAL INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$4,415,303 and recognized foreign source income of $40,014,517.
34
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------- --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf Boston, MA and Consultant,
02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
35
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------- --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
36
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
-------------------------- -------------- -------------- ---------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present),
c/o GMO Trust Chief Chief Chief Operating Officer (2000 - present) and
40 Rowes Wharf Executive Executive Member, Grantham, Mayo, Van Otterloo & Co.
Boston, MA 02110 Officer of the Officer since LLC.
Age: 47 Trust October 2002;
Vice President
from August
1998 -
October 2002.
Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co.
c/o GMO Trust Financial Financial LLC.
40 Rowes Wharf Officer and Officer Since
Boston, MA 02110 Treasurer of February 2000;
Age: 45 the Trust Treasurer
since February
1998.
Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo,
c/o GMO Trust Treasurer of September Van Otterloo & Co. LLC.
40 Rowes Wharf the Trust 1998.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti- Money Laundering
c/o GMO Trust and Clerk of since February Reporting Officer (July 2002 - February 2003)
40 Rowes Wharf Boston, MA the Trust 1997; Clerk and Member, Grantham, Mayo, Van Otterloo &
02110 since March Co. LLC.
Age: 37 2001; May
1999-August
1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo,
c/o GMO Trust and Secretary since August Van Otterloo & Co. LLC (June 1999 -
40 Rowes Wharf of the Trust 1999; present); Associate/ Junior Partner, Hale and
Boston, MA 02110 Secretary Dorr LLP (1991 - 1999).
Age: 58 since March
2001.
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer
c/o GMO Trust and Anti- 2003. (February 2003 - present) and Compliance
40 Rowes Wharf Money Officer, Grantham, Mayo, Van Otterloo & Co.
Boston, MA 02110 Laundering LLC.
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
37
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
Class III shares of GMO International Small Companies Fund returned -6.3% for
the fiscal year ended February 28, 2003. This was 11.2% ahead of the MSCI EAFE
Index, which returned -17.5% over the same period, and 4.1% ahead of the Salomon
Smith Barney EMI World ex-US Index of smaller capitalization stocks, which
returned -10.4%.
International stocks, like the U.S. market, suffered their third straight year
of negative returns in 2002. World equity markets were hit by the continued
global economic slowdown which came on top of valuation levels that remained
high by historical standards. With the addition of corporate governance scandals
and a perilous geopolitical situation, these factors combined to produce the
worst bear market since 1974.
Smaller foreign stocks enjoyed significantly stronger performance than did large
caps, although they still declined in value. Smaller companies generally were
priced at less challenging valuation levels, and so were better able to
withstand a tough macro environment. In addition, the smaller capitalization
universe excludes some of the most disastrously overextended bubble stocks, such
as the trio of Deutsche Telekom, France Telecom, and Vivendi. Through asset
writedowns each suffered losses in excess of 20 billion euros for 2002.
In U.S. dollar terms, large cap foreign stocks fared slightly better than
domestic equities. The EAFE Index outperformed the S&P 500 (which returned
- -22.7%) solely due to weakness in the dollar. Foreign investors have been
slowing their inflows on declining confidence in the U.S. economy. With the
continued large U.S. trade deficit and lower U.S. interest rates, this seems to
have put an end to the long post 1995 dollar rally.
In local currency terms, European markets fell even further than the U.S.
Germany led the way down, with that country's DAX index falling a Nasdaq-like
- -44% in calendar year 2002. Europe continued to suffer from the unraveling of
the "TMT" bubble in the technology, media, and telecommunications sectors. Faith
has all but vanished that third generation mobile phone technology will deliver
pots of gold to these sectors. The insurance sector suffered from a brutal
combination of rising liabilities for natural (and unnatural) disasters with
deteriorating asset values as equity holdings declined in value. There were
questions about the viability of the Eurozone as a single currency region and
the appropriateness of its stability pact, which limits government deficits.
Adhering to this pact means, for example, that Germany has neither fiscal policy
nor monetary policy (now ceded to the ECB) available to stimulate its economy.
In Japan, frustration continued to mount over the lack of reform. GDP growth is
stagnant and some economic indicators forecast a return to recession in 2003.
The solvency of the financial sector remains a concern, and several big banks
have been forced to raise additional capital at the expense of current
shareholders. Prime Minister Koizumi appeared to practice business as usual with
the appointment of an establishment candidate to head the central bank. And the
strength of the yen against the U.S. dollar poses
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
problems for exporters. Despite the fact that the Nikkei 225 index hit a 20-year
low, Japan was the best performing major market. The MSCI Japan index fell
"only" by 10%, as the decline was at least somewhat anticipated in the prices.
Within this difficult environment, GMO's disciplined investment approach
produced strong relative performance within the small cap universe. GMO's stock
selection process, which involves the application of quantitative techniques to
forecast returns based upon an evaluation of stock valuation, dividend yield,
price momentum, and other factors, performed well over the fiscal year.
Generally, the most defensive sectors performed strongest in these times of
uncertainty. Utility stocks led the way, and the portfolio benefited from
overweighting the sector. Telecommunications stocks and consumer staples also
outperformed the benchmark (though all sectors fell in absolute terms). Energy
stocks outperformed as oil prices ran up to nearly $40/barrel. The
outperformance of the telecommunications sector came after two dismal years, as
share prices have fallen enough that the basic revenue from the traditional
business is providing some valuation support even as hopes of future growth
dissipate. Technology stocks performed the worst of the major sectors, which
were underweighted in the portfolio. Sector allocation was a modest benefit to
the portfolio, predominantly from an overweight position in electric utilities.
Country allocation was also a positive, as the portfolio benefited from
overweights in some of the smaller markets that performed relatively well.
Austria was the most notable of these as overweighting that market, which
managed positive absolute return, added close to a percentage point of relative
return. The portfolio benefited from an allocation to emerging markets including
Turkey, South Africa, and Russia that was initiated mid-year. Allocations to
Canada and the Pacific region outside Japan were also positive as those regions
enjoyed relatively strong economic growth. Currency allocation was also positive
as the portfolio benefited not just in absolute terms from not holding the U.S.
dollar, but also in relative terms from overweighting the euro and other
continental currencies at the expense of the pound and yen.
OUTLOOK
The silver lining to the tough bear market is that the bad news is now out in
the open. With lower stock prices, dividend yields are now meaningful and there
is a lower hurdle on earnings growth required to deliver capital gains. Smaller
stocks remain cheaper than large cap stocks and are poised to benefit from any
recovery in the global economy. Lower valuations and continued dollar weakness
position international equities to outperform the U.S. market.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL SMALL COMPANIES FUND CLASS III SHARES AND THE
SALOMON SMITH BARNEY EMI WORLD EX-U.S. INDEX
AS OF FEBRUARY 28, 2003
GMO INTERNATIONAL SMALL SALOMON SMITH BARNEY
COMPANIES FUND EMI WORLD EX-U.S. INDEX MSCI EAFE INDEX
2/28/93 $9,940 $10,000 $10,000
3/31/93 $10,856 $11,007 $10,872
6/30/93 $12,319 $12,170 $11,965
9/30/93 $13,426 $12,916 $12,759
12/31/93 $14,572 $12,552 $12,869
3/31/94 $16,091 $13,675 $13,319
6/30/94 $16,386 $14,175 $13,999
9/30/94 $15,948 $14,075 $14,013
12/31/94 $15,262 $13,615 $13,870
3/31/95 $14,804 $13,531 $14,128
6/30/95 $15,200 $13,525 $14,231
9/30/95 $15,869 $14,060 $14,824
12/31/95 $16,012 $14,328 $15,424
3/31/96 $16,776 $15,152 $15,870
6/30/96 $17,298 $15,821 $16,121
9/30/96 $16,988 $15,463 $16,101
12/31/96 $17,588 $15,367 $16,357
3/31/97 $17,471 $15,084 $16,101
6/30/97 $18,796 $16,169 $18,190
9/30/97 $18,809 $15,517 $18,062
12/31/97 $16,965 $13,921 $16,648
3/31/98 $19,871 $16,315 $19,097
6/30/98 $19,688 $16,256 $19,300
9/30/98 $16,791 $13,797 $16,556
12/31/98 $18,407 $15,612 $19,977
3/31/99 $18,326 $15,834 $20,255
6/30/99 $19,679 $16,808 $20,770
9/30/99 $20,103 $17,662 $21,681
12/31/99 $20,432 $19,320 $25,364
3/31/2000 $20,331 $19,712 $25,337
6/30/2000 $21,022 $19,369 $24,333
9/30/2000 $20,237 $18,349 $22,370
12/31/2000 $21,001 $17,328 $21,770
3/31/2001 $20,169 $15,481 $18,786
6/30/2001 $21,445 $15,952 $18,590
9/30/2001 $18,890 $13,494 $15,987
12/31/2001 $19,594 $14,608 $17,102
3/31/2002 $21,086 $15,485 $17,189
6/30/2002 $22,158 $15,795 $16,825
9/30/2002 $18,268 $13,012 $13,505
12/31/2002 $19,349 $13,543 $14,376
2/28/2003 $18,606 $13,023 $13,460
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEAR 10 YEAR
Class III -7.42% -0.21% 6.41%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 60 bp on the purchase and 60 bp on the redemption.
Transaction fees are retained by the Fund to cover trading costs. Past
performance is not indicative of future performance. Information is unaudited.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
COMMON STOCKS -- 92.2%
ARGENTINA -- 0.2%
32,869 Grupo Financiero Galicia SA ADR* 83,487
71,900 Perez Companc SA ADR* 524,151
80,800 Telecom Argentina SA ADR* 324,816
9,400 Tenaris SA ADR* 210,466
------------
1,142,920
------------
AUSTRALIA -- 4.9%
1,191,038 AMP Diversified Property Trust 1,872,004
323,359 Ansell Ltd* 1,124,400
508,504 Australian Gas Light Co Ltd 3,338,897
127,746 Bank of Western Australia 273,655
293,548 BHP Steel Ltd 614,582
844,580 Boral Ltd 2,275,648
306,624 CFS Gandel Retail Trust 241,897
83,588 Coca Cola Amatil Ltd 288,627
74,259 CSL Ltd 630,446
1,286,460 General Property Trust Units 2,162,506
96,799 James Hardie Industries NV 388,875
111,733 Jupiters Ltd 417,002
383,591 Orica Ltd 1,915,798
117,459 Origin Energy Ltd 306,504
202,991 Patrick Corp Ltd 1,394,455
1,539,250 Principal Office Fund 1,289,050
178,421 QBE Insurance Group Ltd 877,026
653,251 Santos Ltd 2,319,088
674,495 Stockland Trust Group Units 1,989,282
424,793 TABCORP Holdings Ltd 2,577,856
------------
26,297,598
------------
AUSTRIA -- 3.3%
74,886 Austrian Airlines* 516,558
11,261 Bau Holdings AG 831,392
56,328 Boehler Uddeholm (Bearer) 2,809,674
11,136 Brau Union AG 804,160
106 BWT AG 1,040
52,603 Flughafen Wien AG 1,904,969
105,824 Immofinanz Immobilien Anlagen AG* 675,218
43,955 Mayr-Melnhof Karton AG (Bearer) 3,440,351
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
AUSTRIA -- CONTINUED
12,952 Oesterreichische Brau Beteiligungs AG 1,058,841
45,237 RHI AG* 399,803
81,128 VA Technologie AG (Bearer) 1,267,877
84,980 Voestalpine AG 2,028,751
107,089 Wienerberger AG 1,824,799
------------
17,563,433
------------
BELGIUM -- 1.9%
108,643 AGFA-Gevaert NV 2,340,738
15,966 Barco NV 825,991
22,926 Bekaert SA 809,241
6,015 CMB SA 318,054
29,564 Colruyt SA 1,754,118
42,621 Delhaize Group 649,548
11,145 Sofina SA 320,723
12,206 Solvay Et Cie 723,559
22,126 Tessenderlo Chemie 624,802
73,487 UCB SA 1,679,923
5,870 Umicore 239,402
------------
10,286,099
------------
CANADA -- 6.1%
142,600 Air Canada* 306,296
114,000 Brascan Corp 2,245,872
26,800 Canadian Natural Resources 920,137
72,100 Canadian Pacific Railway Ltd 1,509,464
147,900 Canadian Tire Corp 2,968,325
55,300 Cognos Inc* 1,340,741
53,000 CP Ships Ltd 659,921
77,000 Dofasco Inc 1,390,838
17,000 Fairfax Financial Holdings Ltd 914,928
46,000 Fairmont Hotels & Resorts Inc 938,649
140,700 Hudson's Bay Co 793,315
36,500 Inco Ltd* 777,873
64,900 MDS Inc 924,840
136,600 Methanex Corp 1,265,324
159,100 Moore Corp Ltd* 1,743,927
39,100 National Bank of Canada 852,967
81,500 Nexen Inc 1,749,476
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CANADA -- CONTINUED
43,600 Nova Chemicals Corp 782,564
148,800 Onex Corp 1,388,321
44,200 Penn West Petroleum Ltd* 1,191,187
21,400 Precision Drilling Corp* 774,095
183,400 Quebecor Inc* 2,284,806
32,800 Quebecor World Inc 748,337
82,800 Sears Canada Inc 936,488
29,800 Sobeys Inc 796,507
62,500 Torstar Corp 1,004,749
123,500 TransAlta Corp 1,374,433
------------
32,584,380
------------
CHINA -- 0.7%
2,874,000 China Petroleum & Chemical Corp Class H 541,701
386,000 China Resources Enterprise Ltd 346,450
586,000 China Southern Airlines Co Ltd 159,666
508,000 Cosco Pacific Ltd 459,207
874,000 Denway Motors Ltd 336,193
506,000 Huaneng Power International Inc Class H 450,911
1,166,000 Legend Holdings Ltd 399,924
2,892,000 PetroChina Co Ltd Class H 604,424
108,000 Shanghai Industrial Holdings Ltd Class H 167,558
618,000 Yanzhou Coal Mining Co Ltd Class H 265,454
------------
3,731,488
------------
CZECH REPUBLIC -- 0.4%
26,700 Ceske Radiokomunikace* 172,129
25,900 Ceski Telecom AS* 237,275
139,400 CEZ AS 435,151
4,700 Komercni Banka AS 337,285
1,400 Philip Morris CR AS 523,478
143,900 Unipetrol* 196,768
------------
1,902,086
------------
FINLAND -- 3.2%
36,600 Amer Group Class A 1,313,601
56,950 Elisa Communications Oyj* 349,870
85,100 Finnair Class A 334,781
333,200 Huhtamaki Oyj Class I 3,023,815
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
FINLAND -- CONTINUED
35,800 KCI Konecranes International 792,927
191,500 Kemira Oyj 1,213,624
102,900 Kesko Oyj 1,144,546
77,100 Metso Oyj 797,744
29,900 M-real Oyj 227,195
17,500 Orion-Yhtymae Oyj 273,492
115,200 Outokumpu Class A 961,018
144,900 Pohjola Group Plc 2,280,129
217,429 Rautaruukki Oyj 831,925
59,400 Sponda Oyj 346,355
3,200 Stockmann AB Class A 47,251
34,347 Stockmann AB Class B 509,014
24,880 Tietoenator Oyj 343,241
63,300 Uponor Oyj 1,294,906
5,700 Wartsila Oyj ABP 76,793
96,800 Wartsila Oyj Class B 1,253,016
------------
17,415,243
------------
FRANCE -- 5.4%
111,061 Alcatel SA 800,803
590,831 Alstom* 1,865,817
116,288 Altran Technologies SA 323,365
114,288 Arcelor* 1,144,339
31,630 Autoroutes du Sud de la France* 811,020
15,870 Business Objects SA* 269,399
11,217 Eiffage SA 785,829
85,946 Equant NV* 454,826
67,759 Essilor International SA 2,629,103
13,217 Eurazeo 693,745
44,026 Euronext NV 810,941
2,175 Gecina SA 233,601
503,403 Havas SA 1,492,061
5,097 Hermes International 638,350
2,631 Imerys SA 280,166
182,602 JC Decaux SA* 1,672,872
10,979 M6-Metropole Television 206,015
113,840 Michelin SA Class B 3,693,172
50,352 Pernod Ricard 3,899,255
12,295 Remy Cointreau SA 331,289
113,166 Rhodia SA 609,852
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
FRANCE -- CONTINUED
187,588 SCOR SA 837,035
7,357 Seb SA 621,663
98,791 Soc Air France 935,932
2,207 Technip-Coflexip SA 142,722
8,068 Unibail 506,959
7,101 Vallourec 390,326
64,799 Wendel Investissement 1,697,121
------------
28,777,578
------------
GERMANY -- 4.1%
36,730 Adidas-Salomon AG 2,929,482
43,776 AGIV Real Estate AG* 89,645
50 AMB Aachener & Muenchener Beteiligungs AG 2,247
1,500 AVA Allg Handels der Verbrau 46,561
78,570 Bankgesellschaft Berlin AG* 121,096
28,370 Bewag AG Class A 406,677
2,450 BHW Holding AG 15,844
65,950 Bilfinger & Berger 1,314,997
27,892 Celanese AG* 550,135
119,400 Commerzbank AG 752,833
230,180 Continental AG* 3,609,680
23,000 Deutsche Boerse AG 891,179
87,500 Deutsche Lufthansa AG* 733,712
22,890 Douglas Holdings AG 340,458
27,100 Epcos AG* 293,544
21,895 HeidelbergCement AG 521,525
32,480 Hochtief AG 428,835
22,100 IKB Deutsche Industriebank AG 287,024
70,700 Infineon Technologies AG* 454,155
46,375 IWKA AG 545,314
111,950 MAN AG 1,616,840
44,400 Merck KGaA 1,071,937
95,590 MG Technologies AG 542,952
77,540 Schwarz Pharma AG 2,862,362
1,419 Springer (Axel) Verlag AG* 64,999
51,168 Sudzucker AG 805,174
39,400 TUI AG 392,804
196,200 WCM Beteiligungs & Grundbesitz* 422,929
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
GERMANY -- CONTINUED
1,521 Wella AG 107,540
------------
22,222,480
------------
HONG KONG -- 3.1%
283,000 Asia Satellite Telecommunications Holdings Ltd 359,234
359,000 ASM Pacific Technology 823,954
153,200 Dah Sing Financial Services 742,516
747,500 Esprit Holdings Ltd 1,456,835
293,000 Great Eagle Holdings Ltd 169,997
345,000 Guoco Group 1,995,038
1,557,000 Hang Lung Group Co Ltd 1,317,614
1,603,200 HKR International Ltd* 246,675
85,500 Hong Kong Aircraft Engineering Co Ltd 248,308
681,000 Hopewell Holdings Ltd 541,370
196,800 KMB Holdings Ltd 827,665
886,000 Li & Fung Ltd 891,782
28,000 Mandarin Oriental* 11,480
3,158,000 New World Development Co Ltd 1,437,461
1,801,000 QPL International Holdings Ltd* 334,840
22,212 SCMP Group Ltd 8,046
4,899,000 Shun Tak Holdings Ltd 1,237,454
676,000 Sino Land 203,690
308,000 Television Broadcasts Ltd 935,954
990,000 Tom.com Ltd* 252,606
1,374,000 YUE Yuen Industrial Holdings* 2,554,526
------------
16,597,045
------------
HUNGARY -- 0.1%
48,500 OTP Bank Rt 472,825
------------
INDIA -- 0.3%
17,700 Dr. Reddy's Laboratories Ltd ADR 322,848
45,300 ICICI Banking Ltd ADR* 322,083
30,400 Ranbaxy Laboratories Ltd GDR 437,760
26,900 State Bank of India GDR 381,980
------------
1,464,671
------------
INDONESIA -- 0.3%
1,459,000 Bank Central Asia Tbk 406,487
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
INDONESIA -- CONTINUED
3,555,000 Indofood Sukses Makmur Tbk 230,104
386,000 Indonesian Satellite Corp Tbk PT 341,093
1,630,000 Telekomunikasi IndonesiaTbk PT Class B 655,963
------------
1,633,647
------------
IRELAND -- 0.6%
111,171 DCC Ord 1,144,282
343,405 Independent News & Media Plc 488,561
58,103 Irish Life & Permanent Plc 569,873
107,032 Kerry Group Plc 1,297,790
------------
3,500,506
------------
ITALY -- 1.5%
72,896 Banca Popolare di Bergamo Credit 1,305,789
19,933 Banca Popolare di Lodi Scrl 184,116
851,398 Banca Popolare di Milano* 3,312,669
113,100 Bulgari SPA 509,539
102,000 Fornara SPA*(a)(b) --
213,400 Grassetto SPA*(a) 2,300
345,145 Grouppo Editoriale L'Espresso 1,201,551
225,300 Parmalat Finanziaria SPA 371,527
852,204 Pirelli SPA 736,641
51,715 Saipem SPA 322,168
------------
7,946,300
------------
JAPAN -- 16.6%
508,000 AIOI Insurance Co Ltd 1,026,957
71,000 Alps Electric Co Ltd 867,194
70,400 Aoyama Trading 994,443
22,400 Bandai Co 767,350
358,000 Brother Industries Ltd 2,159,053
104,000 Canon Sales Co Inc 754,764
17,000 Chudenko Corp 182,618
166,000 Citizen Watch Co Ltd 853,694
647,000 Cosmo Oil Co Ltd 881,091
19,100 CSK Corp 363,502
312,000 Daido Steel Co Ltd 438,080
680,500 Daiei Inc* 742,521
28,600 Daiichikosho Co Ltd 720,897
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
121,000 Dainippon Screen Manufacturing Co Ltd* 547,558
17,000 Daio Paper Corp 123,519
44,900 Daito Trust Construction Co Ltd 875,403
118,000 Daiwa House Industry Co Ltd 670,721
59,000 Dowa Mining Co 221,578
42,000 Enix Corp 666,103
51,000 Ezaki Glico Co Ltd 259,691
106,200 FamilyMart 1,724,711
293,000 Furukawa Electric Co Ltd 671,626
86,000 Gunze Ltd 314,976
12,800 H I S Co Ltd 176,477
378,400 Haseko Corp* 150,432
26,100 Heiwa Corp 355,432
81,000 Hitachi Metals Ltd 208,966
1,005,500 Hitachi Zosen Corp* 476,278
63,200 Hokkaido Electric Power 884,185
29,000 House Foods Corp 277,183
61,000 Ibiden Co Ltd 501,002
2,046,000 Isuzu Motors Ltd* 969,135
141,000 Itoham Foods Inc 400,727
78,000 Izumiya Co Ltd 311,406
83,000 Japan Securities Finance Co 277,310
86,000 JSRubber Corp 869,275
563,000 Kajima Corp 1,128,619
238,000 Kamigumi Co Ltd 1,105,198
144,000 Kandenko Co 445,794
661,000 Kanebo Ltd* 710,061
2,189,000 Kawasaki Heavy Industries Ltd* 1,907,101
221,000 Kawasaki Kisen Kaisha Ltd 487,892
292,000 Keisei Electric Railway Co 834,815
225,000 Kenwood Corp* 333,051
49,000 Kissei Pharmaceutical Co Ltd 648,222
4,084,000 Kobe Steel Ltd* 2,487,190
63,000 Kyudenko Corp 221,146
87,000 Lopro Corp 353,225
187,000 Maeda Corp 566,259
69,000 Maeda Road Construction 238,122
59,000 Makita Corp 394,248
1,057,000 Marubeni Corp* 1,037,107
16,200 Matsumotokiyoshi Co Ltd 665,951
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
396,000 Mazda Motor Corp 837,386
602,000 Minolta Co Ltd* 2,953,352
152,000 Mitsubishi Gas Chemical Co Inc 254,565
1,297,000 Mitsubishi Material* 1,448,120
362,000 Mitsui Engineering & Shipbuilding* 281,700
956,000 Mitsui Trust Holding Inc 1,698,118
59,000 Mitsumi Electric Co Ltd 519,509
92,000 Nagase & Co 396,092
77,000 Nagoya Railroad Co Ltd 199,949
6,400 Nichii Gakkan Co 310,188
835,000 Nichimen Corp* 367,266
193,000 Nichiro Corp 205,693
121,000 Nippon Chemi-Con Corp 356,168
105,000 Nippon Hodo Co 486,699
1,517,000 Nippon Light Metal 1,411,461
129,500 Nippon Mining Holdings Inc* 214,692
28,000 Nippon Paint Co 71,288
897,000 Nippon Shinpan Co 1,115,322
95,000 Nippon Soda Co Ltd* 170,353
566,000 Nippon Suisan Kaisha Ltd 1,263,895
563,000 Nishimatsu Construction 1,633,402
52,000 Nisshin Oillio Group Ltd 124,475
1,641,000 Nisshin Steel Co Ltd* 1,110,425
1,895,000 Nissho Iwai Corp* 593,064
6,000 Noritake Co Ltd 17,661
269,000 NSK Ltd 766,784
369,000 Obayashi Corp 880,169
105,000 Okasan Securities Co Ltd 255,783
50,000 Onward Kashiyama Co Ltd 377,670
872,000 Orient Corp* 376,164
11,000 Royal Co Ltd 68,387
45,800 Ryosan Co 453,642
27,000 Sanki Engineering 123,781
38,000 Sankyo Co Ltd 842,123
145,000 Sanyo Securities Co Ltd*(b) 1,226
210,000 Seino Transportation Co Ltd 1,314,443
482,000 Sekisui Chemical 1,206,784
7,890 SFCG Co Ltd 560,592
30,700 Shimachu Co 558,300
5,500 Shimamura Co Ltd 285,642
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
524,000 Shimizu Corp 1,289,778
23,300 Shinko Electric Industries 340,952
858,000 Shinko Securities Co Ltd* 1,030,543
418,000 Showa Denko* 590,450
124,000 Showa Shell Sekiyu 819,150
99,500 Snow Brand Milk Products Co Ltd* 160,749
74,000 Stanley Electric Co Ltd 913,851
1,368,000 Sumitomo Heavy Industries Ltd* 960,406
6,085,000 Sumitomo Metal Industries* 2,676,422
215,000 Sumitomo Metal Mining Co Ltd 798,351
341,000 Sumitomo Realty and Development Co Ltd 1,321,023
140,000 Sumitomo Rubber Industries 567,224
49,400 Suzuken Co Ltd 1,199,222
1,127,600 Taiheiyo Cement Corp 1,878,936
1,320,000 Taisei Corp 2,478,664
65,000 Taiyo Yuden Co Ltd 600,930
85,800 THK Co Ltd 870,882
294,000 Toda Corp 482,436
147,000 Toho Gas Co Ltd 353,123
406,000 Tokyu Land Corp* 446,437
50,000 Toshiba Ceramics Co Ltd* 109,114
142,000 Toshiba TEC Corp* 348,319
127,000 Toyo Ink Manufacturing Co Ltd 369,533
48,000 Tsumura & Co* 365,405
26,600 Uni-Charm Corp 1,010,226
162,000 Victor Co of Japan Ltd* 1,181,172
66,000 Wacoal Corp 500,199
80,000 Yamaha Corp 900,656
160,000 Yamaha Motor Co 1,254,557
76,000 Yodogawa Steel Works 212,138
192,000 Yokohama Rubber Co 511,567
------------
88,904,607
------------
MALAYSIA -- 0.1%
170,000 Berjaya Sports Toto 144,053
88,000 Perusahaan Otomobil Nasional 185,263
357,000 Promet Berhad*(a)(b) 939
312,000 Rekapacific Berhad*(a) 821
------------
331,076
------------
</Table>
See accompanying notes to the financial statements.
10
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
MEXICO -- 0.1%
89,000 Cemex SA de CV CPO 320,024
------------
NETHERLANDS -- 4.1%
503,946 Buhrmann NV 1,395,903
86,046 Corio NV 2,476,168
117,498 CSM 2,344,094
18,576 DSM NV 681,722
2,917,471 Getronics NV* 377,334
300,815 Hagemeyer NV 1,468,709
46,868 Hunter Douglas NV 1,357,825
149,623 KLM NV 1,040,151
263,478 Koninklijke Vendex KBB NV 1,896,964
49,664 Koninklijke Volker Wessels 802,918
278,294 Numico NV 1,469,732
220,527 OCE NV 1,989,415
145,606 Randstad Holdings NV 1,241,349
29,018 Rodamco Europe NV 1,342,662
11,045 Van der Moolen Holding NV 145,828
37,382 Wereldhave NV 2,137,401
------------
22,168,175
------------
NEW ZEALAND -- 0.1%
296,811 Fletcher Building Ltd 584,826
------------
NORWAY -- 0.2%
69,200 Frontline Ltd 734,007
43,800 Tandberg ASA* 207,842
------------
941,849
------------
PHILIPPINES -- 0.2%
3,772,000 Ayala Land Inc 321,684
387,000 Bank of the Philippine Islands 227,125
78,000 Philippine Long Distance Telephone* 418,432
2,350,000 SM Prime Holdings 228,427
------------
1,195,668
------------
POLAND -- 0.3%
10,400 Bank Pekao SA* 234,416
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
POLAND -- CONTINUED
13,700 BRE Bank SA 238,075
132,900 KGHM Polska Miedz SA* 424,541
102,500 Polski Koncern Naftowy Orlen 449,234
155,900 Telekomunikacja Polska SA* 464,148
------------
1,810,414
------------
PORTUGAL -- 0.4%
136,858 Multimedia Servicos de Telecomunicacoes e Multimedia
SGPS SA PT* 1,622,561
60,275 Vodafone Telecel-Comunicacoes Pessoais SA 554,146
------------
2,176,707
------------
RUSSIA -- 0.3%
88,500 AO Mosenergo ADR 367,275
17,600 JSC Mining & Smelting Co ADR* 437,800
7,400 Mobile Telesystems ADR* 316,424
21,600 Tatneft ADR 362,880
------------
1,484,379
------------
SINGAPORE -- 2.1%
623,000 Comfort Group 322,399
415,100 Creative Technology Ltd 2,625,478
1,823,000 Datacraft Asia Ltd* 1,221,410
343,000 Elec & Eltek International Co Ltd 637,980
149,000 Hotel Properties Ltd 82,675
115,000 Marco Polo Developments Ltd 115,056
455,000 MobileOne Ltd* 321,795
5,867,000 Neptune Orient Lines Ltd* 3,002,403
5,560,100 Pacific Century Region Developments Ltd* 783,270
232,000 Singapore Exchange Ltd 165,414
651,000 ST Assembly Test Services Ltd* 464,158
15,057 Van Der Horst Ltd*(a) 6,423
2,124,000 Want Want Holdings Ltd 1,444,320
------------
11,192,781
------------
SOUTH AFRICA -- 0.7%
81,764 ABSA Group Ltd 338,609
356,000 FirstRand Ltd 311,193
61,000 Gencor Ltd 315,774
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SOUTH AFRICA -- CONTINUED
15,000 Goldfields Ltd 187,846
6,000 Impala Platinum Holdings Ltd 364,682
106,065 Iscor Ltd 233,432
28,000 Nedcor Ltd 333,288
75,000 Remgro Ltd 544,011
422,000 Sanlam Ltd 371,502
108,000 Standard Bank Investment Corp 384,992
58,900 Tiger Brands Ltd 462,284
------------
3,847,613
------------
SOUTH KOREA -- 1.0%
5,000 Hankuk Electric Glass 216,563
46,100 Hansol Paper Manufacturing Ltd 209,712
37,200 Hyundai Department Store Co Ltd* 309,156
14,400 Hyundai Mobis 267,214
15,300 Hyundai Motor Co 321,727
44,300 Inchon Iron & Steel Co 189,277
3,300 Kangwon Land Inc 355,255
48,900 KIA Motors Corp 309,299
10,600 Kookmin Credit Card Co Ltd* 158,070
9,900 KT Freetel* 203,200
8,100 LG Card Co Ltd 223,935
9,500 LG Electronics Inc 320,739
20,000 LG Engineering & Construction Ltd 236,250
4,250 LG Household & Health Care Ltd 90,793
64,300 Samsung Corp 332,907
3,800 Samsung Fire & Marine Insurance 181,460
4,900 Samsung SDI Co Ltd 279,144
24,700 Shinhan Financial Group Co Ltd 259,695
2,600 Shinsegae Co Ltd 335,442
33,700 SK Corp 355,732
20,706 SK Global* 137,040
------------
5,292,610
------------
SPAIN -- 3.1%
27,209 Acerinox SA 1,057,197
58,934 ACS Actividades Cons y Serv 2,033,880
96,894 Amadeus Global Travel Distribution 445,926
30,766 Augus de Barcelona SA 303,742
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SPAIN -- CONTINUED
63,200 Corp Mapfre SA 514,964
42,822 Ebro Puleva SA 335,075
69,443 Enagas 483,503
2,021,626 Iberia (Lineas Aer de Espana) 2,832,581
110,467 Metrovacesa SA 3,006,299
47,839 NH Hoteles SA* 407,331
78,992 Telefonica Publicidad e Informacion SA 281,805
437,195 Vallehermoso SA 4,283,288
42,984 Zardoya-Otis SA 579,102
------------
16,564,693
------------
SWEDEN -- 4.3%
19,900 Custos AB 315,725
31,500 Drott AB Class B 353,537
360,648 Gambro AB Class A 1,508,881
249,912 Gambro AB Class B 1,042,646
38,300 Getinge Industrier AB Class B 722,429
45,570 Holmen AB Class B 1,113,945
25,310 Kinnevik Investment Class B 267,705
35,900 Lundbergforetagen AB 793,184
5,600 Nobel Biocare AB*(a) 285,199
49,800 SAAB AB Class B 520,884
468,200 Skanska AB Class B 2,410,055
107,500 SKF AB Class B 2,836,262
39,735 SKF AB Series A 1,050,696
95,570 SSAB Swedish Steel Class A 1,162,474
717,200 Swedish Match AB 5,394,382
72,775 Tele2 AB Class B* 2,099,690
432,600 Telelogic AB* 274,538
125,500 Trelleborg AB Class B 1,032,436
------------
23,184,668
------------
SWITZERLAND -- 3.5%
277,560 ABB Ltd* 575,180
22,455 Centerpulse AG* 4,322,091
3,025 Ciba Specialty Chemicals AG 196,201
1,252 Forbo Holdings AG (Registered) 350,855
983 Geberit AG* 263,148
1,987 Givaudan 814,729
</Table>
14 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SWITZERLAND -- CONTINUED
1,393 Helvetia Patria Holding 137,656
40 Intershop Holdings AG (Bearer)* 15,044
190 Jelmoli (Registered) 22,559
3,822 Kuoni Reisen Holdings AG (Registered)* 732,832
46,617 Logitech International SA* 1,562,495
63,864 Micronas Semiconductor Hold* 1,365,823
50 Motor-Columbus (Bearer) 82,965
848 Movenpick Holdings (Bearer)* 353,333
6,400 Nobel Biocare Holding AG* 362,158
353 Pargesa Holdings SA (Bearer) 635,192
5,239 SGS Societe Generale Surveillance Holdings SA
(Registered) 1,777,242
3,070 SIG Holding AG 256,965
7,144 Sulzer AG (Registered)* 833,730
25,449 Swiss Life Holding* 1,463,881
2,204 Unaxis Holding AG 127,429
3,749 Valora Holding AG 620,686
34,527 Vontobel Holdings AG 430,314
13,171 ZKB Finanz Vision AG* 1,073,301
8,193 ZKB Pharma Vision AG* 614,777
------------
18,990,586
------------
TAIWAN -- 0.9%
204,000 Asustek Computer Inc 346,360
911,000 Cheng Loong Corp* 273,955
896,820 China Development Financial Holding Corp* 338,082
567,000 China Steel Corp 352,437
462,000 Chinatrust Financial Holding Co* 370,930
315,700 Compal Electronics Inc 304,344
197,000 Delta Electronics Inc 206,354
271,000 Formosa Chemicals & Fibre Co 269,830
518,000 International Bank of Taipei 223,597
395,000 Inventec Co Ltd 227,338
59,000 MediaTek Inc 434,647
446,105 Mega Financial Holdings Co Ltd* 216,955
152,000 Micro-Star International Co Ltd 238,389
393,000 Prodisc Technology Inc* 208,092
121,000 Quanta Computer Inc 208,921
735,000 Taiwan Cement Corp* 259,101
</Table>
See accompanying notes to the financial statements. 15
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
TAIWAN -- CONTINUED
214,000 Yulon Motor Co 253,105
------------
4,732,437
------------
THAILAND -- 0.5%
346,000 Advanced Info Service Pcl (Foreign Registered) 315,391
522,000 Bangkok Expressway Pcl (Foreign Registered)(a) 183,008
2,200,000 Charoen Pokphand Foods Pcl (Foreign Registered)(a) 215,964
3,845,000 Jasmine International Pcl (Foreign Registered)* 386,432
1,780,000 Land & House Pcl NVDR 309,945
102,500 PTT Exploration & Production Pcl (Foreign
Registered)(a) 309,045
367,800 PTT Pcl (Foreign Registered)(a) 376,096
15,000 Siam Cement Pcl NVDR 431,927
2,683,000 Thai Petrochemical (Foreign Registered)* 201,923
------------
2,729,731
------------
TURKEY -- 0.4%
83,292,000 Akbank TAS* 318,247
42,552,000 Aksa Akrilik Kimya Sanayii 413,126
61,906,000 Aksigorta AS 217,146
46,620,000 Arcelik AS 423,420
20,000,000 Aselsan Askeri Elektroni* 200,438
78,274,000 Hurriyet Gazeteci* 215,725
105,437,570 Trakya Cam Sanayii 224,546
142,910,000 Vestel Elektronik Sanayi* 326,728
------------
2,339,376
------------
UNITED KINGDOM -- 17.2%
44,034 3i Group Plc 330,144
408,922 Aegis Group Plc 388,066
71,135 Alliance & Leicester Plc 868,347
73,176 Alliance Unichem Plc 452,394
156,736 Arriva Plc 711,000
323,834 AWG Plc* 2,682,973
423,209 Barratt Development 2,733,046
106,193 Berkley Group 1,051,258
257,251 BPB Plc 1,065,666
412,577 Britannic Group Plc 883,796
244,100 British Energy Plc 17,302
1,172,836 Cable & Wireless 1,108,400
</Table>
16 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
635,505 Carlton Communications Plc 850,836
1,500 Carlton Communications Plc ADR 9,420
374,537 Cattle's Plc 1,572,172
154,857 Charter Plc (Registered)* 112,201
642,834 Coats 549,296
62,524 Cobham Group Plc 942,961
2,843,653 Cookson Group Plc* 772,634
1,201,504 Cordiant Communications Group Plc* 558,284
2,324,053 Corus Group Plc* 640,608
30,192 Daily Mail & General Trust Plc 230,168
122,965 De La Rue Plc 397,048
147,080 De Vere Group Plc 602,910
319,254 Debenhams Plc 1,358,971
502,485 Edonis Plc* 288,884
90,408 Egg Plc* 138,842
158,292 Eidos Plc* 284,231
172,007 Emap Plc 1,905,980
306,943 EMI Group Plc 513,683
445,556 Friends Provident Plc 621,089
699,901 Fyffes Ord 965,572
241,603 GKN Plc 599,365
761,702 Granada Compass Plc 650,868
352,186 Great Portland Estates Plc 1,220,402
112,321 Hammerson Plc 866,892
413,062 Hays Plc 468,442
376,723 IMI Plc 1,376,633
244,505 Imperial Chemical Industries Plc 585,382
118,588 Inchcape Plc 1,332,732
656,069 International Power Plc* 937,787
1,335,015 Invensys Plc 336,445
679,673 Kelda Group Plc 4,389,267
222,491 Laird Group 530,925
141,010 Liberty International Plc 1,254,892
764,653 LogicaCMG Plc 1,448,297
240,206 London Stock Exchange Plc 1,208,823
346,539 Misys Plc 1,045,271
334,199 Morgan Crucible* 194,767
105,725 Mothercare Plc 159,034
67,687 Next Plc 852,910
779,597 Northern Foods Plc 1,424,414
</Table>
See accompanying notes to the financial statements. 17
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
81,648 Northern Rock Plc 866,789
512,481 Novar Plc 928,290
42,652 P&O Princess Cruises Plc 268,053
493,455 Peninsular & Oriental Steam Navigation Co 1,222,211
154,661 Pennon Group Plc 1,624,856
216,823 Premier Farnell Plc 503,739
319,358 Provident Financial Plc 2,889,854
73,980 RAC Plc 414,832
425,422 Rank Group Plc 1,564,642
188,368 Rexam Plc 957,594
152,614 RMC Group 884,607
1,876,558 Rolls-Royce 2,349,834
1,601,993 Royal & Sun Alliance Insurance Group 1,804,159
65,115 Schroders Plc 438,712
178,123 Severn Trent Plc 1,975,153
204,928 Shire Pharmaceuticals Plc* 1,058,725
632,929 Signet Group Plc 752,680
239,872 Slough Estates 1,158,026
181,203 Smith (WH) Group Plc 753,490
549,912 Somerfield Plc 684,271
1,810,241 Stagecoach Holdings Plc 1,119,139
499,171 Tate & Lyle 2,183,793
882,869 Taylor Woodrow Plc 2,510,046
92,008 TDG Plc 229,701
2,035,145 THUS Group Plc* 273,434
1,257,213 Tomkins Plc 3,722,844
92,733 Travis Perkins Plc 1,404,403
202,194 Trinity Mirror Plc 1,267,534
280,959 United Business Media Plc 969,159
86,512 United Utilities 803,964
501,912 Whitbread Plc 4,118,826
215,283 Wilson (Connolly) Holdings 549,329
685,675 Wimpey (George) 2,926,818
103,629 Wolseley 817,762
------------
92,488,999
------------
TOTAL COMMON STOCKS (COST $567,558,348) 494,819,518
------------
</Table>
See accompanying notes to the financial statements.
18
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
PREFERRED STOCKS -- 1.0%
BRAZIL -- 0.4%
2,278,000 Ambev Ciade Rebid 1.67% 320,413
6,002,000 Bco Itau SA (Registered) 264,027
33,901,000 Brasil Telecom Participacoes SA 2.19% 167,083
14,850 Companhia Vale do Rio Doce Class A 407,761
14,400 Empresa Brasileira de Aeronautica SA ADR 148,464
67,719 Petroleo Brasileiro SA (Petrobras) 3.01% 810,010
26,074,000 Tele Norte Leste Participacoes SA 3.44% 173,145
------------
2,290,903
------------
GERMANY -- 0.4%
48,100 Dyckerhoff AG (Non Voting) 11.72% 230,698
5,300 Porsche AG (Non Voting) 0.83% 1,713,702
35,500 Rheinmetall AG (Non Voting) 3.92% 382,619
------------
2,327,019
------------
ITALY -- 0.1%
33,488 IFI Istituto Finanziario Industries 4.82% 288,747
------------
SOUTH KOREA -- 0.1%
20,000 Hyundai Motor Co Pfd 5.05% 211,117
------------
TOTAL PREFERRED STOCKS (COST $6,797,013) 5,117,786
------------
RIGHTS AND WARRANTS -- 0.0%
FRANCE -- 0.0%
2 Pernod-Ricard Rights*(a) 39
13,893 Wendel Investissement Warrants, Expires 3/27/03* 150
------------
189
------------
TOTAL RIGHTS AND WARRANTS (COST $31,260) 189
------------
SHORT-TERM INVESTMENTS -- 16.6%
CASH EQUIVALENTS -- 15.8%
$ 24,800,000 Banc One Corp, 1.31%, due 3/03/03 24,800,000
</Table>
See accompanying notes to the financial statements. 19
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CASH EQUIVALENTS -- 15.8%-- CONTINUED
$ 59,922,844 The Boston Global Investment Trust(c) 59,922,844
------------
84,722,844
------------
U.S. GOVERNMENT -- 0.8%
$ 4,500,000 U.S. Treasury Bill, 1.21%, due 4/24/03(d) 4,491,883
------------
TOTAL SHORT-TERM INVESTMENTS (COST $89,214,727) 89,214,727
------------
TOTAL INVESTMENTS -- 109.8%
(Cost $663,601,348) 589,152,220
Other Assets and Liabilities (net) -- (9.8%) (52,503,966)
------------
TOTAL NET ASSETS -- 100.0% $536,648,254
============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
ADR American Depositary Receipt
GDR Global Depository Receipt
NVDR Non-Voting Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) Bankrupt issuer.
(c) Represents investment of security lending collateral (Note 1).
(d) All or a portion of this security is held as collateral for open futures
contracts (Note 6).
20 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Consumer Discretionary 20.7%
Industrials 20.1
Financials 17.6
Materials 12.0
Information Technology 7.9
Consumer Staples 7.7
Health Care 4.8
Utilities 4.1
Energy 3.2
Telecommunication Services 1.9
-----
100.0%
=====
</Table>
See accompanying notes to the financial statements. 21
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$55,304,553 (cost $663,601,348) (Note 1) $589,152,220
Cash 67,548
Foreign currency, at value (cost $725,138) (Note 1) 734,016
Receivable for investments sold 584,654
Receivable for Fund shares sold 7,297,274
Dividends and interest receivable 747,692
Foreign taxes receivable 150,230
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 17,161,257
Receivable for expenses reimbursed by Manager (Note 2) 103,572
------------
Total assets 615,998,463
------------
LIABILITIES:
Payable for investments purchased 222,923
Payable upon return of securities loaned (Note 1) 59,922,844
Payable for Fund shares repurchased 7,000,000
Payable to affiliate for (Note 2):
Management fee 246,651
Shareholder service fee 61,663
Payable for open forward foreign currency contracts
(Notes 1 and 6) 11,527,313
Payable for variation margin on open futures contracts
(Notes 1 and 6) 196,334
Accrued expenses 172,481
------------
Total liabilities 79,350,209
------------
NET ASSETS $536,648,254
============
NET ASSETS CONSIST OF:
Paid-in capital $639,920,090
Distributions in excess of net investment income (86,486)
Accumulated net realized loss (32,938,066)
Net unrealized depreciation (70,247,284)
------------
$536,648,254
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $536,648,254
============
SHARES OUTSTANDING:
Class III 56,468,485
============
NET ASSET VALUE PER SHARE:
Class III $ 9.50
============
</Table>
22 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $1,071,070) $ 9,724,769
Interest (including securities lending income of
$411,466) 1,016,494
------------
Total income 10,741,263
------------
EXPENSES:
Management fee (Note 2) 2,684,104
Custodian fees 648,592
Audit fees 51,419
Transfer agent fees 28,557
Legal fees 16,251
Registration fees 12,072
Trustees fees and related expenses (Note 2) 10,747
Miscellaneous 5,927
Fees reimbursed by Manager (Note 2) (761,727)
------------
2,695,942
Shareholder service fee (Note 2)
Class III 671,026
------------
Net expenses 3,366,968
------------
Net investment income 7,374,295
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (9,764,715)
Closed futures contracts (14,662,366)
Foreign currency, forward contracts and foreign
currency related transactions 8,629,557
------------
Net realized loss (15,797,524)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (49,354,028)
Open futures contracts (1,523,104)
Foreign currency, forward contracts and foreign
currency related transactions 5,668,274
------------
Net unrealized loss (45,208,858)
------------
Net realized and unrealized loss (61,006,382)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(53,632,087)
============
</Table>
See accompanying notes to the financial statements. 23
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 7,374,295 $ 4,386,723
Net realized loss (15,797,524) (4,506,586)
Change in net unrealized appreciation (depreciation) (45,208,858) (14,191,285)
------------ ------------
Net decrease in net assets from operations (53,632,087) (14,311,148)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (15,340,291) (7,227,558)
------------ ------------
Total distributions from net investment income (15,340,291) (7,227,558)
------------ ------------
Net realized gains
Class III -- (9,648)
------------ ------------
Total distributions from net realized gains -- (9,648)
------------ ------------
(15,340,291) (7,237,206)
------------ ------------
Net share transactions (Note 5):
Class III 352,008,250 88,068,118
------------ ------------
Increase in net assets resulting from net share
transactions 352,008,250 88,068,118
------------ ------------
Total increase in net assets 283,035,872 66,519,764
NET ASSETS:
Beginning of period 253,612,382 187,092,618
------------ ------------
End of period (including distributions in excess of
net investment income of $86,486 and accumulated
undistributed net investment income of $206,945,
respectively) $536,648,254 $253,612,382
============ ============
</Table>
24 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.44 $ 11.68 $ 11.54 $ 11.02 $ 12.22
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.15 0.22 0.23 0.25 0.55
Net realized and unrealized gain
(loss) (0.80) (1.11) 1.02 0.83 (1.15)
-------- -------- -------- -------- --------
Total from investment operations (0.65) (0.89) 1.25 1.08 (0.60)
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.29) (0.35) (0.25) (0.15) (0.21)
From net realized gains -- (0.00)(c) (0.86) (0.41) (0.39)
-------- -------- -------- -------- --------
Total distributions (0.29) (0.35) (1.11) (0.56) (0.60)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.50 $ 10.44 $ 11.68 $ 11.54 $ 11.02
======== ======== ======== ======== ========
TOTAL RETURN(a) (6.30)% (7.57)% 11.09% 9.62% (5.06)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $536,648 $253,612 $187,093 $173,362 $158,142
Net expenses to average daily net
assets 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income to average
daily net assets 1.65% 2.02% 2.05% 2.19% 1.67%
Portfolio turnover rate 44% 34% 60% 55% 8%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.17% 0.22% 0.22% 0.24% 0.81%
Purchase and redemption fees
consisted of the following per
share amounts:(b) $ 0.06 $ 0.05 $ 0.04 -- --
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown. Calculation excludes purchase
premiums and redemption fees.
(b) Effective March 1, 2000 the Fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
(c) The distribution from net realized gains was less than $.01 per share.
See accompanying notes to the financial statements. 25
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Small Companies Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high total return through investment in equity securities
of non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney EMI
World Ex-U.S. Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign
26
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if there are movements in
foreign currency values that are unfavorable to the Fund. The value of the
currencies the Fund has committed to buy or sell is shown under Note 6,
and represents the currency exposure the Fund has acquired or hedged
through currency contracts as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are
27
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by
28
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
another instrument. The Fund may enter into total return swap agreements,
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return, both based on notional amounts. To
the extent the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. The Fund may also enter into contracts for
differences in which the Fund agrees with the counterparty that its return
will be based on the relative performance of two different groups or
"baskets" of securities, adjusted by an interest rate payment. To the
extent that the relative performance of the two baskets of securities
exceeds or falls short of the offsetting interest rate obligation, the
Fund will receive a payment from or make a payment to the counterparty,
respectively. In connection with these agreements, cash or securities may
be set aside as collateral by the Fund's custodian in accordance with the
terms of the swap agreement. The Fund earns interest on cash set aside as
collateral. Swaps are marked to market daily based upon quotations from
market makers and the change in value, if any, is recorded as unrealized
gain or loss in the Statement of Operations. Payments received or made at
the end of the measurement period are recorded as realized gain or loss in
the Statement of Operations. These financial instruments are not actively
traded on financial markets. The values assigned to these instruments are
based upon the best available information and because of the uncertainty
of the valuation, these values may differ significantly from the values
that would have been realized had a ready market for these instruments
existed, and the differences could be material. Entering into these
agreements involves, to varying degrees, elements of credit, legal, market
and documentation risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform or
disagree as to the meaning of contractual terms in the agreements, or that
there may be unfavorable changes in the price of the security or index
underlying these transactions. At February 28, 2003, there were no open
swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of collateral, the risk of delay in recovery or
loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $55,304,553 collateralized by cash in the amount of
$59,922,844, which was invested in a short-term instrument.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
29
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid was as follows: ordinary income --
$7,227,869 and $15,340,291, respectively; and long-term capital gains --
$9,337 and $0, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $4,433,152 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to foreign currency transactions, passive foreign
investment company transactions and losses on wash sale transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $6,078,276 and $20,471,179 expiring in 2010 and 2011,
respectively. The Fund has elected to defer to March 1, 2003 post-October
capital losses of $5,992,691.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This
30
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
reclassification has no impact on net investment income, realized
gain/loss or the net asset value of the Fund and is primarily attributable
to foreign currency transactions. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Distributions
in excess of Net Accumulated Net
Investment Income Realized Loss
----------------- ---------------
$7,672,565 $(7,672,565)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non-cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is 0.60% of the amount
invested. In the case of cash redemptions, the fee is .60% of the amount
redeemed. If the Manager determines that any portion of a cash purchase or
redemption fee is offset by a corresponding cash redemption or purchase
occurring on the same day, the purchase premium or redemption fee charged
by the Fund will be reduced by 100% with respect to that portion. In
addition, the purchase premium or redemption fee charged by the Fund may
be waived if the Manager determines the Fund is either substantially
overweighted or underweighted in cash so that a redemption or purchase
will not require a securities transaction. All purchase premiums and
redemption fees are paid to and recorded by the Fund as paid-in capital.
For the years ended February 28, 2002 and February 28, 2003, the Fund
received $879,541 and $2,531,977 in purchase premiums and $24,542 and
$54,833 in redemption fees, respectively. There is no premium for
reinvested distributions.
31
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .60% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year February 28, 2003, was $7,761. No remuneration is
paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$505,624,460 and $180,474,274, respectively.
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$664,404,649 $33,961,809 $(109,214,238) $(75,252,429)
</Table>
32
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 27.0% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder may
have a material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ----------------------
Shares Amount Shares Amount
Class III: ---------- ------------ --------- -----------
Shares sold 36,029,447 $390,124,687 8,537,304 $91,049,348
Shares issued to shareholders in reinvestment
of distributions 769,131 7,538,961 220,972 2,296,421
Shares repurchased (4,627,128) (45,655,398) (480,530) (5,277,651)
---------- ------------ --------- -----------
Net increase 32,171,450 $352,008,250 8,277,746 $88,068,118
========== ============ ========= ===========
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
---------- ---------------- -------------- ----------- --------------
Buys
4/28/03 AUD 16,376,251 $ 9,884,910 $ 958,500
4/28/03 CAD 58,797,881 39,358,980 1,559,081
3/28/03 CHF 45,146,308 33,310,084 2,856,644
3/28/03 DKK 119,924,800 17,381,616 1,647,753
3/28/03 EUR 67,076,084 72,227,936 6,649,632
3/28/03 GBP 15,258,609 23,995,327 195,274
4/28/03 HKD 38,157,820 4,891,798 7,794
</Table>
33
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
---------- ---------------- -------------- ----------- --------------
4/28/03 JPY 2,152,617,200 $18,245,972 $ 686,434
3/28/03 NOK 148,974,219 20,731,590 1,281,162
4/28/03 NZD 7,762,222 4,290,950 466,167
3/28/03 SEK 70,097,120 8,224,222 729,002
4/28/03 SGD 10,437,255 6,006,448 123,814
------------
$ 17,161,257
============
Sales
4/28/03 AUD 13,596,841 $ 8,207,223 $ (797,126)
4/28/03 CAD 48,995,554 32,797,356 (1,708,153)
3/28/03 CHF 16,581,162 12,233,999 (1,037,976)
3/28/03 DKK 16,344,470 2,368,929 (226,209)
3/28/03 EUR 66,294,503 71,386,325 (3,853,637)
3/28/03 GBP 23,511,289 36,973,295 (641,051)
4/28/03 HKD 104,574,282 13,406,329 (19,755)
4/28/03 JPY 5,097,878,276 43,210,536 (1,846,040)
3/28/03 NOK 39,931,894 5,557,013 (371,076)
4/28/03 NZD 4,328,615 2,392,855 (342,891)
3/28/03 SEK 63,332,528 7,430,559 (683,399)
------------
$(11,527,313)
============
</Table>
CURRENCY ABBREVIATIONS:
<Table>
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krona
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
</Table>
34
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- ------------- --------------- ------------ --------------
Buys
28 DAX March 2003 $ 1,917,460 $ (244,940)
20 FTSE 100 March 2003 1,143,838 (7,225)
17 Hang Seng March 2003 983,498 3,030
12 IBEX 35 March 2003 775,693 (9,895)
16 MIB 30 March 2003 2,022,470 (126,484)
381 MSCI March 2003 6,835,063 (132,507)
157 OMX March 2003 869,967 550
318 TSE TOPIX March 2003 21,975,555 (1,037,479)
-----------
$(1,554,950)
===========
Sales
320 CAC 40 March 2003 $ 9,498,436 $ (77,934)
99 SPI 200 March 2003 4,196,459 176,162
-----------
$ 98,228
===========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
35
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTERNATIONAL SMALL COMPANIES FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Small Companies
Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
36
<Page>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$1,071,070 and recognized foreign source income of $10,795,839.
37
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
38
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
39
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
40
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO International Bond Fund returned +25.2% for the
fiscal year ended February 28, 2003, compared to +28.8% for the J.P. Morgan
Non-U.S. Government Bond Index. The Fund's exposure to various issues is
achieved directly and indirectly through its investment in the GMO Emerging
Country Debt Fund, the GMO Alpha LIBOR Fund (ALF), and the GMO Short-Duration
Collateral Fund.
The Fund underperformed the benchmark during the fiscal year by 3.6%. Bond
market, emerging debt, and currency selection added value during the fiscal
year, while issue selection underperformed. Issue selection dramatically hurt
performance in late 2002. Credit related spread widening in the assets
underlying the Fund's investment in ALF and the default of certain healthcare
receivable asset-backed bonds held by ALF, which were allegedly involved in a
massive fraud, contributed to the underperformance. National Century Financial
Enterprises, the sponsor of $3.35 billion of health care asset-backed
receivables allegedly violated the terms of the bonds' indentures by, among
other things, spending cash collateral, accepting collateral other than
permitted receivables, moving receivables between trusts to meet compliance
tests, and reimbursing healthcare providers for more than the value of
receivables purchased. National Century, its affiliated operations, the trusts,
and many healthcare providers have declared bankruptcy. This event had a
negative effect on the net asset value of ALF, and an indirect effect on GMO
International Bond Fund of -5.0% (through February 28, 2003).
Overweight positions in Euro-member country bonds and the U.S. bond market, as
well as an underweight position in Japanese government bonds, added value during
the period. In addition, an underweight position in the U.S. dollar and
overweight positions in the Australian dollar, and Swedish krona generated
significant gains.
OUTLOOK
The Fund is structured to benefit from outperformance in the Canadian,
Euro-member country, Swedish, U.S., and emerging bond markets. We expect the
Australian, Danish, Japanese, and Swiss bond markets to underperform. Strong
relative performance is expected from Canadian dollars, Swedish krona, Swiss
francs, and British gilt markets. The Danish krona, euro, Japanese yen and
Australian and US dollars are expected to underperform. At the end of the
period, 3.8% of the Fund was invested in Emerging Country Debt Fund.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL BOND FUND CLASS III SHARES AND THE
J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX
AS OF FEBRUARY 28, 2003
GMO INTERNATIONAL J.P. MORGAN NON-U.S.
BOND FUND GOV'T. BOND INDEX
12/22/93 $10,000 $10,000
12/31/93 $9,900 $9,900
3/31/94 $9,960 $10,017
6/30/94 $10,080 $10,148
9/30/94 $10,576 $10,321
12/31/94 $10,411 $10,387
3/31/95 $11,507 $11,848
6/30/95 $12,446 $12,394
9/30/95 $12,598 $12,241
12/31/95 $13,254 $12,581
3/31/96 $13,266 $12,370
6/30/96 $13,896 $12,455
9/30/96 $14,675 $12,896
12/31/96 $15,463 $13,244
3/31/97 $14,677 $12,475
6/30/97 $15,160 $12,794
9/30/97 $15,711 $12,866
12/31/97 $15,599 $12,744
3/31/98 $15,750 $12,828
6/30/98 $15,810 $13,084
9/30/98 $16,700 $14,387
12/31/98 $17,282 $15,074
3/31/99 $16,283 $14,328
6/30/99 $15,623 $13,668
9/30/99 $16,343 $14,426
12/31/99 $16,335 $14,144
3/31/2000 $16,266 $13,970
6/30/2000 $16,130 $13,877
9/30/2000 $15,518 $13,243
12/31/2000 $16,291 $13,794
3/31/2001 $15,535 $13,127
6/30/2001 $15,157 $12,866
9/30/2001 $16,309 $13,858
12/31/2001 $15,865 $13,298
3/31/2002 $15,658 $13,064
6/30/2002 $18,124 $14,881
9/30/2002 $18,400 $15,312
12/31/2002 $18,788 $16,238
2/28/2003 $19,535 $16,757
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 12/22/93
Class III 25.17% 4.32% 7.56%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset of values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE/
SHARES DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 25.0%
BULGARIA -- 2.4%
USD 10,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 2,964,307
------------
CANADA -- 7.1%
CAD 2,000,000 Province of British Columbia, 7.88%, due 11/30/23 1,631,091
GBP 3,500,000 Province of Quebec, 8.63%, due 11/04/11 7,004,627
------------
8,635,718
------------
CAYMAN ISLANDS -- 10.0%
CAD 2,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 1,495,503
EUR 10,000,000 MBNA America Euro Structured Offering, Variable
Rate, 3 mo.
EURIBOR + .14%, 2.83%, due 05/19/04 10,778,000
------------
12,273,503
------------
JAPAN -- 0.9%
USD 1,030,000 Japan Highway Public Corporation, 7.63%, due
09/22/04 1,122,185
------------
SUPRA NATIONAL -- 0.4%
CAD 700,000 European Investment Bank, 8.50%, due 08/30/05 520,842
------------
UNITED STATES -- 4.2%
U.S. GOVERNMENT -- 4.2%
USD 4,479,320 U.S. Treasury Inflation Indexed Note, 3.63%, due
01/15/08(b) 5,060,232
------------
TOTAL DEBT OBLIGATIONS (COST $27,468,646) 30,576,787
------------
MUTUAL FUNDS -- 69.5%
483,701 GMO Emerging Country Debt Fund, Class III 4,604,832
619,387 GMO Alpha LIBOR Fund 14,691,865
2,633,646 GMO Short-Duration Collateral Fund 65,867,490
------------
TOTAL MUTUAL FUNDS (COST $86,006,184) 85,164,187
------------
</Table>
See accompanying notes to the financial statements.
1
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
CALL OPTIONS PURCHASED -- 0.5%
CROSS CURRENCY OPTIONS -- 0.5%
GBP 8,000,000 GBP Call/JPY Put, Expires 01/23/04 Strike 184.00 333,198
GBP 4,700,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 197,841
USD 4,200,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 101,121
------------
632,160
------------
TOTAL CALL OPTIONS PURCHASED (COST $886,491) 632,160
------------
PUT OPTIONS PURCHASED -- 0.0%
CROSS CURRENCY OPTIONS -- 0.0%
GBP 9,100,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.43 2,867
------------
TOTAL PUT OPTIONS PURCHASED (COST $371,881) 2,867
------------
<Caption>
PAR VALUE ($)
-------------
SHORT-TERM INVESTMENTS -- 0.8%
CASH EQUIVALENTS -- 0.8%
USD 1,003,875 Merrimac Cash Fund 1,003,875
------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,003,875) 1,003,875
------------
TOTAL INVESTMENTS -- 95.8%
(Cost $115,737,077) 117,379,876
Other Assets and Liabilities (net) -- 4.2% 5,140,627
------------
TOTAL NET ASSETS -- 100.0% $122,520,503
============
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
NOTES TO SCHEDULE OF INVESTMENTS:
Variable rates - The rates shown on variable rate notes are the
current interest rates at February 28, 2003, which are subject
to change based on the terms of the security.
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
</Table>
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts and open swap contracts
(Note 6).
See accompanying notes to the financial statements. 3
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $115,737,077) (Note 1) $117,379,876
Receivable for investments sold 9,090,915
Receivable for Fund shares sold 8,300,000
Interest receivable 1,463,836
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 1,659,560
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 57,443
Net receivable for open swap contracts (Notes 1 and 6) 2,222,370
Receivable for expenses reimbursed by Manager (Note 2) 11,930
------------
Total assets 140,185,930
------------
LIABILITIES:
Payable for Fund shares repurchased 16,400,000
Payable to affiliate for (Note 2):
Management fee 24,867
Shareholder service fee 14,920
Payable for open forward foreign currency contracts
(Notes 1 and 6) 1,185,129
Accrued expenses 40,511
------------
Total liabilities 17,665,427
------------
NET ASSETS $122,520,503
============
NET ASSETS CONSIST OF:
Paid-in capital $110,127,090
Distributions in excess of net investment income (568,991)
Accumulated net realized gain 8,707,103
Net unrealized appreciation 4,255,301
------------
$122,520,503
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $122,520,503
============
SHARES OUTSTANDING:
Class III 12,321,002
============
NET ASSET VALUE PER SHARE:
Class III $ 9.94
============
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Interest (including securities lending income of $835) $ 2,568,536
Dividends from investment company shares 1,173,155
-----------
Total income 3,741,691
-----------
EXPENSES:
Management fee (Note 2) 336,004
Custodian and transfer agent fees 72,135
Audit fees 36,863
Legal fees 9,337
Registration fees 7,008
Trustees fees and related expenses (Note 2) 4,031
Miscellaneous 2,747
Fees reimbursed by Manager (Note 2) (125,516)
-----------
342,609
Indirectly incurred fees waived or borne by Manager (Note
2) (21,029)
-----------
321,580
-----------
Shareholder service fee (Note 2) - Class III 201,602
Shareholder service fee waived (Note 2) - Class III (7,675)
-----------
193,927
-----------
Net expenses 515,507
-----------
Net investment income 3,226,184
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (8,442,805)
Realized gains distributions from investment company
shares 396,140
Closed futures contracts 985,447
Closed swap contracts 3,269,594
Written options 40,079
Foreign currency, forward contracts and foreign
currency related transactions 20,397,793
-----------
Net realized gain 16,646,248
-----------
Change in net unrealized appreciation on:
Investments 6,168,094
Open futures contracts 348,500
Open swap contracts 1,627,041
Foreign currency, forward contracts and foreign
currency related transactions 2,886,299
-----------
Net unrealized gain 11,029,934
-----------
Net realized and unrealized gain 27,676,182
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $30,902,366
===========
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,226,184 $ 8,164,480
Net realized gain (loss) 16,646,248 (10,470,647)
Change in net unrealized appreciation (depreciation) 11,029,934 (4,431,557)
------------ ------------
Net increase (decrease) in net assets from
operations 30,902,366 (6,737,724)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (15,448,356) (499,961)
------------ ------------
Total distributions from net investment income (15,448,356) (499,961)
------------ ------------
Net share transactions (Note 5):
Class III (27,981,311) (70,305,217)
------------ ------------
Decrease in net assets resulting from net share
transactions (27,981,311) (70,305,217)
------------ ------------
Total decrease in net assets (12,527,301) (77,542,902)
NET ASSETS:
Beginning of period 135,047,804 212,590,706
------------ ------------
End of period (including distribution in excess of
net investment income of $568,991 and $2,419,906,
respectively) $122,520,503 $135,047,804
============ ============
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------------------------------
2003 2002 2001(D) 2000 1999
--------- --------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.05 $ 9.44 $ 9.19 $ 10.06 $ 10.45
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.24(a)+ 0.45(a)+ 0.63(a)+ 0.70(a) 0.71
Net realized and unrealized gain
(loss) 1.96 (0.81) (0.34) (0.99) (0.42)
-------- -------- -------- -------- --------
Total from investment operations 2.20 (0.36) 0.29 (0.29) 0.29
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (1.31) (0.03) -- (0.39) (0.45)
From net realized gains -- -- (0.04) (0.19) (0.23)
-------- -------- -------- -------- --------
Total distributions (1.31) (0.03) (0.04) (0.58) (0.68)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.94 $ 9.05 $ 9.44 $ 9.19 $ 10.06
======== ======== ======== ======== ========
TOTAL RETURN(b) 25.17% (3.80)% 3.20% (2.98)% 2.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $122,521 $135,048 $212,591 $145,373 $181,829
Net operating expenses to average
daily net assets 0.38%(e) 0.38%(e) 0.39%(e) 0.40% 0.40%
Interest expense to average daily net
assets -- -- -- 0.03%(c) --
Total net expenses to average daily
net assets 0.38% 0.38% 0.39% 0.43% 0.40%
Net investment income to average
daily net assets 2.40%(a) 4.85%(a) 6.82%(a) 6.51%(a) 6.45%
Portfolio turnover rate 40% 36% 114% 39% 106%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.11% 0.11% 0.04% 0.98% 0.24%
</Table>
(a) Net investment income is affected by the timing of the declaration of
dividends by other Funds of the Trust in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(c) Interest expense incurred as a result of entering into reverse
repurchase agreements is included in the Fund's net expenses. Income
earned on investing proceeds from reverse repurchase agreements is
included in interest income.
(d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
premium and discount on debt securities. The effect of this change for
the year ended February 28, 2001 was to decrease net investment income
per share by $0.01, increase net realized and unrealized gains and
losses per share by $0.01 and decrease the ratio of net investment
income to average net assets from 6.97% to 6.82%. Per share and
ratios/supplemental data for periods prior to March 1, 2000 have not
been restated to reflect this change.
(e) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 2.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 7
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through direct and indirect investment in
foreign bond and currency markets. The Fund's benchmark is the J.P. Morgan
Non-U.S. Government Bond Index.
At February 28, 2003, 53.8% of the Fund was invested in the GMO
Short-Duration Collateral Fund and 12.0% of the Fund was invested in the
GMO Alpha LIBOR Fund, separate funds of GMO Trust managed by GMO. Shares
of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are
not publicly available for direct purchase. At February 28, 2003, 3.7% of
the net assets of the Fund was invested in the GMO Emerging Country Debt
Fund, a separate fund of GMO Trust managed by GMO. The financial
statements of the GMO Alpha LIBOR Fund, the GMO Short-Duration Collateral
Fund and the GMO Emerging Country Debt Fund should be read in conjunction
with the Fund's financial statements.
The Fund invested a substantial portion of its assets in GMO Alpha LIBOR
Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In
November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds")
defaulted amid allegations of fraud and significant violations of the
bonds' indentures. Currently, no market exists for the NPF bonds, and they
are being valued at fair value by the trustees of GMO Trust or persons
acting at their direction. The devaluation of the NPF bonds had a negative
impact on the Fund's net asset value per share.
In late November 2002, Alpha LIBOR Fund undertook a reorganization
transaction with a new series of GMO Trust, GMO Short-Duration Collateral
Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR
Fund was transferred to SDCF in exchange for SDCF shares. The
reorganization was treated as a sale of the Alpha LIBOR Fund shares for
financial reporting purposes and a distribution by Alpha LIBOR Fund for
tax purposes. Accordingly, for financial reporting purposes, the Fund
recognized a loss on the sale of the Alpha LIBOR shares of approximately
$17,424,200. In addition, the Fund recognized for tax, but not for
financial reporting purposes, ordinary income of $6,635,832 and long-term
capital gains of $1,183,564 from Alpha LIBOR Fund. $25,243,596 was added
to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund.
8
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Shares of mutual funds are valued at their net asset value as reported on
each business day. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction. A security's value may be deemed
unreliable if, for example, the Manager becomes aware of information or
events occurring after the close of a foreign market that would materially
affect that security's value.
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund, or underlying Funds in which it
invests, were valued on the basis of a price provided by a principal
market maker. The prices provided by the principal market maker may differ
from the value that would be realized if the securities were sold and the
differences could be material to the financial statements.
9
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. The value of the currencies the Fund has
committed to buy or sell is shown under Note 6 and represents the currency
exposure the Fund has acquired or hedged through forward currency
contracts as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
10
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. See the Schedule of Investments
for all open purchased option contracts as of February 28, 2003.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
11
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the "lender") that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into interest rate, total return, forward swap spread lock and
credit default swap agreements to manage its exposure to interest rates
and credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return, both based on notional amounts. To the extent the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty,
respectively. Forward swap spread lock swap agreements involve commitments
to pay or receive a settlement amount calculated as the difference between
the swap spread and a fixed spread, multiplied by the notional amount
times the duration of the swap rate. The swap spread is the difference
between the benchmark swap rate (market rate) and the specific treasury
rate. In a credit default swap, one party makes a stream of payments to
another party in exchange for the right to receive a specified return in
the event of a default by a third party on its obligation. The Fund may
use credit default swaps to provide a measure of protection against
defaults of sovereign or corporate issuers (i.e., to reduce risk where the
Fund owns or has exposure
12
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
to the issuer) or to take an active long or short position with respect to
the likelihood of a particular issuer's default. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations. Net
payments of interest on interest rate swap agreements are included as part
of interest income. These financial instruments are not actively traded on
financial markets. The values assigned to these instruments are based upon
the best available information and because of the uncertainty of the
valuation, these values may differ significantly from the values that
would have been realized had a ready market for these instruments existed,
and the differences could be material. Entering into these agreements
involves, to varying degrees, elements of credit, legal, market, and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will
be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be
unfavorable changes in interest rates. See Note 6 for a summary of open
swap agreements as of February 28, 2003.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund has sold may
decline below the price at which it is obligated to repurchase them under
the agreement. For the year ended February 28, 2003, the Fund did not
enter into any reverse repurchase agreements.
13
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recover
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income were $499,961 and
$15,448,356, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $13,543,148 of undistributed ordinary income. The
temporary difference between book and tax basis distributable earnings are
primarily due to foreign currency transactions, losses on wash sale
transactions, and differing treatments for amortization of premiums and
discounts on debt securities.
The Fund elected to defer to March 1, 2003 post-October losses of
$4,511,190.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of
14
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
the Fund and is primarily attributable to foreign currency transactions,
the GMO Alpha LIBOR Fund transactions (See Note 1), and redemption in kind
transactions. Net losses resulting from redemption in kind transactions
were $17,512. The financial highlights exclude these adjustments.
<Table>
<Caption>
Distributions in Accumulated
Excess of Net Net
Investment Income Realized Gain Paid-in Capital
----------------- ------------- ---------------
$14,073,087 $(5,578,321) $(8,494,766)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the amortization of
premium and discounts. Dividend income is recorded on the ex-dividend
date. Non-cash dividends, if any, are recorded at the fair market value of
the securities received. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
Interest income on inflation indexed securities is accrued daily based
upon an inflation adjusted principal. Additionally, any increase in the
principal or face amount of these securities is recorded as interest
income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities 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 securities markets of the U.S. and developed
foreign markets.
15
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares. The Fund may invest in Class III shares of GMO Emerging Country
Debt Fund ("ECDF"). Like the management fee (as described below), the
Fund's shareholder service fee will be waived (but not below zero) to the
extent of the indirect shareholder service fees paid in connection with
the Fund's investment in ECDF. The Fund does not incur any indirect
shareholder service fees as a result of the Fund's investment in Alpha
LIBOR Fund and SDCF. For the year ended February 28, 2003, the shareholder
service fees incurred indirectly by the Fund were 0.006% of the Fund's
average daily net assets.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes ("fund expenses")) and the amount of fees and
operating expenses (excluding shareholder service fees (ECDF only) and
fund expenses, as defined above) incurred indirectly by the Fund through
its investment in the underlying funds (including GMO Alpha LIBOR Fund,
GMO Short-Duration Collateral Fund, and ECDF) exceed the management fee.
For the year ended February 28, 2003, indirect operating expenses
(excluding shareholder service fees (GMO ECDF only) and investment-related
expenses) and indirect investment-related expenses (including, but not
limited to, interest expense, foreign audit expense, and
investment-related legal expense) incurred by the Fund through its
investment in underlying funds were 0.019% and 0.022% of the Fund's
average daily net assets, respectively.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $3,081. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$50,794,294 and $61,984,747, respectively.
16
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
For the year ended February 28, 2003, the cost of purchases and proceeds
from sales of investments exclude the initial transfer of GMO Alpha LIBOR
Fund's investments in GMO Short-Duration Collateral Fund of $57,966,912.
(See Note 1)
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$124,443,518 $3,152,219 $(10,215,861) $(7,063,642)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 73.2% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------- --------------------------
Shares Amount Shares Amount
Class III: ----------- ------------ ------------ ------------
Shares sold 1,695,024 $ 17,095,583 2,426,506 $ 22,049,789
Shares issued to shareholders
in reinvestment of distributions 1,459,236 13,731,415 49,148 450,690
Shares repurchased (5,748,110) (58,808,309) (10,077,404) (92,805,696)
----------- ------------ ------------ ------------
Net decrease (2,593,850) $(27,981,311) (7,601,750) $(70,305,217)
=========== ============ ============ ============
</Table>
17
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- --------------- ----------------- ------------ --------------
Buys
3/25/03 AUD 29,500,000 $17,867,978 $ 502,884
4/01/03 CAD 23,000,000 15,419,057 385,663
3/04/03 CHF 42,400,000 31,268,437 578,105
4/29/03 CHF 29,200,000 21,558,944 25,021
4/22/03 EUR 46,700,000 50,247,348 (113,932)
4/15/03 GBP 1,400,000 2,199,156 (53,444)
3/18/03 JPY 5,900,000,000 49,930,400 (188,245)
----------
$1,136,052
==========
Sales
3/25/03 AUD 19,600,000 $11,871,606 $ (381,266)
4/01/03 CAD 14,600,000 9,787,749 (211,335)
3/04/03 CHF 42,400,000 31,268,437 (233,800)
4/15/03 GBP 2,000,000 3,141,652 51,272
3/18/03 JPY 950,000,000 8,039,641 (3,107)
----------
$ (778,236)
==========
</Table>
FORWARD CROSS CURRENCY CONTRACTS
<Table>
<Caption>
Settlement Net Unrealized
Date Deliver/Units of Currency Receive/In Exchange For Appreciation
---------- ------------------------- ----------------------- --------------
3/11/03 CHF 20,799,350 EUR 14,300,000 $ 67,668
4/08/03 EUR 23,200,000 SEK 213,412,160 48,947
--------
$116,615
========
</Table>
18
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<Table>
<Caption>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- ------------------------------------- --------------- ------------ --------------
Buys
40 Canadian Government Bond 10 Yr. June 2003 $ 2,865,888 $ 4,029
25 Euro BOBL March 2003 3,057,180 65,573
21 Euro BOBL June 2003 2,546,982 (363)
21 Euro Bund March 2003 2,640,685 32,812
107 Euro Bund June 2003 13,353,435 (465)
9 Japanese Government Bond 10 Yr. June 2003 10,854,049 11,595
---------
$ 113,181
---------
Sales
10 Australian Government Bond 10 Yr. March 2003 $ 650,749 $ (19,863)
29 Australian Government Bond 3 Yr. March 2003 1,835,335 (20,973)
51 Swiss Government Bond March 2003 4,948,429 (167,841)
4 U.K. Gilt June 2003 765,499 1,045
73 U.S. Treasury Note 5 Yr. June 2003 8,300,328 (27,795)
---------
$(235,427)
=========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
19
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
WRITTEN OPTIONS TRANSACTIONS
<Table>
<Caption>
Puts Calls
---------------------------- --------------------------------
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- ---------- ---------------- --------------
Outstanding, beginning of period -- $ -- -- $ --
Options written -- -- 65,300 2,886,232
Options closed -- -- -- --
Options exercised -- -- (60,900) (2,846,153)
Options expired -- -- (4,400) (40,079)
Options sold -- -- -- --
--------- ---------- ------------ -----------
Outstanding, end of period -- $ -- -- $ --
========= ========== ============ ===========
</Table>
SWAP AGREEMENTS
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- --------------- --------------------------------------- ------------------------------------------
CREDIT DEFAULT SWAPS
100,117,997 EUR 3/31/03 Agreement with Morgan Guaranty Trust $ (24,843)
Company dated 5/4/01 to pay .07% per
year times the notional amount. The
Fund receives payment only upon a
default event in Belgium, the notional
amount times the difference between the
par value and the then-market value of
Kingdom of Belgium, 5.75% due 3/28/08.
INTEREST RATE SWAPS
20,000,000 EUR 3/21/05 Agreement with UBS AG dated 3/17/00 to 1,244,286
receive the notional amount multiplied
by 5.222% and to pay the notional
amount multiplied by the 3 month
Floating Rate EURIBOR adjusted by a
specified spread.
</Table>
20
<Page>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- --------------- --------------------------------------- ------------------------------------------
7,800,000 SEK 9/25/07 Agreement with Citibank N.A. dated $ 24,292
9/24/02 to receive the notional amount
multiplied by 4.79% and to pay the
notional amount multiplied by the 3
month Floating Rate Swedish STIBOR
adjusted by a specified spread.
10,800,000 SEK 9/25/12 Agreement with Citibank N.A. dated 35,458
9/24/02 to receive the notional amount
multiplied by 5.08% and to pay the
notional amount multiplied by the 3
month Floating Rate Swedish STIBOR
adjusted by a specified spread.
3,109,769 USD 7/28/24 Agreement with JP Morgan Chase Bank (117,245)
dated 9/20/02 to pay $10,000,000 at
expiration date and to receive at
expiration date $3,090,000 plus
interest based upon the 3 month
Floating Rate LIBOR (compounded
quarterly) adjusted by a specified
spread.
5,000,000 EUR 3/21/30 Agreement with UBS AG dated 3/17/00 to 998,432
receive the notional amount multiplied
by 5.895% and to pay the notional
amount multiplied by the 3 month
Floating Rate EURIBOR adjusted by a
specified spread.
TOTAL RETURN SWAPS
52,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust 111,692
Company dated 7/18/01 to receive (pay)
the notional amount multiplied by the
return on the JP Morgan Non-U.S. Traded
Total Return Government Bond Index and
to pay the notional amount multiplied
by the 1 month LIBOR adjusted by a
specified spread.
----------
$2,272,072
==========
</Table>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
21
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTERNATIONAL BOND FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Bond Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
22
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
23
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
24
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------------------ -------------- -------------- --------------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present), Chief
c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member,
40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer of the Officer since
Age: 47 Trust October 2002;
Vice President
from August
1998 - October
2002.
Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Financial Financial
40 Rowes Wharf Officer and Officer Since
Boston, MA 02110 Treasurer of February 2000;
Age: 45 the Trust Treasurer
since February
1998.
Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust Treasurer of September Otterloo & Co. LLC.
40 Rowes Wharf the Trust 1998.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting
c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 since March
Age: 37 2001; May
1999 - August
1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP
Boston, MA 02110 Secretary (1991 - 1999).
Age: 58 since March
2001.
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Laundering
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
25
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
ANALYSIS OF FUND PERFORMANCE
Class III shares of GMO Intrinsic Value Fund returned -21.1% for the fiscal year
ended February 28, 2003 as compared to -19.3% for the Russell 1000 Value Index
and -22.7% for the S&P 500. Consistent with the Fund's investment objectives and
policies, the Fund was invested substantially in common stocks throughout the
period.
For the fiscal year, the best performing sectors in the Russell 1000 Value Index
were financial services, healthcare, and consumer staples, albeit all still
reporting negative absolute returns. Autos and transportation, the weakest
performing sector in the index, fell over 31% during the fiscal year. Also
posting weak returns were the utilities, technology, and consumer discretionary
sectors, falling 27%, 26%, and 23%, respectively.
While there was virtually no difference between small cap and large cap
performance this fiscal year, value stocks did continue to outpace growth stocks
by 6% to 8% across all market capitalizations.
The Fund's underperformance of the benchmark for the period is attributable to
both sector and stock selection. The Fund's overweight position in healthcare
added to relative returns, as did the underweight in utilities and overweight in
consumer staples. However, these gains were more than offset by the Fund's
overweight position in the weak performing autos and transportation sector and
its underweight position in financial services. Together, these cost the Fund
over 60 basis points in relative performance.
While stock selection was quite strong in both financial and healthcare stocks,
overall selection in the Fund was weak this fiscal year. Selection was
particularly impaired in the auto and transportation sector and, to a lesser
extent, in both the consumer staples and utilities selections.
The Fund incorporates three investment disciplines in the portfolio: price to
intrinsic value, which has a 50% weight; price to normalized earnings, with a
30% weight; and momentum, with a 20% weight. Both price momentum and price to
normalized earnings, our traditional value measure, had positive impacts to
return this fiscal year, but price to intrinsic value had a significant negative
impact on the relative performance of the Fund.
OUTLOOK
The portfolio currently maintains overweight positions in healthcare, producer
durables, and technology stocks, and underweight positions in integrated oil and
materials and processing companies. We believe that our approach of combining
value and momentum is well positioned to add value in the current volatile
equity market.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTRINSIC VALUE FUND CLASS III SHARES AND THE RUSSELL 1000 VALUE INDEX
AS OF FEBRUARY 28, 2003 GMO INTRINSIC VALUE FUND RUSSELL 1000 VALUE INDEX
8/2/99 $10,000 $10,000
9/30/99 $9,290 $9,287
12/31/99 $9,933 $9,791
3/31/2000 $9,923 $9,838
6/30/2000 $9,531 $9,377
9/30/2000 $10,469 $10,114
12/31/2000 $10,993 $10,478
3/31/2001 $10,962 $9,865
6/30/2001 $11,759 $10,346
9/30/2001 $10,545 $9,213
12/31/2001 $11,357 $9,893
3/31/2002 $11,814 $10,297
6/30/2002 $10,616 $9,420
9/30/2002 $8,775 $7,652
12/31/2002 $9,568 $8,357
2/28/2003 $9,008 $7,937
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 8/2/99
Class III -21.05% -2.88%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
COMMON STOCKS -- 97.4%
AUTO & TRANSPORTATION -- 4.6%
26,400 AMR Corp* 61,776
4,200 ArvinMeritor Inc 64,176
5,300 Autoliv Inc 109,710
17,100 Burlington Northern Santa Fe Railroad Co 427,500
4,200 Continental Airlines Inc, Class B* 21,420
3,700 Cooper Tire & Rubber Co 51,837
8,600 Dana Corp 73,616
16,900 Delta Air Lines Inc 141,960
47,054 Ford Motor Co 391,489
37,582 General Motors Corp 1,269,144
10,200 Goodyear Tire & Rubber Co 40,800
3,700 Lear Corp* 140,526
2,500 Navistar International Corp* 59,075
-------------
2,853,029
-------------
CONSUMER DISCRETIONARY -- 8.6%
12,100 Autonation Inc* 160,083
1,900 Belo Corp, Series A 40,945
6,300 Big Lots Inc* 69,615
5,400 Blockbuster Inc 82,620
4,200 Catalina Marketing Corp* 76,020
44,100 Cendant Corp* 542,871
3,500 Clear Channel Communications Inc* 127,785
1,800 Columbia Sportswear Co* 64,350
2,100 Cox Radio Inc, Class A* 44,940
5,400 Dillard's Inc, Class A 75,330
14,600 Eastman Kodak Co 432,160
6,000 Federated Department Stores Inc* 153,000
7,600 Fox Entertainment Group Inc, Class A* 203,148
700 Gannett Co Inc 50,519
3,500 Getty Images Inc* 102,725
4,000 Hasbro Inc 48,440
2,400 Hilton Hotels Corp 26,376
11,400 IKON Office Solutions Inc 79,914
4,400 Jones Apparel Group Inc* 124,784
2,000 Mandalay Resort Group* 50,480
1,500 Manpower Inc 45,555
7,600 May Department Stores Co 149,112
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
800 MGM Mirage* 20,496
1,800 Mohawk Industries Inc* 88,884
1,800 New York Times Co, Class A 83,628
4,600 Newell Rubbermaid Inc 129,720
7,700 Penney (JC) Co Inc 152,845
700 Pier 1 Imports Inc 11,179
4,900 R.R. Donnelley and Sons 89,474
10,400 Saks Inc* 79,976
18,600 Sears Roebuck & Co 405,108
24,300 Service Corp International* 74,601
7,600 Toys R Us Inc* 61,408
6,700 Tribune Co 300,495
3,000 VF Corp 101,550
12,000 Viacom Inc, Class A* 446,520
11,400 Viacom Inc, Class B* 423,282
1,400 Waste Connections Inc* 46,592
1,600 Whirlpool Corp 78,816
-------------
5,345,346
-------------
CONSUMER STAPLES -- 5.1%
42,900 Altria Group Inc 1,658,085
10,500 Coca Cola Enterprises Inc 211,890
7,200 CVS Corp 179,280
1,100 Hormel Foods Corp 23,111
5,400 PepsiAmericas Inc 65,988
12,800 Rite Aid Corp* 30,720
5,300 RJ Reynolds Tobacco Holdings 211,523
17,800 Safeway Inc* 354,042
2,500 Smithfield Foods Inc* 46,325
23,824 Tyson Foods Inc, Class A 219,181
3,900 UST Inc 112,437
4,900 Winn-Dixie Stores Inc 59,780
-------------
3,172,362
-------------
FINANCIAL SERVICES -- 29.6%
10,000 AFLAC Corp 312,500
4,700 Allmerica Financial Corp* 66,505
15,300 Allstate Corp 483,939
1,800 AMB Property Corp, REIT 50,400
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
5,400 American Express Co 181,332
2,300 American Financial Group Inc 45,609
400 American National Insurance Co 31,316
20,900 Bank of America Corp 1,447,116
4,200 Bank of Hawaii Corp 130,620
7,600 Bank One Corp 273,828
5,280 Bear Stearns Cos Inc 330,739
90 Berkshire Hathaway Inc, Class B* 185,850
309 BOK Financial Corp* 10,033
3,676 Charter One Financial Inc 106,273
7,800 Checkfree Corp* 163,644
3,700 Cigna Corp 158,989
16,000 Citigroup Inc 533,440
3,500 CNA Financial Corp* 80,465
6,000 Comerica Inc 245,880
700 Commerce Group Inc 23,814
7,300 Countrywide Financial Corp 389,747
300 Cullen/Frost Bankers Inc 9,348
1,800 Edwards (AG) Inc 48,006
31,600 Fannie Mae 2,025,560
7,000 Fidelity National Financial Inc 229,810
3,600 First American Financial Corp 83,160
20,984 FleetBoston Financial Corp 515,367
21,600 Freddie Mac 1,180,440
1,900 GATX Corp 29,336
2,000 General Growth Properties, REIT 104,540
2,800 Global Payments Inc 78,232
2,500 Golden West Financial Corp 181,000
4,600 Greater Bay Bancorp 73,646
3,500 Greenpoint Financial Corp 148,680
1,900 Hospitality Properties Trust, REIT 58,064
1,000 Host Marriott Corp, REIT* 6,920
4,600 Hudson City Bancorp Inc 87,354
3,200 Huntington Bancshares Inc 61,440
14,180 J.P. Morgan Chase & Co 321,603
3,900 Janus Capital Group Inc 46,137
16,700 KeyCorp 396,291
3,200 Lehman Brothers Holdings Inc 177,184
1,900 Lincoln National Corp 53,827
14,100 Loews Corp 616,311
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
900 M & T Bank Corp 71,118
5,400 MGIC Investment Corp 213,084
1,600 Mony Group Inc 34,240
17,600 Morgan Stanley 648,560
11,700 National City Corp 323,154
1,600 National Processing Inc* 22,800
4,900 Nationwide Financial Services, Class A 119,070
1,800 North Fork Bancorp 58,032
4,700 Old Republic International Corp 128,310
5,400 PMI Group Inc 146,340
6,100 PNC Financial Services Group 274,073
600 Popular Inc 20,334
6,700 Principal Financial Group 184,719
2,700 Prologis, REIT 66,906
1,400 Provident Financial Group 40,474
23,600 Providian Financial Corp* 143,960
3,900 Radian Group Inc 135,993
9,700 Regions Financial Corp 314,086
3,200 Ryder System Inc 72,608
3,000 Silicon Valley Bancshares* 52,050
1,900 Simon Property Group Inc, REIT 65,816
3,900 Southtrust Corp 105,261
3,500 Southwest Bancorporation of Texas Inc* 110,670
19,700 Sovereign Bancorp Inc 267,526
700 Student Loan Group 66,010
6,200 Torchmark Corp 225,122
2,600 Union Planters Corp 71,552
3,900 UnionBanCal Corp 162,318
14,600 Unumprovident Corp 189,800
18,100 Wachovia Corp 642,188
13,300 Washington Mutual Inc 459,249
23,900 Wells Fargo & Co 1,083,865
-------------
18,303,583
-------------
HEALTH CARE -- 9.3%
10,000 Aetna Inc 421,200
2,100 Anthem Inc* 125,181
23,700 Bristol Myers Squibb Co 552,210
2,100 Coventry Health Care Inc* 59,493
8,300 Health Net Inc* 208,413
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
HEALTH CARE -- CONTINUED
56,700 Merck & Co Inc 2,990,925
13,600 Pfizer Inc 405,552
53,600 Schering Plough Corp 965,872
-------------
5,728,846
-------------
INTEGRATED OILS -- 2.9%
1,400 Amerada Hess Corp 62,342
13,409 ConocoPhillips 679,836
16,300 Exxon Mobil Corp 554,526
15,800 Marathon Oil Corp 364,822
3,400 Occidental Petroleum Corp 101,660
-------------
1,763,186
-------------
MATERIALS & PROCESSING -- 3.5%
1,500 AK Steel Holding Corp* 8,235
6,300 Allegheny Technologies Inc 18,837
1,400 AptarGroup Inc 42,420
4,000 Ashland Inc 111,240
1,500 Avery Dennison Corp 86,100
2,100 Dow Chemical Co 57,330
6,700 Du Pont (E.I.) De Nemours 245,689
2,800 Eastman Chemical Co 90,132
5,000 Energizer Holdings Inc* 132,750
3,700 Engelhard Corp 76,775
14,900 Hercules Inc* 119,647
10,200 IMC Global Inc 89,862
4,400 Lafarge Corp 124,432
2,800 Lubrizol Corp 81,004
7,200 Lyondell Chemical Co 85,752
1,900 Owens Illinois Inc* 17,100
3,900 PPG Industries Inc 180,960
3,600 RPM International Inc 36,000
6,400 Sealed Air Corp* 232,128
1,200 Sigma Aldrich Corp 52,584
4,400 Sonoco Products Co 91,300
11,800 United States Steel Corp 137,116
1,400 Valspar Corp 57,316
-------------
2,174,709
-------------
</Table>
See accompanying notes to the financial statements.
5
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
OTHER -- 2.1%
500 3 M Co 62,685
7,000 Brunswick Corp 132,300
1,600 Carlisle Cos Inc 68,176
800 Eaton Corp 56,760
3,000 FMC Corp* 46,590
2,100 Fortune Brands Inc 92,064
20,600 Honeywell International Inc 471,534
1,500 ITT Industries Inc 84,345
1,800 Johnson Controls Inc 140,328
4,000 Textron Inc 144,520
-------------
1,299,302
-------------
OTHER ENERGY -- 3.1%
3,900 Apache Corp 254,592
3,100 Burlington Resources Inc 143,685
9,900 Chesapeake Energy Corp 80,388
2,500 Cooper Cameron Corp* 130,000
4,400 Devon Energy Corp 212,080
3,900 Ensco International Inc 109,122
8,600 Halliburton Co 174,236
1,600 Helmerich & Payne Inc 44,000
2,400 Nabors Industries Ltd* 95,160
2,500 National-Oilwell Inc* 56,250
4,400 Pioneer Natural Resources Co* 115,060
2,600 Pogo Producing Co 103,350
5,800 Pride International Inc* 84,100
4,600 Rowan Cos Inc 90,298
6,700 Transocean Inc 152,090
1,900 Varco International Inc* 36,024
400 Weatherford International Ltd* 16,016
1,900 XTO Energy Inc 47,899
-------------
1,944,350
-------------
PRODUCER DURABLES -- 6.0%
11,800 American Power Conversion Corp* 184,552
20,000 Boeing Co 551,200
5,300 Centex Corp 292,984
4,400 Cooper Industries Ltd 166,540
4,200 Crane Co 72,576
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
PRODUCER DURABLES -- CONTINUED
2,300 Cummins Inc 55,131
11,800 DR Horton Inc 216,058
4,000 Goodrich (BF) Co 61,480
900 Grainger (WW) Inc 41,427
3,200 Hubbell Inc, Class B 98,432
4,900 KB HOME 229,810
4,600 Lennar Corp 248,354
1,700 Lockheed Martin Corp 77,724
1,860 Northrop Grumman Corp 161,262
3,000 Pitney Bowes Inc 93,120
5,300 Pulte Corp 269,399
1,400 Ryland Group Inc 57,820
2,600 Steelcase Inc 23,946
5,300 Thomas & Betts Corp* 80,189
5,100 Toll Brothers Inc* 98,787
19,000 Tyco International Ltd 281,200
2,100 United Technologies Corp 123,018
26,700 Xerox Corp* 240,300
-------------
3,725,309
-------------
TECHNOLOGY -- 7.5%
9,800 3 Com Corp* 41,062
4,500 Acxiom Corp* 68,670
4,900 Adaptec Inc* 29,841
9,300 Arrow Electronics Inc* 133,734
2,300 AVX Corp 21,758
8,700 BMC Software Inc* 168,780
12,100 Ceridian Corp* 166,980
22,900 Computer Associates International Inc 305,715
18,100 Comverse Technology Inc* 184,620
21,100 Corning Inc* 103,812
20,000 EMC Corp* 147,800
5,700 Foundry Networks Inc* 50,559
1,200 Harris Corp 35,952
33,387 Hewlett-Packard Co 529,184
2,500 Imation Corp* 90,000
10,700 Ingram Micro Inc, Class A* 110,852
7,400 Keane Inc* 59,274
800 Macromedia Inc* 12,672
123,800 Oracle Corp* 1,480,648
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
TECHNOLOGY -- CONTINUED
3,300 Perot Systems Corp* 33,033
5,300 Raytheon Co 143,524
3,000 Reynolds & Reynolds Inc, Class A 73,350
12,300 Rockwell Automation 283,023
43,400 Tellabs Inc* 264,306
8,600 Vishay Intertechnology Inc* 86,860
-------------
4,626,009
-------------
UTILITIES -- 15.1%
3,500 Ameren Corp 136,465
6,500 American Electric Power Inc 141,570
49,391 AT & T Corp 915,709
38,400 Bellsouth Corp 832,128
14,900 Centerpoint Energy Inc 69,285
10,400 CMS Energy Corp 46,800
7,890 Comcast Corp, Class A* 230,546
5,300 Consolidated Edison Inc 206,700
6,200 Constellation Energy Group Inc 162,564
2,300 DQE Inc 31,050
1,800 DTE Energy Co 74,592
16,800 Edison International* 207,648
600 Energen Corp 18,252
4,400 Energy East Corp 82,808
5,300 Exelon Corp 260,495
4,000 FPL Group Inc 224,040
1,900 Great Plains Energy Inc 43,073
1,600 Keyspan Corp 51,152
1,600 Nicor Inc 48,144
4,200 Pepco Holdings Inc 75,390
24,100 PG & E Corp* 307,275
3,200 Pinnacle West Capital Corp 97,728
5,900 PPL Corp 207,503
6,200 Public Service Enterprise Group Inc 214,706
3,900 Puget Energy Inc 78,936
900 Questar Corp 25,092
22,300 Qwest Communications International Inc* 79,834
69,053 SBC Communications Inc 1,436,303
1,600 SCANA Corp 47,984
5,100 Sempra Energy 118,320
7,900 Southern Co 222,859
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
UTILITIES -- CONTINUED
55,600 Sprint Corp (Fon Group) 706,120
8,300 The AES Corp* 27,556
53,052 Verizon Communications Inc 1,834,538
4,100 Wisconsin Energy Corp 93,685
-------------
9,356,850
-------------
TOTAL COMMON STOCKS (COST $71,166,566) 60,292,881
-------------
RIGHTS AND WARRANTS -- 0.0%
TECHNOLOGY -- 0.0%
800 Seagate Technology Inc Rights(a) 8
-------------
TOTAL RIGHTS AND WARRANTS (COST $0) 8
-------------
SHORT-TERM INVESTMENTS -- 6.0%
CASH EQUIVALENTS -- 2.4%
632,921 Dreyfus Money Market Fund(b) 632,921
$ 447,248 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(b) 447,248
368,980 Merrimac Money Market Fund(b) 368,980
-------------
1,449,149
-------------
U.S. GOVERNMENT -- 0.1%
$ 75,000 U.S. Treasury Bill, 1.14%, due 4/24/03(c) 74,862
-------------
</Table>
See accompanying notes to the financial statements.
9
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 3.5%
$ 2,180,775 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/02, due 3/03/03, with a maturity value of
$2,180,840, and an effective yield of .36%,
collateralized by a U.S. Treasury Bond with a rate of
3.625%, maturity date of 3/31/04, and a market value,
including accrued interest of $2,346,469. 2,180,775
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $3,704,786) 3,704,786
-------------
TOTAL INVESTMENTS -- 103.4%
(Cost $74,871,352) 63,997,675
Other Assets and Liabilities (net) -- (3.4%) (2,074,504)
-------------
TOTAL NET ASSETS -- 100.0% $ 61,923,171
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
<Table>
REIT -- Real Estate Investment Trust
</Table>
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
(b) Represents investment of security lending collateral (Note 1).
(c) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
10 See accompanying notes to the financial statements.
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$1,364,721 (cost $74,871,352) (Note 1) $63,997,675
Receivable for investments sold 1,059,995
Dividends and interest receivable 127,582
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 2,700
Receivable for expenses reimbursed by Manager (Note 2) 4,676
-----------
Total assets 65,192,628
-----------
LIABILITIES:
Payable for investments purchased 1,762,803
Payable upon return of securities loaned (Note 1) 1,449,149
Payable to affiliate for (Note 2):
Management fee 15,787
Shareholder service fee 7,176
Accrued expenses 34,542
-----------
Total liabilities 3,269,457
-----------
NET ASSETS $61,923,171
===========
NET ASSETS CONSIST OF:
Paid-in capital $74,454,542
Accumulated undistributed net investment income 171,441
Accumulated net realized loss (1,842,204)
Net unrealized depreciation (10,860,608)
-----------
$61,923,171
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $61,923,171
===========
SHARES OUTSTANDING:
Class III 7,692,756
===========
NET ASSET VALUE PER SHARE:
Class III $ 8.05
===========
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends $ 1,041,022
Interest (including securities lending income of $5,154) 19,028
------------
Total income 1,060,050
------------
EXPENSES:
Management fee (Note 2) 171,478
Audit fees 37,808
Custodian and transfer agent fees 32,110
Legal fees 3,582
Registration fees 3,198
Trustees fees and related expenses (Note 2) 1,910
Miscellaneous 1,832
Fees reimbursed by Manager (Note 2) (78,124)
------------
173,794
Shareholder service fee (Note 2) - Class III 77,945
------------
Net expenses 251,739
------------
Net investment income 808,311
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (671,035)
Closed futures contracts 124,985
------------
Net realized loss (546,050)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (11,875,844)
Open futures contracts 17,655
------------
Net unrealized loss (11,858,189)
------------
Net realized and unrealized loss (12,404,239)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(11,595,928)
============
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 808,311 $ 1,572,950
Net realized gain (loss) (546,050) 2,676,637
Change in net unrealized appreciation (depreciation) (11,858,189) (2,302,982)
------------ -----------
Net increase (decrease) in net assets from
operations (11,595,928) 1,946,605
------------ -----------
Distributions to shareholders from:
Net investment income
Class III (856,517) (1,733,415)
------------ -----------
Total distributions from net investment income (856,517) (1,733,415)
------------ -----------
Net realized gains
Class III (1,978,445) (1,287,553)
------------ -----------
Total distributions from net realized gains (1,978,445) (1,287,553)
------------ -----------
(2,834,962) (3,020,968)
------------ -----------
Net share transactions (Note 5):
Class III (21,268,403) 47,832,361
------------ -----------
Increase (decrease) in net assets resulting from net
share transactions (21,268,403) 47,832,361
------------ -----------
Total increase (decrease) in net assets (35,699,293) 46,757,998
NET ASSETS:
Beginning of period 97,622,464 50,864,466
------------ -----------
End of period (including accumulated undistributed
net investment income of $171,441 and $238,650,
respectively) $ 61,923,171 $97,622,464
============ ===========
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------
2003 2002 2001 2000*
------- ------- ------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.73 $ 10.84 $ 8.79 $ 10.00
------- ------- ------- -------
Income from investment operations:
Net investment income 0.15+ 0.18+ 0.20 0.11+
Net realized and unrealized gain (loss) (2.36) 0.05 2.06 (1.24)
------- ------- ------- -------
Total from investment operations (2.21) 0.23 2.26 (1.13)
------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.15) (0.20) (0.14) (0.08)
From net realized gains (0.32) (0.14) (0.07) --
------- ------- ------- -------
Total distributions (0.47) (0.34) (0.21) (0.08)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.05 $ 10.73 $ 10.84 $ 8.79
======= ======= ======= =======
TOTAL RETURN(a) (21.05)% 2.16% 26.00% (11.36)%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $61,923 $97,622 $50,864 $38,650
Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48%**
Net investment income to average daily net
assets 1.56% 1.67% 2.04% 1.94%**
Portfolio turnover rate 114% 61% 89% 26%
Fees and expenses reimbursed by the
Manager to average daily net assets: 0.15% 0.09% 0.17% 0.25%**
</Table>
(a) The total return would have been lower had certain expenses not been
reimbursed during the periods shown.
* Period from August 2, 1999 (commencement of operations) through February
29, 2000.
** Annualized
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
14 See accompanying notes to the financial statements.
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 25, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks long-term capital growth through investment in equity
securities. The Fund's benchmark is the Russell 1000 Value Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and
15
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
agency obligations in accordance with the initial margin requirements of
the broker or exchange. In addition, the Fund maintains cash or securities
in an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the
16
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. At February 28, 2003, the Fund had no open swap contracts.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of collateral, the risk of delay in recovery or
loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $1,364,721 collateralized by cash in the amount of
$1,449,149 which was invested in short-term instruments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
17
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. For the years ended February 28, 2002 and February 28, 2003,
the tax basis of the distributions paid was as follows: ordinary
income -- $1,733,415 and $1,451,043, respectively and long-term capital
gains -- $1,287,553 and $1,383,919, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $171,441 of undistributed ordinary income. The
temporary difference between book and tax basis distributable earnings are
primarily due to wash sale transactions. The Fund elected to defer to
March 1, 2003 post-October losses of $613,388.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus U.S. GAAP. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss
----------------- ---------------
$(19,003) $19,003
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost,
when the amount of the return of capital is conclusively determined.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
18
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $1,631. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$59,340,991 and $79,680,783, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$76,087,096 $737,226 $(12,826,647) $(12,089,421)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 87.6% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
shares outstanding. Investment activities of these shareholders may have a
material effect on the Fund.
19
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ----------------------
Shares Amount Shares Amount
Class III: ---------- ------------ --------- -----------
Shares sold 3,468,670 $ 30,846,300 4,322,392 $46,854,135
Shares issued to shareholders in reinvestment
of distributions 213,208 2,062,934 129,480 1,378,226
Shares repurchased (5,090,081) (54,177,637) (41,624) (400,000)
---------- ------------ --------- -----------
Net increase (decrease) (1,408,203) $(21,268,403) 4,410,248 $47,832,361
========== ============ ========= ===========
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FUTURES CONTRACTS
<Table>
<Caption>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Appreciation
--------- --------------------------------------------- --------------- --------- --------------
Buys
4 S&P 500 March 2003 $840,900 $13,069
=======
</Table>
At February 28, 2003 the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
20
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTRINSIC VALUE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Intrinsic Value Fund (the
"Fund") (a series of the GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
21
<Page>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 2003, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 48.82% of the distributions as net capital gain
dividends.
22
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
23
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
24
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Principal Occupation(s)
Name, Address, Position(s) Term of Office(4) and Length During Past
and Age Held with Fund of Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
25
<Page>
GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND)
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Active Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Real Estate Fund declined 2.2% during the fiscal
year ended February 28, 2003. The Morgan Stanley REIT Index returned +0.8%,
while the S&P 500 returned -22.7% during the same period.
For the third consecutive year, REITs outperformed the S&P 500 index by more
than 20%, as investors continued to seek asset classes with better risk/return
characteristics. Although absolute returns lagged the outstanding results
delivered in the prior two years, REIT relative performance remained outstanding
versus U.S. equities.
The continuing resiliency of consumer spending and the beneficial effect of
historically low interest rates combined to drive the outperformance of outlet,
regional mall, and shopping center shares, as these sectors returned +45.1%,
+22.5%, and +19.1%, respectively. In addition, industrial sector performance
significantly exceeded the benchmark, delivering +13.5% for the year.
On the negative side, hotel shares continued to lag the market due to weak
demand, declining 31.0%. Hurt by declining occupancy rates and pricing weakness,
central business district office and apartment shares endured continuing
weakness, falling 9.1% and 5.8%, respectively.
The GMO Real Estate Fund lagged the index due to poor stock selection.
Office-CBD stock selection subtracted 1.0%, while hotel selection subtracted
0.5%. The top three contributors to relative returns were General Growth
Properties (+0.2%), CBL & Associates (+0.2%), and Developers Diversified Realty
(+0.2%), while Trizec Properties (-1.2%), Starwood Hotels & Resorts (-1.0%), and
Apartment Investment & Management (-0.3%) were the largest detractors.
Sector selection was slightly positive for the year. Cash balances added 1.7%,
and our underweightings in apartment and storage shares each added 0.3%.
Underweighting shopping mall shares subtracted 1.0% from performance.
OUTLOOK
Industry earnings will likely be flat year-over-year due to deteriorating
fundamentals -- the first time in several years that we expect REIT industry
fundamentals to lag the broader market. While valuation levels remain subdued
compared to the broader market, increased attention to potential dividend cuts
will likely cause wide dispersion in individual security and sector returns. The
overall industry yield remains attractive as compared to anemic nominal growth
trends.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO REAL ESTATE FUND CLASS III SHARES AND THE MORGAN STANLEY
REIT INDEX
AS OF FEBRUARY 28, 2003
GMO Real Estate Fund Morgan Stanley REIT Index S&P 500 Index
5/31/96 $10,000 $10,000 $10,000
6/30/96 $10,140 $10,187 $10,038
9/30/96 $10,840 $10,849 $10,348
12/31/96 $12,808 $13,015 $11,211
3/31/97 $12,940 $13,044 $11,512
6/30/97 $13,551 $13,687 $13,521
9/30/97 $15,113 $15,283 $14,534
12/31/97 $15,287 $15,433 $14,951
3/31/98 $15,014 $15,322 $17,037
6/30/98 $14,184 $14,649 $17,600
9/30/98 $11,876 $13,099 $15,849
12/31/98 $11,563 $12,824 $19,224
3/31/99 $11,131 $12,205 $20,182
6/30/99 $12,365 $13,415 $21,605
9/30/99 $11,049 $12,332 $20,256
12/31/99 $11,024 $12,241 $23,269
3/31/2000 $11,297 $12,566 $23,803
6/30/2000 $12,662 $13,869 $23,171
9/30/2000 $13,630 $14,953 $22,946
12/31/2000 $14,202 $15,523 $21,151
3/31/2001 $14,093 $15,448 $18,643
6/30/2001 $15,674 $17,135 $19,734
9/30/2001 $15,023 $16,690 $16,838
12/31/2001 $15,581 $17,515 $18,637
3/31/2002 $16,998 $18,968 $18,688
6/30/2002 $17,699 $19,887 $16,184
9/30/2002 $15,966 $18,119 $13,388
12/31/2002 $15,920 $18,153 $14,518
2/28/2003 $15,637 $17,969 $13,926
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
Since
1 Year 5 Year Inception
5/31/96
Class III -2.16% 1.26% 6.85%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
REAL ESTATE INVESTMENTS -- 95.4%
COMMON STOCKS -- 1.0%
LODGING -- 1.0%
59,500 Starwood Hotels and Resorts Worldwide Inc 1,345,295
-------------
TOTAL COMMON STOCKS (COST $1,382,247) 1,345,295
-------------
REAL ESTATE INVESTMENT TRUSTS -- 94.4%
APARTMENTS -- 17.3%
25,600 Amli Residential Properties Trust 517,120
46,700 Apartment Investment & Management Co, Class A 1,717,159
207,100 Archstone-Smith Trust 4,566,555
21,300 Associated Estates Realty Corp 120,345
73,000 Avalonbay Communities Inc 2,679,830
59,900 BRE Properties Inc 1,791,010
25,500 Camden Property Trust 813,450
37,300 Cornerstone Realty Income Trust 267,814
245,600 Equity Residential Properties Trust 5,963,168
22,700 Essex Property Trust Inc 1,156,565
22,800 Gables Residential Trust 581,856
22,000 Home Properties of NY Inc 698,500
24,200 Investors Real Estate Trust 229,682
15,200 Mid America Apartment Community 354,312
49,400 Post Properties 1,153,984
36,500 Summit Properties Inc 647,875
19,000 Town & Country Trust 381,900
65,700 United Dominion Realty Trust Inc 1,022,949
-------------
24,664,074
-------------
DIVERSIFIED -- 6.4%
19,300 Colonial Properties Trust 617,986
8,600 Corrections Corporation of America* 148,608
33,300 Cousins Properties Inc 821,844
62,000 Crescent Real Estate Equities 914,500
22,600 Glenborough Realty Trust Inc 366,120
15,400 Pennsylvania Real Estate 398,860
140,800 Vornado Realty Trust 4,928,000
36,900 Washington Realty Trust 926,559
-------------
9,122,477
-------------
</Table>
See accompanying notes to the financial statements.
1
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
HEALTH CARE -- 4.8%
38,200 Health Care Inc 984,032
51,300 Health Care Property Investors Inc 1,813,455
44,700 Healthcare Realty Trust Inc 1,254,729
58,200 Nationwide Health Properties 754,272
84,400 Senior Housing Properties Trust 973,976
14,200 Universal Health Realty Income 374,312
59,200 Ventas Inc 710,400
-------------
6,865,176
-------------
HOTELS -- 3.2%
11,700 Boykin Lodging Co 92,430
23,200 Equity Inns Inc 126,440
33,700 Felcor Lodging Trust Inc 231,519
80,300 Hospitality Properties Trust 2,453,968
143,800 Host Marriott Corp* 995,096
25,400 Innkeepers USA Trust 177,546
13,300 Lasalle Hotel Properties 160,930
27,100 Meristar Hospitality Corp 72,357
17,500 RFS Hotel Investors Inc 168,175
10,000 Winston Hotels Inc 71,800
-------------
4,550,261
-------------
INDUSTRIAL -- 6.7%
68,400 AMB Property Corp 1,915,200
17,300 Centerpoint Properties Corp 976,239
13,200 Eastgroup Properties Inc 336,468
50,100 First Industrial Realty Trust 1,407,810
18,500 Keystone Property Trust 307,100
183,900 Prologis 4,557,042
-------------
9,499,859
-------------
MANUFACTURED HOUSING -- 1.0%
18,400 Chateau Communities Inc 379,592
18,700 Manufactured Home Communities 543,048
15,500 Sun Communities Inc 542,500
-------------
1,465,140
-------------
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
OFFICE CENTRAL BUSINESS DISTRICT -- 11.5%
91,900 Boston Properties Inc 3,418,680
489,400 Equity Office Properties Trust 12,004,982
24,100 SL Green Realty Corp 709,745
21,500 Trizec Properties Inc 185,115
-------------
16,318,522
-------------
OFFICE SUBURBAN -- 13.2%
11,300 Alexandria Real Estate Equity Inc 469,515
50,300 Arden Realty Group Inc 1,116,660
21,200 Bedford Property Investors 538,692
32,200 Brandywine Realty Trust 662,354
35,200 CarrAmerica Realty Corp 859,232
12,200 Corporate Office Properties 171,166
126,700 Duke Realty Investments 3,287,865
19,300 Great Lakes Inc 301,080
55,800 Highwood Properties Inc 1,172,358
140,700 HRPT Properties Trust 1,197,357
24,700 Kilroy Realty Corp 541,918
27,300 Koger Equity Inc 422,604
91,900 Liberty Property Trust 2,869,118
72,700 Mack-Cali Realty Corp 2,101,030
18,600 Mission West Properties 172,980
10,300 Parkway Properties Inc 375,435
45,600 Prentiss Properties Trust 1,195,176
16,900 PS Business Parks Inc 530,660
41,100 Reckson Associates Realty Corp 828,987
-------------
18,814,187
-------------
OUTLETS -- 1.0%
34,400 Chelsea Property Group Inc 1,216,384
6,800 Tanger Factory Outlet Centers Inc 204,340
-------------
1,420,724
-------------
REGIONAL MALLS -- 12.3%
46,000 CBL & Associates Properties Inc 1,833,100
19,600 Crown American Realty Trust 187,768
80,000 General Growth Properties 4,181,600
24,200 Glimcher Realty Trust 456,654
40,500 Macerich Co 1,302,075
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
REGIONAL MALLS -- CONTINUED
43,500 Mills Corp 1,273,680
118,000 Simon Property Group Inc 4,087,520
28,500 Taubman Centers Inc 500,175
111,000 The Rouse Co 3,702,960
-------------
17,525,532
-------------
SHOPPING CENTERS -- 10.9%
13,500 Acadia Realty Trust 105,570
54,500 Developers Diversified Realty Corp 1,269,850
52,100 Equity One Inc 768,475
33,300 Federal Realty Investment Trust 976,023
27,200 JDN Realty Corp 327,216
123,500 Kimco Realty Corp 4,161,950
12,700 Kramont Realty Trust 189,865
22,200 Mid Atlantic Realty Trust 383,394
84,100 New Plan Excel Realty Trust 1,636,586
33,700 Pan Pacific Retail Property Inc 1,267,120
7,100 Ramco-Gershenson Properties 149,597
58,800 Regency Centers Corp 1,891,596
14,300 Saul Centers Inc 321,893
7,300 Urstadt Biddle Properties Inc 80,300
48,900 Weingarten Realty 1,899,765
-------------
15,429,200
-------------
STORAGE -- 3.0%
83,900 Public Storage Inc 2,768,700
31,900 Shurgard Storage Centers Inc 937,541
18,700 Sovran Self Storage 507,892
-------------
4,214,133
-------------
TRIPLE NET -- 3.1%
30,600 Capital Automotive 762,858
45,300 Commercial Net Lease Realty 672,705
7,800 Correctional Properties Trust 163,956
22,300 Entertainment Properties Trust 553,040
23,500 Getty Realty Corp 450,025
35,000 Lexington Corporate Properties Trust 577,500
33,500 Realty Income Corp 1,161,110
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
TRIPLE NET -- CONTINUED
6,600 U.S. Restaurant Properties Inc 93,258
-------------
4,434,452
-------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $134,626,541) 134,323,737
-------------
TOTAL REAL ESTATE INVESTMENTS (COST $136,008,788) 135,669,032
-------------
SHORT-TERM INVESTMENTS -- 3.5%
CASH EQUIVALENTS -- 2.2%
1,339,503 Dreyfus Money Market Fund(a) 1,339,503
$ 946,548 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(a) 946,548
780,903 Merrimac Money Market Fund(a) 780,903
-------------
3,066,954
-------------
REPURCHASE AGREEMENT -- 1.3%
$ 1,920,860 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of
$1,920,918 and an effective yield of 0.36%,
collateralized by a U.S. Treasury Bond with a rate of
3.625%, maturity date of 3/31/04 and a market value,
including accrued interest of $2,066,806. 1,920,860
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $4,987,814) 4,987,814
-------------
TOTAL INVESTMENTS -- 98.9%
(Cost $140,996,602) 140,656,846
Other Assets and Liabilities (net) -- 1.1% 1,599,193
-------------
TOTAL NET ASSETS -- 100.0% $ 142,256,039
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
(a) Represents investment of security lending collateral (Note 1).
See accompanying notes to the financial statements. 5
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$2,975,212 (cost $140,996,602) (Note 1) $140,656,846
Receivable for investments sold 2,713,190
Receivable for Fund shares sold 3,704,134
Dividends and interest receivable 146,017
Receivable for expenses reimbursed by Manager (Note 2) 9,996
------------
Total assets 147,230,183
------------
LIABILITIES:
Payable for investments purchased 1,743,438
Payable upon return of securities loaned (Note 1) 3,066,954
Payable for Fund shares repurchased 54,320
Payable to affiliate for (Note 2):
Management fee 60,717
Shareholder service fee 16,866
Accrued expenses 31,849
------------
Total liabilities 4,974,144
------------
NET ASSETS $142,256,039
============
NET ASSETS CONSIST OF:
Paid-in capital $181,116,741
Accumulated undistributed net investment income 4,999,289
Accumulated net realized loss (43,520,235)
Net unrealized depreciation (339,756)
------------
$142,256,039
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $142,256,039
============
SHARES OUTSTANDING:
Class III 13,558,518
============
NET ASSET VALUE PER SHARE:
Class III $ 10.49
============
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $4,917) $11,016,335
Interest (including securities lending income of $16,428) 104,167
-----------
Total income 11,120,502
-----------
EXPENSES:
Management fee (Note 2) 1,162,513
Audit fees 38,480
Custodian and transfer agent fees 35,268
Legal fees 11,136
Trustees fees and related expenses (Note 2) 5,877
Registration fees 4,993
Miscellaneous 4,017
Fees reimbursed by Manager (Note 2) (92,965)
-----------
1,169,319
Shareholder service fee (Note 2) -- Class III 322,920
-----------
Net expenses 1,492,239
-----------
Net investment income 9,628,263
-----------
REALIZED AND UNREALIZED LOSS:
Net realized loss on investments (15,461,070)
-----------
Change in net unrealized appreciation (depreciation) on
investments (3,555,069)
-----------
Net realized and unrealized loss (19,016,139)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(9,387,876)
===========
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 9,628,263 $ 8,022,803
Net realized loss (15,461,070) (1,508,670)
Change in net unrealized appreciation (depreciation) (3,555,069) 14,307,314
------------ ------------
Net increase (decrease) in net assets from
operations (9,387,876) 20,821,447
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (9,424,727) (7,471,215)
------------ ------------
Total distributions from net investment income (9,424,727) (7,471,215)
------------ ------------
Net share transactions (Note 5):
Class III (31,537,654) 45,835,735
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (31,537,654) 45,835,735
------------ ------------
Total increase (decrease) in net assets (50,350,257) 59,185,967
NET ASSETS:
Beginning of period 192,606,296 133,420,329
------------ ------------
End of period (including accumulated undistributed
net investment income of $4,999,289 and $6,209,202,
respectively) $142,256,039 $192,606,296
============ ============
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.17 $ 10.31 $ 8.26 $ 9.13 $ 12.92
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.50+ 0.56+ 0.60 0.51+ 0.51+
Net realized and unrealized gain
(loss) (0.71) 0.84 1.92 (0.87) (3.36)
-------- -------- -------- -------- --------
Total from investment operations (0.21) 1.40 2.52 (0.36) (2.85)
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.47) (0.54) (0.47) (0.51) (0.19)
From net realized gains -- -- -- -- (0.75)
-------- -------- -------- -------- --------
Total distributions (0.47) (0.54) (0.47) (0.51) (0.94)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.49 $ 11.17 $ 10.31 $ 8.26 $ 9.13
======== ======== ======== ======== ========
TOTAL RETURN(a) (2.16)% 13.73% 30.86% (4.69)% (23.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $142,256 $192,606 $133,420 $120,508 $143,129
Net expenses to average daily net
assets 0.69% 0.69% 0.69% 0.69% 0.69%
Net investment income to average
daily net assets 4.47% 5.18% 5.85% 5.64% 4.60%
Portfolio turnover rate 61% 6% 11% 13% 59%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.04% 0.05% 0.05% 0.06% 0.26%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 9
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Real Estate Fund (the "Fund") (formerly GMO REIT Fund) is a series of
GMO Trust (the "Trust"). The Fund is registered under the Investment
Company Act of 1940, as amended, as an open-end, non-diversified
management investment company. The Fund is advised and managed by
Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust
was established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a
series of shares into classes.
The Fund seeks high total return through investment in publicly traded
real estate stocks with market capitalizations greater than $100 million,
primarily real estate investment trusts ("REITs"). REITs are managed
vehicles that invest in real estate, real estate-related assets and other
real-estate related companies. The Fund's benchmark is the Morgan Stanley
REIT Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments.
10
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
In addition, the Fund maintains cash or securities in an amount that at
least equals the net amount payable in the event the Fund must deliver the
full amount of the contracts. Futures contracts are marked to market daily
and an appropriate payable or receivable for the change in value
("variation margin") is recorded by the Fund. The payable or receivable is
liquidated on the following business day. Gains or losses are recognized
but not considered realized until the contracts expire or are closed.
Futures contracts involve, to varying degrees, risk of loss in excess of
the variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. As of February 28,
2003, the Fund held no open futures contracts.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $2,975,212, collateralized by cash in the amount of
$3,066,954, which was invested in short-term instruments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute
11
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
substantially all of its net investment income and net realized short-term
and long-term capital gains, if any, after giving effect to any available
capital loss carryovers for U.S. federal income tax purposes. Therefore,
no provision for U.S. federal income or excise tax is necessary. Taxes on
foreign dividend income are withheld in accordance with the applicable
country's tax treaty with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income was $7,471,215
and $9,424,727, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $4,999,293 of undistributed ordinary income.
At February 28, 2003, the Fund had capital loss carryforwards available to
offset future capital gains, if any, to the extent permitted by the Code,
of $4,376,897, $15,979,464, $3,875,337 and $323,175 expiring in 2007,
2008, 2009 and 2010, respectively. The Fund elected to defer to March 1,
2003 post-October losses of $16,318,633.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to the classifications of
distributions from REIT securities. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain
----------------- -----------------
$(1,413,449) $1,413,449
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
12
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost,
when the amount of return of capital is conclusively determined.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
INVESTMENT RISK
There are certain additional risks involved in investing in REITs rather
than a more diversified portfolio of investments. Since the Fund's
investments are concentrated in real-estate related securities, the value
of its shares can be expected to change in light of factors affecting the
real estate industry, including local or regional economic conditions,
changes in zoning laws, changes in real estate value and property taxes,
and changes in interest rates. The value of the Fund's shares may
fluctuate more widely than the value of shares of a portfolio that invests
in a broader range of industries.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
13
<Page>
GMO REAL ESTATE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
As of February 28, 2003, substantially all of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $4,376. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$120,660,521 and $146,851,426, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$143,643,331 $5,684,006 $(8,670,491) $(2,986,485)
</Table>
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 11.2% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder may
have a material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- ------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ---------- ------------
Shares sold 8,496,059 $ 98,980,288 5,244,492 $ 56,043,036
Shares issued to shareholders
in reinvestment of distributions 608,527 6,861,914 451,024 4,887,978
Shares repurchased (12,782,580) (137,379,856) (1,401,885) (15,095,279)
----------- ------------- ---------- ------------
Net increase (decrease) (3,677,994) $ (31,537,654) 4,293,631 $ 45,835,735
=========== ============= ========== ============
</Table>
14
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO REAL ESTATE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Real Estate Fund (the "Fund")
(formerly, GMO REIT Fund) (a series of GMO Trust) at February 28, 2003, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
15
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
16
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
17
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Principal Occupation(s)
Name, Address, Position(s) Term of Office(4) and Length During Past
and Age Held with Fund of Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
18
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Short-Term Income Fund returned -4.9% for the fiscal year ended February
28, 2003, as compared with +1.6% for the Salomon Smith Barney 3-Month Treasury
Bill Index.
The Fund underperformed the benchmark during the fiscal year by 6.5%.
Underperformance was attributable primarily to issue selection. The Fund's
duration at fiscal year-end was 0.3 years.
Issue selection dramatically hurt performance in late 2002. Major factors were
the widening of credit-related spreads in the assets underlying the Fund's
investment in the GMO Alpha LIBOR Fund (ALF) and the default of certain
healthcare receivable asset-backed bonds held by ALF, which were allegedly
involved in massive fraud. National Century Financial Enterprises, the sponsor
of $3.35 billion of healthcare asset-backed receivables, allegedly violated the
terms of the bonds' indentures by, among other things, spending cash collateral,
accepting collateral other than permitted receivables, moving receivables
between trusts to meet compliance tests, and reimbursing healthcare providers
for more than the value of receivables purchases. National Century, its
affiliated operations, the trusts, and many healthcare providers have declared
bankruptcy. This had a negative effect on the net asset value of ALF, and an
indirect effect on GMO Short-Term Income Fund of -7.0% (through February 28,
2003).
At fiscal year-end, approximately 44% of the Fund was invested in highly-rated,
floating rate, asset-backed securities, 18% in U.S. Treasury notes and cash, 8%
in highly-rated corporate bonds, 18% in U.S. Government-backed bonds, and 12% in
highly-rated collateralized bonds. The Fund's exposure to these assets is
achieved directly, and indirectly through an investment in the GMO Alpha LIBOR
Fund and, as of December 2002, the GMO Short-Duration Collateral Fund.
OUTLOOK
The Fund will continue to focus on high credit quality, but less liquid sectors
of the U.S. bond market that offer attractive returns relative to the index.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO SHORT-TERM INCOME FUND AND THE
SALOMON SMITH BARNEY 3 MONTH T-BILL INDEX
AS OF FEBRUARY 28, 2003
GMO SHORT-TERM SALOMON SMITH BARNEY
INCOME FUND 3 MONTH T-BILL INDEX
2/28/93 $10,000 $10,000
3/31/93 $10,040 $10,025
6/30/93 $10,141 $10,100
9/30/93 $10,253 $10,179
12/31/93 $10,334 $10,258
3/31/94 $10,387 $10,338
6/30/94 $10,408 $10,439
9/30/94 $10,495 $10,555
12/31/94 $10,499 $10,693
3/31/95 $10,814 $10,843
6/30/95 $11,100 $11,001
9/30/95 $11,298 $11,156
12/31/95 $11,546 $11,308
3/31/96 $11,653 $11,454
6/30/96 $11,774 $11,598
9/30/96 $11,972 $11,750
12/31/96 $12,169 $11,902
3/31/97 $12,320 $12,052
6/30/97 $12,523 $12,208
9/30/97 $12,728 $12,366
12/31/97 $12,912 $12,527
3/31/98 $13,099 $12,688
6/30/98 $13,258 $12,849
9/30/98 $13,471 $13,012
12/31/98 $13,491 $13,161
3/31/99 $13,661 $13,305
6/30/99 $13,828 $13,455
9/30/99 $14,002 $13,615
12/31/99 $14,178 $13,784
3/31/2000 $14,431 $13,969
6/30/2000 $14,663 $14,169
9/30/2000 $14,928 $14,380
12/31/2000 $15,227 $14,605
3/31/2001 $15,508 $14,809
6/30/2001 $15,740 $14,968
9/30/2001 $15,931 $15,104
12/31/2001 $15,987 $15,202
3/31/2002 $16,088 $15,269
6/30/2002 $16,278 $15,336
9/30/2002 $16,282 $15,402
12/31/2002 $15,248 $15,461
2/28/2003 $15,266 $15,492
</Table>
AVERAGE ANNUAL TOTAL RETURN
<Table>
<Caption>
1 YEAR 5 YEAR 10 YEAR
Class III -4.91% 3.19% 4.32%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 13.0%
U.S. GOVERNMENT -- 5.8%
2,757,850 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09 3,174,975
-------------
U.S. GOVERNMENT AGENCY -- 7.2%
233,333 Agency for International Development Floater (Support
of Botswana),
Variable Rate, 6 mo. U.S. Treasury Bill + .40%,
1.60%, due 10/01/12 229,542
1,500,750 Agency for International Development Floater (Support
of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury
Bill + .40%, 1.60%, due 10/01/12 1,476,363
1,501,933 Agency for International Development Floater (Support
of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill
x 1.17%, 1.41%, due 10/01/11 1,496,301
68,985 Agency for International Development Floater (Support
of Peru), Series A, Variable Rate, 6 mo. U.S.
Treasury Bill +.35%, 1.55%, due 05/01/14 68,553
710,104 Small Business Administration Pool #502320,
Variable Rate, Prime - 2.18%, 2.06%, due 08/25/18 711,966
-------------
3,982,725
-------------
TOTAL DEBT OBLIGATIONS (COST $7,039,737) 7,157,700
-------------
MUTUAL FUNDS -- 86.0%
450,459 GMO Alpha LIBOR Fund 10,684,880
1,475,588 GMO Short-Duration Collateral Fund 36,904,449
-------------
TOTAL MUTUAL FUNDS (COST $48,424,977) 47,589,329
-------------
TOTAL INVESTMENTS -- 99.0%
(Cost $55,464,714) 54,747,029
Other Assets and Liabilities (net) -- 1.0% 568,568
-------------
TOTAL NET ASSETS -- 100.0% $ 55,315,597
=============
</Table>
Variable rates - The rates shown on variable rate notes are the current
interest rates at February 28, 2003, which are subject to change based on the
terms of the security.
See accompanying notes to the financial statements. 1
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $55,464,714) (Note 1) $54,747,029
Cash 549,192
Interest receivable 43,064
Receivable for expenses reimbursed by Manager (Note 2) 5,320
-----------
Total assets 55,344,605
-----------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 2,153
Shareholder service fee 6,459
Accrued expenses 20,396
-----------
Total liabilities 29,008
-----------
NET ASSETS $55,315,597
===========
NET ASSETS CONSIST OF:
Paid-in capital $56,339,006
Accumulated net realized loss (305,724)
Net unrealized depreciation (717,685)
-----------
$55,315,597
===========
SHARES OUTSTANDING 6,373,567
===========
NET ASSET VALUE PER SHARE $ 8.68
===========
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends $ 335,940
Interest 250,518
-----------
Total income 586,458
-----------
EXPENSES:
Management fee (Note 2) 27,078
Audit fees 23,467
Custodian and transfer agent fees 9,047
Registration fees 4,984
Legal fees 3,401
Trustees fees and related expenses (Note 2) 2,290
Miscellaneous 1,465
Fees reimbursed by Manager (Note 2) (41,455)
-----------
30,277
Shareholder service fee 81,237
-----------
Net expenses 111,514
-----------
Net investment income 474,944
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (3,634,344)
Realized gains distributions from investment company
shares 128,674
-----------
Net realized loss (3,505,670)
-----------
Change in net unrealized appreciation (depreciation) on
investments (405,617)
-----------
Net realized and unrealized loss (3,911,287)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(3,436,343)
===========
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 474,944 $ 1,183,337
Net realized gain (loss) (3,505,670) 1,497,617
Change in net unrealized appreciation (depreciation) (405,617) (1,199,696)
------------ ------------
Net increase (decrease) in net assets from
operations (3,436,343) 1,481,258
------------ ------------
Distributions to shareholders from:
Net investment income (2,325,404) (1,411,118)
Net realized gains (786,056) (1,032,265)
------------ ------------
(3,111,460) (2,443,383)
------------ ------------
Fund share transactions: (Note 5)
Proceeds from sale of shares 47,278,043 39,182,645
Net asset value of shares issued to shareholders in
payment of distributions declared 3,079,622 2,340,365
Cost of shares repurchased (36,841,075) (32,719,050)
------------ ------------
Net increase in net assets resulting from Fund share
transactions 13,516,590 8,803,960
------------ ------------
Total increase in net assets 6,968,787 7,841,835
NET ASSETS:
Beginning of period 48,346,810 40,504,975
------------ ------------
End of period $ 55,315,597 $ 48,346,810
============ ============
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.62 $ 9.92 $ 9.62 $ 9.63 $ 9.81
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.08(b)+ 0.30(b)+ 0.42(b)+ 0.46(b)+ 0.57
Net realized and unrealized gain
(loss) (0.54) 0.07 0.33 0.05 (0.16)
------- ------- ------- ------- -------
Total from investment operations (0.46) 0.37 0.75 0.51 0.41
------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.33) (0.39) (0.44) (0.52) (0.59)
From net realized gains (0.15) (0.28) (0.01) -- --
------- ------- ------- ------- -------
Total distributions (0.48) (0.67) (0.45) (0.52) (0.59)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.68 $ 9.62 $ 9.92 $ 9.62 $ 9.63
======= ======= ======= ======= =======
TOTAL RETURN(a) (4.91)% 3.73% 7.91% 5.42% 4.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $55,316 $48,347 $40,505 $43,491 $53,387
Net expenses to average daily net
assets 0.21%(c) 0.20%(c) 0.20%(c) 0.20%(c) 0.20%
Net investment income to average
daily net assets 0.88%(b) 3.04%(b) 4.30%(b) 4.82%(b) 5.50%
Portfolio turnover rate 43% 91% 50% 178% 76%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.08% 0.12% 0.09% 0.08% 0.32%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Net investment income for the years ended February 28, 2003,
February 28, 2002, February 28, 2001 and February 28, 2000 is affected
by the timing of the declaration of dividends by other GMO Funds in
which the Fund invests.
(c) Net expenses exclude expenses incurred indirectly through investment in
underlying funds (See Note 1).
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 5
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Short-Term Income Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes. The
Fund is not currently accepting purchase orders for Fund shares.
The Fund seeks to provide current income to the extent consistent with the
preservation of capital and liquidity through investment in a portfolio of
high-quality fixed income instruments. The Fund's benchmark is the Salomon
Smith Barney 3 Month T-Bill Index.
At February 28, 2003, 19.3% of the Fund was invested in the GMO Alpha
LIBOR Fund and 66.7% of the Fund was invested in the GMO Short-Duration
Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the
GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not
publicly available for direct purchase. The financial statements of the
GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund should be
read in conjunction with the Fund's financial statements.
The Fund invested a substantial portion of its assets in GMO Alpha LIBOR
Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In
November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds")
defaulted amid allegations of fraud and significant violations of the
bonds' indentures. Currently, no market exists for the NPF bonds, and they
are being valued at fair value by the trustees of GMO Trust or persons
acting at their direction. The devaluation of the NPF bonds had a negative
impact on the Fund's net asset value per share.
In late November 2002, Alpha LIBOR Fund undertook a reorganization
transaction with a new series of GMO Trust, GMO Short-Duration Collateral
Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR
Fund was transferred to SDCF in exchange for SDCF shares. The
reorganization was treated as a sale of the Alpha LIBOR Fund shares for
financial reporting purposes and a distribution by Alpha LIBOR Fund for
tax purposes. Accordingly, for financial reporting purposes, the Fund
recognized a loss on the sale of the Alpha LIBOR shares of approximately
$3,428,863. In addition, the Fund recognized for tax, but not for
financial reporting purposes, ordinary income of $1,852,605 and long-term
capital gains of $330,430 from Alpha LIBOR Fund. $5,611,898 was added to
the tax cost basis of the Fund's holdings of Alpha LIBOR Fund.
6
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Portfolio securities listed on a securities exchange
for which market quotations are readily available are valued at the last
sale price or official closing price on each business day, or if there is
no such reported sale or official closing price, at the most recent quoted
bid price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost, which approximates fair value. Securities for which
quotations are not readily available or whose values the manager has
determined to be unreliable are valued at fair value as determined in good
faith by the Trustees or other persons acting at their direction. A
security's value may be deemed unreliable if, for example, the manager
becomes aware of information or events occurring after the close of a
foreign market that would materially affect that security's value.
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund, or an underlying fund in which it
invests, were valued on the basis of a price provided by a principal
market maker. The prices provided by the principal market makers may
differ from the value that would be realized if the securities were sold.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain
7
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
8
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States of America.
For the years ended February 28, 2002 and February 28, 2003, the tax basis
of distributions paid from ordinary income were $1,688,299 and $2,345,585,
respectively. As of February 28, 2002 and February 28, 2003 the tax basis
distributions paid from capital long term gains were $755,084 and
$765,875, respectively.
The Fund elected to defer to March 1, 2003 post-October losses of
$104,643.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to the GMO Alpha LIBOR
Fund transaction (Note 1). The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
$1,850,460 $3,379,353 $(5,229,813)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the amortization of
premiums and discounts. Dividend income is recognized on the ex-dividend
date. Non cash dividends, if any, are recorded at the fair market value of
the securities received. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
Interest income on U.S. Treasury inflation indexed securities is accrued
daily based upon the inflation adjusted principal. Additionally, any
increase in the principal or face amount of the securities adjusted for
inflation is recorded as interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
9
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .05% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of the Fund at the annual rate of .15%.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha
LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended
February 28, 2003, indirect operating expenses (excluding
investment-related expenses) were 0.004% of the Fund's average daily net
assets, and indirect investment-related expenses (including, but not
limited to, interest expense, foreign audit expense, and
investment-related legal expense) were 0.025% of the Fund's average daily
net assets.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $1,933. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 28, 2003, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<Table>
<Caption>
Purchases Sales
----------- -----------
U.S. Government securities $ -- $ 500,183
Investments (non-U.S. Government securities) 35,364,613 22,987,000
</Table>
10
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
For the year ended February 28 , 2003, the cost of purchases and proceeds
from sales of investments excluded $42,026,098 and $43,142,553,
respectively, from the initial transfer of GMO Alpha LIBOR Fund's
investments in GMO Short-Duration Collateral Fund. (See Note 1)
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$60,894,744 $ -- $(6,147,715) $(6,147,715)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 58.8% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
----------------- -----------------
Shares sold 4,944,849 4,058,239
Shares issued to shareholders
in reinvestment of distributions 344,459 240,652
Shares repurchased (3,940,125) (3,358,895)
-------------- --------------
Net increase 1,349,183 939,996
Fund shares:
Beginning of period 5,024,384 4,084,388
-------------- --------------
End of period 6,373,567 5,024,384
============== ==============
</Table>
11
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO SHORT-TERM INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Short-Term Income Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
12
<Page>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 2003, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 30.90% of the distributions as net capital gain
dividends.
13
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
14
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
15
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti-Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
16
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the
U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Small Cap Growth Fund returned -18.0% for the
fiscal year ended February 28, 2003 as compared to -24.6% for the Russell 2500
Growth Index (the "Index") and -22.7% for the S&P 500 Index. Consistent with the
Fund's investment objectives and policies, the Fund was primarily invested in
common stocks throughout the period.
For the fiscal year, small capitalization growth stocks outperformed large cap
growth stocks by 1%, but underperformed small cap value stocks by 8%. Producer
durables and technology were the weakest performing sectors in the Index,
falling 33% and 35%, respectively, for the period. The top performing sectors in
the Russell 2500 Growth Index were energy, consumer staples and financial
services.
Both stock and sector selection contributed to the Fund's outperformance over
the benchmark for the period. The Fund's underweight position in the producer
durable sector and overweight position in the consumer discretionary sector
added the most value relative to the benchmark. Underweight positions in the
weak performing healthcare and technology sectors also contributed to relative
performance. Strong stock selection among healthcare, consumer discretionary,
producer durables and energy stocks accounted for nearly all of the Fund's
value-added over the benchmark.
The Fund incorporates three investment disciplines in the portfolio: price
momentum and estimate revision momentum, each of which has a 40% weight; and
price to intrinsic value, which has a 20% weight. All three of these disciplines
added value this year, with the bulk of that coming from estimate revision
momentum.
OUTLOOK
We believe that the portfolio is well positioned to continue to add value
relative to the benchmark. Currently, the equities in the Small Cap Growth
portfolio are trading at a discount, measured by the price to earnings ratio,
relative to the benchmark. The portfolio currently maintains underweight
positions in the technology, healthcare, and financial services sectors and an
overweight position in the consumer discretionary sector.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO SMALL CAP GROWTH FUND CLASS III SHARES AND THE
RUSSELL 2500 GROWTH INDEX
AS OF FEBRUARY 28, 2003
GMO SMALL CAP RUSSELL 2500
GROWTH FUND GROWTH INDEX
Dec 31, 96 $9,950 $10,000
Mar 31, 97 $9,502 $9,200
Jun 30, 97 $11,207 $10,695
Sep 30, 97 $13,388 $12,474
Dec 31, 97 $12,407 $11,476
Mar 31, 98 $13,983 $12,755
Jun 30, 98 $13,756 $12,132
Sep 30, 98 $10,718 $9,438
Dec 31, 98 $13,125 $11,831
Mar 31, 99 $12,381 $11,707
Jun 30, 99 $13,791 $13,674
Sep 30, 99 $13,477 $13,200
Dec 31, 99 $17,113 $18,395
Mar 31, 2000 $19,543 $21,182
Jun 30, 2000 $18,389 $19,718
Sep 30, 2000 $18,403 $19,139
Dec 31, 2000 $15,340 $15,436
Mar 31, 2001 $12,437 $12,362
Jun 30, 2001 $14,658 $14,995
Sep 30, 2001 $11,049 $10,932
Dec 31, 2001 $13,304 $13,763
Mar 31, 2002 $13,826 $13,357
Jun 30, 2002 $12,338 $11,136
Sep 30, 2002 $10,266 $9,013
Dec 31, 2002 $10,960 $9,759
Feb 28, 2003 $10,479 $9,323
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR DEC 31, 96
Class III -18.78% -4.83% 0.76%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 50 bp on the redemption.
Transaction fees are retained by the Fund to cover trading costs. Past
performance is not indicative of future performance. Information is unaudited.
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
COMMON STOCKS -- 97.7%
AUTO & TRANSPORTATION -- 3.3%
1,600 Airborne Inc 22,464
2,400 American Axle & Manufacturing Holdings Inc* 56,760
4,000 Atlantic Coast Airlines Holdings* 25,200
3,000 Coachmen Industries Inc 32,700
3,600 Egl, Inc* 45,432
3,500 Gentex Corp* 94,080
2,300 JetBlue Airways Corp* 60,628
1,000 Landstar System Inc* 54,190
1,000 Polaris Industries Inc 48,400
1,500 Superior Industries International Inc 58,110
900 Thor Industries Inc 23,121
2,200 Tidewater Inc 67,364
-------------
588,449
-------------
CONSUMER DISCRETIONARY -- 30.5%
2,200 Abercrombie & Fitch Co, Class A* 60,500
1,600 Action Performance Cos Inc 26,400
4,200 Activision Inc* 62,580
2,500 Advance Auto Parts* 97,550
3,000 American Eagle Outfitters Inc* 43,410
1,000 American Woodmark Corp 39,500
4,050 Applebees International Inc 103,842
2,600 Bally Total Fitness Holdings Corp* 14,820
1,900 Bebe Stores Inc* 26,277
920 Benihana Inc* 10,120
7,500 Big Lots Inc* 82,875
4,100 Blyth Industries Inc 101,885
1,800 Bob Evans Farms Inc 42,120
6,600 Boyd Gaming Corp* 82,566
3,200 Callaway Golf Co 36,736
3,800 Career Education Corp* 176,700
2,800 Catalina Marketing Corp* 50,680
1,500 CDW Computer Centers Inc* 65,490
800 Central Garden and Pet Co* 18,320
5,650 Chicos FAS Inc* 102,095
2,700 Children's Place Retail Stores Inc* 25,569
2,300 Choice Hotels International Inc* 54,280
6,000 Claire's Stores Inc 136,920
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
5,900 Coach Inc* 210,807
3,100 Columbia Sportswear Co* 110,825
5,700 Corinthian Colleges Inc* 213,636
2,000 Corrections Corporation of America, REIT* 34,560
2,400 Cost Plus Inc* 55,800
4,000 Dillard's Inc, Class A 55,800
2,000 Dollar Tree Stores Inc* 41,300
3,200 Dover Motorsports Inc 11,520
3,500 Fisher Scientific International Inc* 100,555
3,400 Fossil Inc* 61,132
2,100 Fred's Inc 51,198
1,500 FTI Consulting Inc* 64,500
4,800 G TECH Holdings Corp* 139,680
1,300 Genesco Inc* 17,745
3,400 Getty Images Inc* 99,790
2,600 Gymboree Corp* 33,488
4,500 Hollywood Entertainment Corp* 63,270
3,600 Isle of Capri Casinos Inc* 42,660
3,500 ITT Educational Services Inc* 94,325
2,800 J Jill Group Inc* 28,896
2,300 Jack in the Box Inc* 37,973
600 Jarden Corp* 16,086
1,300 Kenneth Cole Productions, Class A* 29,445
1,200 Maytag Corp 28,920
2,500 Michaels Stores Inc* 58,750
3,100 Movie Gallery Inc* 47,123
8,500 MPS Group Inc* 41,735
3,063 Nautilus Group Inc 44,958
4,400 Oakley Inc* 35,156
1,700 Outback Steakhouse Inc 54,740
2,800 Overture Services Inc* 44,576
4,650 Pacific Sunwear of California* 82,352
1,700 Papa Johns International Inc* 40,409
1,000 Payless ShoeSource Inc* 46,610
7,300 Petsmart Inc* 109,135
5,800 Pier 1 Imports Inc 92,626
2,300 Pixar Inc* 124,177
2,900 QRS Corp* 16,646
2,500 Quiksilver Inc* 62,750
4,000 Reader's Digest Association 43,240
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
4,000 Reebok International Ltd* 125,000
3,800 Regis Corp 88,464
3,200 Rent-A-Center Inc* 159,840
6,100 Ross Stores Inc 208,681
4,000 Saks Inc* 30,760
2,700 Sharper Image Corp* 41,580
3,700 Sinclair Broadcast Group, Class A* 32,338
3,700 Skechers U.S.A. Inc* 21,756
2,400 Sonic Automotive Inc* 36,528
1,600 Steven Madden Ltd* 27,120
5,000 Take-Two Interactive Software* 104,550
6,200 TeleTech Holdings Inc* 31,682
2,500 Timberland Co* 96,000
3,700 Topps Inc (The)* 29,859
1,800 Tractor Supply Co* 59,526
7,400 United Online Inc* 105,524
1,900 United Stationers Inc* 39,501
2,200 Urban Outfitters Inc* 41,646
1,700 Waste Connections Inc* 56,576
-------------
5,387,060
-------------
CONSUMER STAPLES -- 3.0%
2,900 Constellation Brands Inc, Class A* 71,427
1,500 Coors (Adolph) Co, Class B 72,150
2,400 Dole Food Co 78,720
1,700 Natures Sunshine Products Inc 14,333
3,400 NBTY Inc* 60,792
6,100 The Dial Corp 110,959
2,400 Whole Foods Market Inc* 122,568
-------------
530,949
-------------
FINANCIAL SERVICES -- 10.7%
9,800 Checkfree Corp* 205,604
3,400 Commerce Bancorp Inc 140,488
5,500 CompuCredit Corp* 28,600
4,400 Doral Financial Corp 142,604
4,500 Espeed Inc* 46,440
1,900 Factset Research Systems Inc 48,621
6,000 Fidelity National Financial Inc 196,980
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
3,300 First American Financial Corp 76,230
2,200 First Midwest Bancorp Inc 57,464
2,800 General Growth Properties, REIT 146,356
1,500 Greater Bay Bancorp 24,015
1,800 Irwin Financial Corp 32,580
900 McGrath Rentcorp 20,340
3,300 New Century Financial Corp 87,879
4,112 New York Community Bancorp Inc 117,644
1,800 Nuveen Investments Inc 40,086
25,300 Providian Financial Corp* 154,330
2,600 Roslyn Bancorp Inc 51,792
2,100 Sandy Spring Bancorp Inc 67,956
1,000 Silicon Valley Bancshares* 17,350
1,300 Southwest Bancorporation of Texas Inc* 41,106
1,000 Triad Guaranty Inc* 33,410
2,500 UCBH Holdings Inc 105,250
-------------
1,883,125
-------------
HEALTH CARE -- 17.5%
2,400 Accredo Health Inc* 57,000
2,200 AdvancePCS* 61,446
3,700 Allos Therapeutics Inc* 16,280
2,500 American Medical Systems Holdings Inc* 40,400
4,000 American Pharmaceutical Partners Inc* 73,200
5,800 Amylin Pharmaceuticals Inc* 88,972
2,300 Aspect Medical Systems Inc* 10,511
3,400 AVI BioPharma Inc* 10,744
1,800 Biosite Inc* 56,286
900 Centene Corp* 22,950
2,300 Cerner Corp* 76,406
3,900 Charles River Laboratories International Inc* 116,649
2,300 Chattem Inc* 35,696
2,200 Cooper (The) Companies Inc 63,910
2,800 Covance Inc* 65,940
5,000 Coventry Health Care Inc* 141,650
2,200 Curative Health Services Inc* 36,828
2,200 Cyberonics* 37,400
3,900 DaVita Inc* 80,925
2,600 Hanger Orthopedic Group Inc* 27,118
1,400 Health Net Inc* 35,154
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
HEALTH CARE -- CONTINUED
1,700 Henry Schein Inc* 68,000
2,300 Hologic Inc* 16,629
500 ICN Pharmaceuticals Inc 4,810
1,300 Idexx Laboratories Inc* 47,398
2,900 Immucor Inc* 57,217
1,500 LabOne Inc* 29,460
5,900 Lincare Holdings Inc* 176,410
3,800 Mentor Corp 66,044
4,200 MGI Pharma Inc* 42,084
5,000 Mid Atlantic Medical Services Inc* 178,750
1,700 Odyssey HealthCare Inc* 39,287
1,400 Patterson Dental Co* 61,614
1,300 Pediatrix Medical Group Inc* 36,725
3,600 Pharmaceutical Product Development Inc* 112,932
2,800 Pharmaceutical Resources Inc* 104,860
1,400 PolyMedica Corp 40,866
1,200 Renal Care Group Inc* 35,124
2,200 Scios Inc* 96,008
2,500 Stericycle Inc* 88,575
5,900 Steris Corp* 148,975
3,200 United Surgical Partners International Inc* 58,752
3,000 Universal Health Services, Class B* 116,520
4,200 Varian Medical Systems Inc* 212,310
4,500 VitalWorks Inc* 17,280
2,700 Watson Pharmaceutical Inc* 83,511
-------------
3,095,606
-------------
MATERIALS & PROCESSING -- 2.9%
14,900 Crown Holdings Inc* 85,228
6,600 Energizer Holdings Inc* 175,230
1,000 MeadWestvaco Corp 23,190
3,200 Owens Illinois Inc* 28,800
2,300 Phelps Dodge Corp* 82,708
1,900 Royal Gold Inc 36,955
1,300 Sealed Air Corp* 47,151
800 Trex Company Inc* 26,000
-------------
505,262
-------------
</Table>
See accompanying notes to the financial statements.
5
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
OTHER -- 0.5%
1,800 FMC Corp* 27,954
1,700 Lancaster Colony Corp 64,566
-------------
92,520
-------------
OTHER ENERGY -- 8.3%
6,900 Chesapeake Energy Corp 56,028
1,700 Clayton Williams Energy Inc* 21,573
3,800 Cooper Cameron Corp* 197,600
5,200 Denbury Resources Inc* 59,696
3,300 Helmerich & Payne Inc 90,750
4,000 National-Oilwell Inc* 90,000
1,750 Patina Oil & Gas Corp 58,240
2,900 Patterson-UTI Energy Inc* 96,106
5,000 Pioneer Natural Resources Co* 130,750
4,100 Pogo Producing Co 162,975
6,900 Pride International Inc* 100,050
4,600 Rowan Cos Inc 90,298
1,100 Stone Energy Corp* 37,675
4,800 Varco International Inc* 91,008
3,800 Vintage Petroleum Inc 37,810
6,000 XTO Energy Inc 151,260
-------------
1,471,819
-------------
PRODUCER DURABLES -- 5.7%
5,800 American Power Conversion Corp* 90,712
2,300 Ametek Inc 75,854
4,300 Asyst Technologies Inc* 27,821
2,100 Cohu Inc 31,395
1,200 Engineered Support Systems 43,332
3,200 Hovnanian Enterprises Inc* 105,056
4,500 Interdigital Communications Corp* 64,710
2,300 KB HOME 107,870
1,300 Manitowoc Co Inc 23,621
1,300 Meritage Corporation* 41,080
500 NVR Inc* 165,975
2,800 Plantronics Inc* 40,348
1,700 Pulte Corp 86,411
2,200 Rayovac Corp.* 26,950
3,500 Somera Communications Inc* 3,780
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
PRODUCER DURABLES -- CONTINUED
2,400 Standard Pacific Corp 61,848
4,600 Trident Microsystems Inc* 15,962
-------------
1,012,725
-------------
TECHNOLOGY -- 13.2%
5,800 Acxiom Corp* 88,508
8,800 Adaptec Inc* 53,592
2,300 Adtran Inc* 74,037
2,500 American Management Systems Inc* 26,500
700 Analogic Corp 31,801
3,000 Autodesk Inc 43,470
3,200 Benchmark Electronics Inc* 111,488
1,400 Black Box Corp 56,924
6,500 Ceridian Corp* 89,700
6,300 Ciber Inc* 34,020
13,000 Ciena Corp* 70,460
7,100 Citrix Systems Inc* 85,200
1,700 Cognizant Technology Solutions Corp* 119,340
6,600 Cray Inc* 56,298
4,900 Cree Inc* 83,398
3,900 Digital River Inc* 35,022
11,900 Foundry Networks Inc* 105,553
3,200 Imation Corp* 115,200
2,100 Invision Technologies Inc* 45,927
2,200 j2 Global Communications Inc* 52,558
3,900 Mercury Interactive Corp* 126,555
5,500 NetScreen Technologies Inc* 107,415
3,300 Newport Corp* 40,425
3,400 Omnivision Technologies* 64,600
8,900 Pinnacle Systems Inc* 86,419
4,500 Quadramed Corp* 1,890
4,400 Rambus Inc* 66,792
6,000 Sandisk Corp* 100,080
6,300 ScanSoft Inc* 28,350
5,600 Silicon Laboratories Inc* 151,872
1,100 Siliconix Inc* 24,641
2,100 SPSS Inc* 22,890
2,000 Supertex Inc* 29,480
4,600 Syntel Inc* 87,170
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
TECHNOLOGY -- CONTINUED
7,200 Zomax Inc* 24,264
-------------
2,341,839
-------------
UTILITIES -- 2.1%
1,600 Commonwealth Telephone Enterprises Inc* 60,416
1,800 Edison International* 22,248
700 Energen Corp 21,294
2,200 IDT Corp* 34,210
37,200 Level 3 Communications Inc* 183,768
1,000 UGI Corp 41,400
-------------
363,336
-------------
TOTAL COMMON STOCKS (COST $17,562,832) 17,272,690
-------------
RIGHTS AND WARRANTS -- 0.1%
CONSUMER DISCRETIONARY -- 0.1%
403 Expedia Inc Warrants, Expires 2/04/09* 14,911
-------------
HEALTH CARE -- 0.0%
2,800 Endo Pharmaceutical Warrants, Expires 3/31/03* 112
-------------
TOTAL RIGHTS AND WARRANTS (COST $16,346) 15,023
-------------
SHORT-TERM INVESTMENTS -- 14.9%
CASH EQUIVALENTS -- 12.1%
935,290 Dreyfus Money Market Fund(a) 935,290
$ 660,915 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(a) 660,915
545,254 Merrimac Money Market Fund(a) 545,254
-------------
2,141,459
-------------
U.S. GOVERNMENT -- 0.6%
$ 100,000 U.S. Treasury Bill, 1.14%, due 4/24/03(b) 99,816
-------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.2%
$ 387,035 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/3/03, with a maturity value of $387,047
and an effective yield of 0.36%, collateralized by a
U.S. Treasury Note with a rate of 3.625%, maturity date
of 3/31/04 and a market value, including accrued
interest of $416,441. 387,035
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,628,310) 2,628,310
-------------
TOTAL INVESTMENTS -- 112.7%
(Cost $20,207,488) 19,916,023
Other Assets and Liabilities (net) -- (12.7%) (2,247,250)
-------------
TOTAL NET ASSETS -- 100.0% $ 17,668,773
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Represents investment of security lending collateral (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
See accompanying notes to the financial statements. 9
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$2,052,649 (cost $20,207,488) (Note 1) $19,916,023
Receivable for investments sold 1,096,423
Dividends and interest receivable 5,079
Receivable for expenses reimbursed by Manager (Note 2) 4,536
-----------
Total assets 21,022,061
-----------
LIABILITIES:
Payable for investments purchased 1,173,742
Payable upon return of securities loaned (Note 1) 2,141,459
Payable to affiliate for (Note 2):
Management fee 4,276
Shareholder service fee 1,944
Payable for variation margin on open futures contracts
(Notes 1 and 6) 1,261
Accrued expenses 30,606
-----------
Total liabilities 3,353,288
-----------
NET ASSETS $17,668,773
===========
NET ASSETS CONSIST OF:
Paid-in capital $23,653,269
Accumulated net realized loss (5,691,770)
Net unrealized depreciation (292,726)
-----------
$17,668,773
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $17,668,773
===========
SHARES OUTSTANDING:
Class III 1,306,561
===========
NET ASSET VALUE PER SHARE:
Class III $ 13.52
===========
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $196) $ 54,929
Interest (including securities lending income of $7,573) 12,672
-----------
Total income 67,601
-----------
EXPENSES:
Management fee (Note 2) 51,709
Audit fees 33,860
Custodian and transfer agent fees 20,378
Registration fees 1,764
Trustees fees and related expenses (Note 2) 1,164
Legal fees 284
Miscellaneous 1,099
Fees reimbursed by Manager (Note 2) (57,285)
-----------
52,973
Shareholder service fee (Note 2) - Class III 23,504
-----------
Net expenses 76,477
-----------
Net investment loss (8,876)
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on:
Investments (1,441,976)
Closed futures contracts (36,321)
-----------
Net realized loss (1,478,297)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (1,391,464)
Open futures contracts 11,582
-----------
Net unrealized loss (1,379,882)
-----------
Net realized and unrealized loss (2,858,179)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,867,055)
===========
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) $ (8,876) $ 13,089
Net realized loss (1,478,297) (4,129,648)
Change in net unrealized appreciation (depreciation) (1,379,882) 2,747,114
----------- -----------
Net decrease in net assets from operations (2,867,055) (1,369,445)
----------- -----------
Distributions to shareholders from:
Net investment income
Class III -- (12,318)
----------- -----------
Total distributions from net investment income -- (12,318)
----------- -----------
Net realized gains
Class III -- (1,633,992)
----------- -----------
Total distributions from net realized gains -- (1,633,992)
----------- -----------
-- (1,646,310)
----------- -----------
Net share transactions (Note 5):
Class III 3,486,588 108,455
----------- -----------
Increase in net assets resulting from net share
transactions 3,486,588 108,455
----------- -----------
Total increase (decrease) in net assets 619,533 (2,907,300)
NET ASSETS:
Beginning of period 17,049,240 19,956,540
----------- -----------
End of period $17,668,773 $17,049,240
=========== ===========
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------------
2003 2002 2001++ 2000++ 1999++
------- ------- -------------- -------------- --------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.48 $ 19.08 $ 168.70 $ 108.80 $ 122.80
------- ------- -------- -------- --------
Income from investment operations:
Net investment income (loss) (0.01)+ 0.01+ (0.04) 0.10 0.30
Net realized and unrealized gain
(loss) (2.95) (1.12) (37.26) 70.20 (9.80)
------- ------- -------- -------- --------
Total from investment operations (2.96) (1.11) (37.30) 70.30 (9.50)
------- ------- -------- -------- --------
Less distributions to shareholders:
From net investment income -- -- -- (0.30) (0.20)
From net realized gains -- (1.49) (112.32) (10.10) (4.30)
------- ------- -------- -------- --------
Total distributions -- (1.49) (112.32) (10.40) (4.50)
------- ------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.52 $ 16.48 $ 19.08 $ 168.70 $ 108.80
======= ======= ======== ======== ========
TOTAL RETURN(a) (17.96)% (6.36)% (33.14)% 67.27% (8.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $17,669 $17,049 $ 19,957 $137,290 $129,983
Net expenses to average daily net
assets 0.49% 0.48% 0.48% 0.48% 0.48%
Net investment income (loss) to
average daily net assets (0.06)% 0.07% (0.09)% 0.09% 0.21%
Portfolio turnover rate 116% 118% 147% 122% 113%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.37% 0.33% 0.19% 0.11% 0.23%
Purchase and redemption fees
consisted of the following per
share amounts:(b) $ 0.03 $ 0.02 $ 0.87 N/A N/A
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown. Calculation excludes purchase
premiums and redemption fees.
(b) Effective March 1, 2000, the Fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
+ Calculated using average shares outstanding throughout the period.
++ Amounts were adjusted to reflect a 1:10 reverse stock split effective
December 11, 2000.
See accompanying notes to the financial statements. 13
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Small Cap Growth Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks long-term growth of capital. The Fund's benchmark is the
Russell 2500 Growth Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In
14
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
addition, the Fund maintains cash or securities in an amount that at least
equals the net amount payable in the event the Fund must deliver the full
amount of the contracts. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 2003.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. As of
February 28, 2003, there were no open swap agreements.
15
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $2,052,649 collateralized by cash in the amount of
$2,141,459, which was invested in short-term instruments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid was as follows: ordinary income --
$379,334 and $0, respectively and long-term capital gains -- $1,266,976
and $0, respectively.
16
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $3,602,582 expiring in 2010 and $1,513,997 expiring in 2011. The
Fund elected to defer to March 1, 2003 post-October losses of $511,521.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus U.S. GAAP. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
$8,876 $1,062 $(9,938)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost,
when the amount of the return of capital is conclusively determined.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases and fee on redemptions of Fund shares is
.50% of the amount invested or redeemed. If the Manager determines that
any portion of a cash purchase is offset by a corresponding cash
redemption occurring on the same day, the purchase premium or redemption
fee charged by the Fund will be reduced by 100% with respect to that
portion. In addition, the purchase premium or redemption fee charged by
the Fund may be waived if the Manager determines the Fund
17
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
is substantially underweighted/overweighted in cash so that a purchase or
redemption will not require a securities transaction. All purchase
premiums and redemption fees are paid to and recorded by the Fund as
paid-in capital. For the years ended February 28, 2002 and February 28,
2003, the Fund received $8,071 and $25,921 in purchase premiums and
$15,820 and $8,521 in redemption fees, respectively. There is no premium
for reinvested distributions or in-kind transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, substantially all of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $1,081. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$21,726,854 and $17,670,494, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$20,272,418 $1,366,350 $(1,722,745) $(356,395)
</Table>
18
<Page>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 60.4% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
----------------------- -----------------------
Shares Amount Shares Amount
Class III: -------- ----------- -------- -----------
Shares sold 373,781 $ 5,184,289 99,465 $ 1,677,783
Shares issued to shareholders
in reinvestment of distributions -- -- 92,295 1,644,603
Shares repurchased (101,766) (1,697,701) (203,137) (3,213,931)
-------- ----------- -------- -----------
Net increase (decrease) 272,015 $ 3,486,588 (11,377) $ 108,455
======== =========== ======== ===========
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FINANCIAL FUTURES
<Table>
<Caption>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Depreciation
--------------------- ---------------------- ---------------------- -------- --------------
Buys
1 Russell 2000 March 2003 $180,250 $(1,261)
=======
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
19
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO SMALL CAP GROWTH FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Small Cap Growth Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
20
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
21
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
22
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Principal Occupation(s)
Name, Address, Position(s) Term of Office(4) and Length During Past
and Age Held with Fund of Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since Associate General Counsel,
c/o GMO Trust of the Trust August 1999; Secretary since Grantham, Mayo, Van
40 Rowes Wharf March 2001. Otterloo & Co. LLC
Boston, MA 02110 (June 1999 - present);
Age: 58 Associate/Junior Partner, Hale
and Dorr LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
23
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Small Cap Value Fund returned -18.6% for the
fiscal year ended February 28, 2003, as compared to -16.6% for the Russell 2500
Value Index and -22.7% for the S&P 500. Consistent with the Fund's investment
objectives and policies, the Fund was primarily invested in common stocks
throughout the period.
For the fiscal year, small capitalization growth stocks outperformed large cap
growth stocks by 1%, but underperformed small cap value stocks by 8%. Autos and
transportation and technology were the weakest performing sectors in the Index,
falling 38% and 30%, respectively, for the period. The top performing sectors in
the Russell 2500 Value Index were integrated oils, energy, and financial
services.
The Fund's underperformance of the benchmark for the period is attributable to
sector selection. Hit the hardest were the Fund's overweight positions in the
weak performing autos and transportation and consumer discretionary sectors
along with an underweight position in the financial services sector. These
losses were partially offset by the Fund's underweighting in healthcare and
materials and processing sectors.
In spite of its weak sector attribution, the Fund gained from good stock
selection. Most notable were selections in producer durables, healthcare, and
auto and transportation stocks, which added 1.5% over the benchmark. The Fund,
however, had weak selection among the technology, financial services, and
integrated oils stocks.
The Fund incorporates three investment disciplines in the portfolio: price to
intrinsic value, which has a 50% weight; price to normalized earnings, with a
30% weight; and momentum, with a 20% weight. The Fund's two value investment
disciplines were disappointing for the period, with the bulk of the relative
underperformance attributable to intrinsic value. Momentum also detracted,
albeit a very small amount.
OUTLOOK
Over the past year, U.S. small cap value stocks have posted a significant
recovery relative to their counterparts in small cap growth stocks. We believe
that our process of combining value and momentum disciplines in the Small Cap
Value Fund is well suited to the continued choppy market environment that we
anticipate. The portfolio currently maintains overweight positions in the
producer durables, consumer discretionary, and auto/transportation sectors, and
underweight positions in the utilities, healthcare, technology, and financial
services sectors.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO SMALL CAP VALUE FUND CLASS III SHARES AND THE
RUSSELL 2500 VALUE INDEX
AS OF FEBRUARY 28, 2003
GMO SMALL RUSSELL 2500 RUSSELL 2500
CAP VALUE FUND VALUE INDEX VALUE + INDEX*
2/28/93 $9950.00 $10000.00 $10000.00
3/31/93 $10342.35 $10406.51 $10373.98
6/30/93 $10484.48 $10600.75 $10591.49
9/30/93 $11082.88 $11263.04 $11341.84
12/31/93 $11465.22 $11386.54 $11543.91
3/31/94 $11349.41 $11207.07 $11287.94
6/30/94 $10984.55 $11100.17 $10889.22
9/30/94 $11958.62 $11634.78 $11680.27
12/31/94 $11904.83 $11237.77 $11431.81
3/31/95 $12631.84 $11941.66 $12276.40
6/30/95 $13508.38 $13002.89 $13370.97
9/30/95 $14813.83 $14042.18 $14655.61
12/31/95 $15151.89 $14582.08 $15056.08
3/31/96 $16057.83 $15241.28 $15937.37
6/30/96 $16603.69 $15709.00 $16600.92
9/30/96 $17040.00 $16196.16 $16974.90
12/31/96 $18206.24 $17820.11 $17919.51
3/31/97 $18064.74 $17964.62 $18063.78
6/30/97 $20858.43 $20510.83 $20623.43
9/30/97 $23896.22 $23064.24 $23189.53
12/31/97 $23617.91 $23717.64 $23849.08
3/31/98 $26249.78 $25980.94 $26124.92
6/30/98 $25362.45 $25050.72 $25187.28
9/30/98 $20718.44 $20924.84 $21037.46
12/31/98 $23625.46 $23261.57 $23388.79
3/31/99 $21329.05 $21400.16 $21515.40
6/30/99 $25219.78 $24828.46 $24960.64
9/30/99 $22957.66 $22683.17 $22802.09
12/31/99 $24322.58 $23608.80 $23733.08
3/31/2000 $24993.42 $24710.27 $24842.33
6/30/2000 $24831.03 $24563.32 $24693.46
9/30/2000 $26831.79 $26254.63 $26393.28
12/31/2000 $28946.69 $28516.37 $28666.97
3/31/2001 $28464.59 $27953.86 $28099.84
6/30/2001 $31111.71 $30756.00 $30916.61
9/30/2001 $27461.57 $26915.57 $27056.12
12/31/2001 $31815.08 $31293.88 $31457.29
3/31/2002 $34930.31 $33956.61 $34133.93
6/30/2002 $33487.93 $32770.99 $32942.12
9/30/2002 $26887.14 $26749.26 $26888.95
12/31/2002 $28161.96 $28203.63 $28350.91
2/28/2003 $26688.11 $26680.42 $26819.74
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEAR 10 YEAR
Class III -19.39% 1.06% 10.31%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 50 bp on the redemption.
Transaction fees are retained by the Fund to cover trading costs. Past
performance is not indicative of future performance. Information is unaudited. *
The Russell 2500 Value + Index is comprised of the Russell 2500 Index from
12/31/91 to 12/31/96 and the Russell 2500 Value Index from 12/31/96 to the
present.
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
COMMON STOCKS -- 97.3%
AUTO & TRANSPORTATION -- 4.7%
18,600 Airborne Inc 261,144
14,525 Arctic Cat Inc 208,448
42,650 ArvinMeritor Inc 651,692
42,400 Atlantic Coast Airlines Holdings* 267,120
29,800 Autoliv Inc 616,860
8,100 Bandag Inc 245,592
10,500 Borg Warner Automotive Inc 548,310
15,500 Celadon Group Inc* 128,650
24,400 Cooper Tire & Rubber Co 341,844
47,900 Dana Corp 410,024
14,800 Dura Automotive Systems Inc* 104,340
12,600 Egl, Inc* 159,012
6,700 Landstar System Inc* 363,073
31,300 Lear Corp* 1,188,774
21,800 Mesa Airline Group Inc* 81,750
4,800 Oglebay Norton Co* 25,920
10,300 Polaris Industries Inc 498,520
21,800 Tenneco Automotive Inc* 51,230
15,600 Tidewater Inc 477,672
11,900 US Freightways Corp 289,289
-------------
6,919,264
-------------
CONSUMER DISCRETIONARY -- 19.7%
35,400 Abercrombie & Fitch Co, Class A* 973,500
14,800 Amerco* 46,620
46,800 American Eagle Outfitters Inc* 677,196
4,700 American Woodmark Corp 185,650
10,100 Angelica Corp 182,305
25,650 Applebees International Inc 657,666
16,950 Banta Corp 482,905
28,400 Big Lots Inc* 313,820
23,900 Blyth Industries Inc 593,915
29,800 Bombay Co Inc* 143,040
12,000 Bowne and Co Inc 117,600
32,700 Boyd Gaming Corp* 409,077
8,200 Brown Shoe Co Inc 222,548
17,940 Burlington Coat Factory Warehouse 281,658
26,700 Callaway Golf Co 306,516
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
20,100 Catalina Marketing Corp* 363,810
11,000 CDI Corp* 250,250
12,700 CDW Computer Centers Inc* 554,482
14,300 Central Garden and Pet Co* 327,470
21,700 Charlotte Russe Holding Inc* 181,195
13,400 Children's Place Retail Stores Inc* 126,898
13,600 Claire's Stores Inc 310,352
11,400 Consolidated Graphics Inc* 275,310
15,900 Cornell Companies Inc* 126,723
10,215 Corrections Corporation of America, REIT* 176,515
10,900 CPI Inc 139,738
16,300 CSK Auto Corp* 142,788
6,100 CSS Industries Inc* 200,385
17,500 Dave and Busters Inc* 144,200
11,600 Dollar Thrifty Automotive Group Inc* 191,980
22,600 Dollar Tree Stores Inc* 466,690
20,500 Dover Motorsports Inc 73,800
30,000 Footstar Inc* 260,400
23,750 Fossil Inc* 427,025
18,000 Furniture Brands International Inc* 327,780
22,900 G TECH Holdings Corp* 666,390
9,400 Getty Images Inc* 275,890
28,600 Goody's Family Clothing Inc* 90,948
11,900 Group 1 Automotive Inc* 277,151
13,900 Ihop Corp* 313,445
66,700 IKON Office Solutions Inc 467,567
21,800 Isle of Capri Casinos Inc* 258,330
25,100 Jack in the Box Inc* 414,401
6,900 Jo-ann Stores Inc, Class A* 138,759
13,900 Kelly Services, Class A 288,008
11,800 Kenneth Cole Productions, Class A* 267,270
18,000 Lone Star Steakhouse and Saloon Inc 365,220
30,900 Luby's Inc* 42,024
15,300 Mandalay Resort Group* 386,172
16,800 Manpower Inc 510,216
13,650 Marcus Corp 182,910
14,000 Maytag Corp 337,400
3,300 McClatchy Co, Class A 178,926
15,800 Mohawk Industries Inc* 780,204
64,600 MPS Group Inc* 317,186
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
23,600 Nautilus Group Inc 346,448
16,900 Neiman Marcus Group Inc, Class A* 457,652
8,900 Nelson (Thomas) Inc* 82,503
38,100 Nu Skin Enterprises Inc 400,812
16,000 Outback Steakhouse Inc 515,200
18,800 Papa Johns International Inc* 446,876
15,500 Payless ShoeSource Inc* 722,455
12,000 Pdi Inc* 115,800
31,200 Pier 1 Imports Inc 498,264
20,500 Pinnacle Entertainment Inc* 81,385
18,400 Polo Ralph Lauren Corp* 371,496
30,900 Prime Hospitality Corp* 159,444
20,400 QRS Corp* 117,096
8,100 Quiksilver Inc* 203,310
15,000 Reebok International Ltd* 468,750
20,500 Rent-A-Center Inc* 1,023,975
14,500 Republic Services Inc, Class A* 276,515
23,200 Ross Stores Inc 793,672
10,600 Russell Corp 171,190
33,000 Ryan's Family Steak Houses Inc* 340,890
24,600 Saks Inc* 189,174
15,100 Salton Inc* 152,963
9,400 Sharper Image Corp* 144,760
23,900 Shopko Stores Inc* 261,705
22,900 Sinclair Broadcast Group, Class A* 200,146
14,600 Snap-On Inc 364,854
11,500 Sonic Automotive Inc* 175,030
50,900 Spherion Corp* 308,963
52,500 Spiegel Inc, Class A* 6,825
23,100 Sports Authority Inc* 148,533
16,700 Steven Madden Ltd* 283,065
13,500 Tech Data Corp* 305,370
7,400 Tractor Supply Co* 244,718
39,300 Trans World Entertainment Corp* 94,320
17,200 United Online Inc* 245,272
25,700 United Stationers Inc* 534,303
19,600 Wallace Computer Services 499,604
-------------
28,973,562
-------------
</Table>
See accompanying notes to the financial statements.
3
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
CONSUMER STAPLES -- 3.0%
24,600 Chiquita Brands International* 236,898
10,400 Dean Foods Co* 438,568
2,000 Farmer Brothers Co 613,000
20,200 Ingles Markets Inc, Class A 199,980
57,000 PepsiAmericas Inc 696,540
860 Seaboard Corp 197,757
24,400 Smithfield Foods Inc* 452,132
24,600 Supervalu Inc 342,432
15,200 Universal Corp 579,272
50,400 Winn-Dixie Stores Inc 614,880
-------------
4,371,459
-------------
FINANCIAL SERVICES -- 29.3%
25,100 Allmerica Financial Corp* 355,165
11,300 AMB Property Corp, REIT 316,400
18,800 American Financial Group Inc 372,804
4,100 American National Insurance Co 320,989
19,100 AmerUs Group Co, Class A 500,993
30,200 Annaly Mortgage Management Inc, REIT 546,922
21,100 Anthracite Capital Inc, REIT 238,852
13,200 Anworth Mortgage Asset Corp, REIT 165,000
31,900 Apex Mortgage Capital Inc, REIT 192,357
7,600 Argonaut Group Inc 95,000
14,800 Associated Banc Corp 511,488
22,500 Associated Estates Realty Corp, REIT 127,125
30,500 Astoria Financial Corp 766,160
14,700 Baldwin and Lyons Inc, Class B 366,030
9,500 Bank of Hawaii Corp 295,450
8,400 Bedford Property Investors, REIT 213,444
27,000 Boykin Lodging Co, REIT 213,300
22,300 Capstead Mortgage Corp, REIT 280,980
5,000 CBL & Associates Properties Inc, REIT 199,250
13,800 CCC Information Services Group* 237,222
29,600 Checkfree Corp* 621,008
6,700 City Holding Co 187,935
6,500 Coastal Bancorp Inc 186,095
27,900 Colonial BancGroup Inc 323,361
16,800 Commerce Group Inc 571,536
37,300 Commercial Net Lease Realty Inc, REIT 553,905
10,400 Compass Bankshares Inc 330,928
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
8,700 Cullen/Frost Bankers Inc 271,092
11,199 Delphi Financial Group Inc, Class A 412,683
12,600 Doral Financial Corp 408,366
10,600 Downey Financial Corp 425,590
22,500 Electro Rent Corp* 231,750
13,100 Entertainment Properties Trust, REIT 324,880
32,400 Equity Inns Inc, REIT 176,580
23,310 Equity One Inc, REIT 343,823
9,400 Erie Indemnity Co, Class A 342,160
17,000 Factset Research Systems Inc 435,030
14,100 FBR Asset Investment Corp, REIT 452,328
25,064 Felcor Lodging Trust Inc, REIT 172,190
69,000 Fidelity National Financial Inc 2,265,270
42,400 First American Financial Corp 979,440
14,350 First Bancorp Puerto Rico 359,755
4,100 First Citizens Bancshares, Class A 382,571
11,900 First Industrial Realty Trust, REIT 334,390
28,100 Firstmerit Corp 556,352
15,700 Flagstar Bancorp Inc 380,725
40,000 Fremont General Corp 242,800
20,000 Friedman Billings Ramsey, Class A* 177,400
24,400 GATX Corp 376,736
9,700 GBC Bancorp (California) 222,421
11,200 General Growth Properties, REIT 585,424
3,100 Granite State Bankshares Inc 138,852
5,900 Hancock Holding Co 264,910
21,300 Hibernia Corp, Class A 385,956
18,162 Highwood Properties Inc, REIT 381,584
10,900 Hospitality Properties Trust, REIT 333,104
27,800 Host Marriott Corp, REIT* 192,376
131,500 HRPT Properties Trust, REIT 1,119,065
22,400 Hudson City Bancorp Inc 425,376
10,100 Hudson United Bancorp 318,554
25,600 Huntington Bancshares Inc 491,520
20,300 Impac Mortgage Holdings Inc, REIT 242,788
41,100 IndyMac Bancorp Inc, REIT 785,010
20,500 Innkeepers USA Trust, REIT 143,295
23,800 Interpool Inc 380,800
20,625 iStar Financial Inc, REIT 585,750
29,100 JDN Realty Corp, REIT 350,073
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
13,700 Kansas City Life Insurance Co 541,287
10,100 Klamath First Bancorp Inc 169,074
11,500 Koger Equity Inc 178,020
88,300 La Quinta Corp, REIT 290,507
13,600 Landamerica Financial Group Inc 512,720
18,600 Lasalle Hotel Properties, REIT 225,060
14,400 Macerich Co, REIT 462,960
19,706 Mack-Cali Realty Corp, REIT 569,503
9,400 MAF Bancorp Inc 319,609
28,900 Meristar Hospitality Corp, REIT 77,163
27,300 National Health Investors, REIT 429,975
25,900 Nationwide Financial Services, Class A 629,370
12,100 Nationwide Health Properties Inc, REIT 156,816
18,800 New Century Financial Corp 500,644
25,989 New Plan Excel Realty Trust, REIT 505,746
8,500 Novastar Financial Inc, REIT 278,800
29,600 Old Republic International Corp 808,080
29,900 Omega Healthcare Investors Inc, REIT* 84,019
29,700 PMI Group Inc 804,870
7,056 Prentiss Properties Trust, REIT 184,938
24,700 Prime Group Realty Trust, REIT* 123,253
30,100 Protective Life Corp 816,312
16,500 Provident Financial Group 477,015
217,200 Providian Financial Corp* 1,324,920
9,000 Public Storage Inc, REIT 297,000
15,600 R & G Financial Corp, Class B 347,100
6,200 RAIT Investment Trust, REIT 133,238
10,400 Redwood Trust Inc, REIT 320,008
24,200 RFS Hotel Investors Inc, REIT 232,562
12,000 Riggs National Corp 167,400
19,100 Senior Housing Properties Trust, REIT 220,414
12,800 Silicon Valley Bancshares* 222,080
45,196 Sovereign Bancorp Inc 613,762
9,100 Sovran Self Storage, REIT 247,156
6,700 Student Loan Group 631,810
5,800 Texas Regional Bancshares, Class A 191,922
13,800 UICI* 138,690
6,956 UMB Financial Corp 256,607
7,900 Value Line Inc 366,402
20,000 Ventas Inc, REIT 240,000
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
6,200 W Holding Co Inc 113,088
21,015 Washington Federal Inc 466,533
7,900 Webster Financial Corp 281,240
4,600 Weingarten Realty, REIT 178,710
11,700 WSFS Financial Corp 374,985
-------------
42,999,836
-------------
HEALTH CARE -- 3.1%
5,500 Aetna Inc 231,660
11,200 American Med Security Group* 144,928
14,300 Amylin Pharmaceuticals Inc* 219,362
10,000 Centene Corp* 255,000
11,400 Chattem Inc* 176,928
16,000 Cooper (The) Companies Inc 464,800
31,210 Health Net Inc* 783,683
29,300 Osteotech Inc* 219,750
28,600 Pacificare Health Systems Inc* 617,760
11,200 PolyMedica Corp 326,928
14,300 PracticeWorks Inc* 116,831
29,000 Prime Medical Service Inc* 224,489
38,700 Res-Care Inc* 110,295
20,900 Sierra Health Services Inc* 252,681
14,000 United Therapeutics Corp* 221,200
8,800 Watson Pharmaceutical Inc* 272,184
-------------
4,638,479
-------------
INTEGRATED OILS -- 0.2%
14,900 Holly Corp 331,525
-------------
MATERIALS & PROCESSING -- 9.0%
12,800 A. Schulman Inc 184,960
33,400 AK Steel Holding Corp* 183,366
9,200 Albemarle Corp 225,308
29,200 Ashland Inc 812,052
6,500 Barnes Group Inc 124,800
13,400 Carpenter Technology Corp 155,976
11,300 Cleveland Cliffs Inc* 238,204
21,500 Commercial Metals Co 302,505
23,600 CompX International Inc 164,728
55,500 Crown Holdings Inc* 317,460
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- CONTINUED
15,500 Culp Inc* 93,000
21,400 Cytec Industries Inc* 619,530
21,400 Dycom Industries Inc* 223,416
23,400 Energizer Holdings Inc* 621,270
11,600 Great Lakes Chemical Corp 244,644
10,700 Greif Brothers Corp 205,440
11,600 Harsco Corp 349,972
16,800 Hercules Inc* 134,904
27,300 Intermet Corp 112,749
29,200 Lafarge Corp 825,776
16,200 Lennox International Inc 216,432
15,500 LNR Property Corp 512,430
12,800 Macdermid Inc 280,832
17,900 Maverick Tube Corp* 312,176
6,800 Mueller Industries Inc* 167,416
85,000 Owens Illinois Inc* 765,000
6,800 Phelps Dodge Corp* 244,528
26,900 Precision Castparts Corp 634,840
10,100 Quanex Corp 319,160
21,300 Rock-Tenn Co, Class A 275,835
25,600 Sealed Air Corp* 928,512
7,500 Sigma Aldrich Corp 328,650
12,700 Sonoco Products Co 263,525
19,700 Southern Peru Copper Corp 306,335
7,600 Standard Register Co 123,348
13,300 Stepan Co 323,323
7,700 Texas Industries Inc 152,845
5,300 Trex Company Inc* 172,250
8,700 Urstadt Biddle Properties Inc, REIT 95,700
33,120 US Industries Inc* 115,920
23,300 York International Corp 498,620
-------------
13,177,737
-------------
OTHER -- 1.0%
15,800 Brunswick Corp 298,620
26,100 FMC Corp* 405,333
11,200 Kaman Corp, Class A 110,096
14,400 Lancaster Colony Corp 546,912
3,600 Sequa Corp, Class A* 126,900
-------------
1,487,861
-------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
OTHER ENERGY -- 4.1%
62,100 Chesapeake Energy Corp 504,252
19,400 Clayton Williams Energy Inc* 246,186
5,200 Cooper Cameron Corp* 270,400
25,600 Denbury Resources Inc* 293,888
6,000 Equitable Resources Inc 217,800
41,900 Harvest Natural Resources Inc* 241,763
11,500 Helmerich & Payne Inc 316,250
28,500 Horizon Offshore Inc* 109,440
18,800 National-Oilwell Inc* 423,000
16,500 Pioneer Natural Resources Co* 431,475
16,200 Pogo Producing Co 643,950
25,500 Pride International Inc* 369,750
17,900 Rowan Cos Inc 351,377
49,300 Tesoro Petroleum Corp* 263,755
16,000 Valero Energy Corp 624,160
15,400 Varco International Inc* 291,984
16,200 XTO Energy Inc 408,402
-------------
6,007,832
-------------
PRODUCER DURABLES -- 13.4%
5,100 Allied Defense Group Inc/The* 89,097
101,100 American Power Conversion Corp* 1,581,204
12,600 Ametek Inc 415,548
8,200 Beazer Homes USA, Inc* 478,552
7,400 Briggs & Stratton Corp 292,300
28,900 C-cor Electronics Inc* 85,833
28,900 Centex Corp 1,597,592
32,300 Cooper Industries Ltd 1,222,555
19,800 CTS Corp 134,838
3,800 Curtiss Wright Corp 207,480
8,300 Donaldson Co Inc 289,255
59,937 DR Horton Inc 1,097,446
13,600 Esterline Corp* 233,648
42,400 General Cable Corp 164,936
9,300 Goodrich (BF) Co 142,941
12,000 HON Industries Inc 321,720
11,400 Hovnanian Enterprises Inc* 374,262
10,500 Imagistics International Inc* 200,340
36,900 KB HOME 1,730,610
17,600 Kimball International, Class B 238,128
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
PRODUCER DURABLES -- CONTINUED
17,100 Lennar Corp 923,229
12,200 M/I Schottenstein Homes Inc 315,980
17,000 MDC Holdings Inc 638,180
48,000 Measurements Specialties Inc* 139,200
7,900 Meritage Corporation* 249,640
20,200 Milacron Inc 94,940
5,100 Mine Safety Appliances Co 182,835
12,600 MTS Systems Inc 143,766
5,000 Nacco Industries Inc, Class A 224,250
3,000 NVR Inc* 995,850
22,600 Plantronics Inc* 325,666
15,428 Pulte Corp 784,205
15,400 Ryland Group Inc 636,020
12,050 Smith (AO) Corp, Class B 310,649
20,000 Standard Pacific Corp 515,400
11,700 Standex International Corp 223,470
12,500 Steel Technologies Inc 133,000
15,800 Steelcase Inc 145,518
8,200 Tecumseh Products Co, Class A 364,900
8,400 Tecumseh Products Co, Class B 354,900
47,000 Toll Brothers Inc* 910,390
16,700 Watts Industries Inc, Class A 250,500
-------------
19,760,773
-------------
TECHNOLOGY -- 5.1%
80,100 3 Com Corp* 335,619
49,600 Adaptec Inc* 302,064
37,000 American Management Systems Inc* 392,200
6,200 Analogic Corp 281,666
22,700 Avnet Inc* 233,810
22,200 AVX Corp 210,012
8,700 Benchmark Electronics Inc* 303,108
16,000 Black Box Corp 650,560
38,400 Ciber Inc* 207,360
60,500 Citrix Systems Inc* 726,000
9,200 Imation Corp* 331,200
9,100 Inforte Corp* 59,787
15,800 Infospace Inc* 183,280
58,000 Ingram Micro Inc, Class A* 600,880
20,800 Iomega Corp* 208,000
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
TECHNOLOGY -- CONTINUED
57,500 Kemet Corp* 458,850
31,900 MEMC Electronic Materials Inc* 294,437
65,500 Nvidia Corp* 826,610
19,600 Pomeroy Computer Resources Inc* 141,120
16,500 Radisys Corp* 111,045
14,100 Sbs Technologies Inc* 119,286
11,500 SCM Microsystems Inc* 33,580
17,600 Sykes Enterprises Inc* 61,248
26,100 Vishay Intertechnology Inc* 263,610
37,700 Zomax Inc* 127,049
-------------
7,462,381
-------------
UTILITIES -- 4.7%
18,400 Alliant Energy Corp 289,984
20,100 Avista Corp 205,221
20,100 DPL Inc 243,210
8,400 Energen Corp 255,528
25,600 Energy East Corp 481,792
5,400 Hawaiian Electric Industries Inc 214,920
23,800 National Fuel Gas Co 465,052
12,600 NSTAR 509,292
24,000 OGE Energy Corp 416,880
17,400 Oneok Inc 299,802
20,700 Pepco Holdings Inc 371,565
27,400 PNM Resources Inc 577,592
15,900 Puget Energy Inc 321,816
8,400 Questar Corp 234,192
25,800 SCANA Corp 773,742
17,400 Talk America Holdings Inc* 97,440
8,000 UIL Holdings Corp 263,200
19,340 UniSource Energy Corp 324,332
23,800 Wisconsin Energy Corp 543,830
-------------
6,889,390
-------------
TOTAL COMMON STOCKS (COST $153,653,376) 143,020,099
-------------
</Table>
See accompanying notes to the financial statements.
11
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
RIGHTS AND WARRANTS -- 0.0%
CONSUMER DISCRETIONARY -- 0.0%
6,934 Sunbeam Corporation Warrants, Expires 08/24/03* 1
-------------
TOTAL RIGHTS AND WARRANTS (COST $4,334) 1
-------------
SHORT-TERM INVESTMENTS -- 14.6%
CASH EQUIVALENTS -- 9.5%
6,070,887 Dreyfus Money Market Fund(a) 6,070,887
$ 4,289,940 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(a) 4,289,940
3,539,201 Merrimac Money Market Fund(a) 3,539,201
-------------
13,900,028
-------------
U.S. GOVERNMENT -- 0.4%
$ 660,000 U.S. Treasury Bill, 1.14%, due 4/24/03(b) 658,787
-------------
REPURCHASE AGREEMENT -- 4.7%
$ 6,839,453 Salomon Smith Barney Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of
$6,839,658 and an effective yield of 0.36%,
collateralized by a U.S. Treasury Obligation with a
rate of 3.625%, maturity date of 3/31/04 and market
value, including accrued interest of $7,359,112. 6,839,453
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $21,398,268) 21,398,268
-------------
TOTAL INVESTMENTS -- 111.9%
(Cost $175,055,978) 164,418,368
Other Assets and Liabilities (net) -- (11.9%) (17,503,377)
-------------
TOTAL NET ASSETS -- 100.0% $ 146,914,991
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
<Table>
REIT - Real Estate Investment Trust
</Table>
* Non-income producing security.
(a) Represents investment of security lending collateral (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
12 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$13,275,800 (cost $175,055,978) (Note 1) $164,418,368
Receivable for investments sold 5,263,997
Receivable for Fund shares sold 57,116
Dividends, interest receivable and other 232,858
Receivable for expenses reimbursed by Manager (Note 2) 6,692
------------
Total assets 169,979,031
------------
LIABILITIES:
Payable for investments purchased 6,594,692
Payable upon return of securities loaned (Note 1) 13,900,028
Payable for Fund shares repurchased 2,471,013
Payable to affiliate for (Note 2):
Management fee 37,392
Shareholder service fee 16,996
Payable for variation margin on open futures contracts
(Notes 1 and 6) 257
Accrued expenses 43,662
------------
Total liabilities 23,064,040
------------
NET ASSETS $146,914,991
============
NET ASSETS CONSIST OF:
Paid-in capital $165,981,678
Accumulated undistributed net investment income 592,822
Distributions in excess of net realized gains (8,947,726)
Net unrealized depreciation (10,711,783)
------------
$146,914,991
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $146,914,991
============
SHARES OUTSTANDING:
Class III 14,974,852
============
NET ASSET VALUE PER SHARE:
Class III $ 9.81
============
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $778) $ 3,002,476
Interest (including securities lending income of $23,158) 120,228
------------
Total income 3,122,704
------------
EXPENSES:
Management fee (Note 2) 609,617
Custodian and transfer agent fees 68,111
Audit fees 40,434
Registration fees 20,676
Legal fees 8,559
Trustees fees and related expenses (Note 2) 5,076
Miscellaneous 2,941
Fees reimbursed by Manager (Note 2) (139,504)
------------
615,910
Shareholder service fee (Note 2) -- Class III 277,099
------------
Net expenses 893,009
------------
Net investment income 2,229,695
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 23,244,140
Closed futures contracts (1,680,316)
------------
Net realized gain 21,563,824
------------
Change in net unrealized appreciation (depreciation) on:
Investments (48,706,576)
Open futures contracts (35,215)
------------
Net unrealized loss (48,741,791)
------------
Net realized and unrealized loss (27,177,967)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(24,948,272)
============
</Table>
14 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 2,229,695 $ 4,830,025
Net realized gain 21,563,824 29,733,253
Change in net unrealized appreciation (depreciation) (48,741,791) 3,505,145
------------- ------------
Net increase (decrease) in net assets from
operations (24,948,272) 38,068,423
------------- ------------
Distributions to shareholders from:
Net investment income
Class III (2,143,600) (4,491,724)
------------- ------------
Total distributions from net investment income (2,143,600) (4,491,724)
------------- ------------
Net realized gains
Class III (28,451,497) (11,393,594)
------------- ------------
Total distributions from net realized gains (28,451,497) (11,393,594)
------------- ------------
(30,595,097) (15,885,318)
------------- ------------
Net share transactions (Note 5):
Class III (111,137,973) (13,764,934)
------------- ------------
Decrease in net assets resulting from net share
transactions (111,137,973) (13,764,934)
------------- ------------
Total increase (decrease) in net assets (166,681,342) 8,418,171
NET ASSETS:
Beginning of period 313,596,333 305,178,162
------------- ------------
End of period (including accumulated undistributed
net investment income of $592,822 and $558,268,
respectively) $ 146,914,991 $313,596,333
============= ============
</Table>
See accompanying notes to the financial statements. 15
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.91 $ 13.86 $ 12.41 $ 11.69 $ 18.28
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income 0.18 0.23 0.23 0.15 0.18
Net realized and unrealized gain
(loss) (2.74) 1.58 2.38 1.11 (2.50)
--------- --------- --------- --------- ---------
Total from investment operations (2.56) 1.81 2.61 1.26 (2.32)
--------- --------- --------- --------- ---------
Less distributions to shareholders:
From net investment income (0.17) (0.21) (0.20) (0.14) (0.19)
From net realized gains (2.37) (0.55) (0.96) (0.40) (4.08)
--------- --------- --------- --------- ---------
Total distributions (2.54) (0.76) (1.16) (0.54) (4.27)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.81 $ 14.91 $ 13.86 $ 12.41 $ 11.69
========= ========= ========= ========= =========
TOTAL RETURN(a) (18.58)% 13.39% 22.14% 10.66% (14.74)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 146,915 $ 313,596 $ 305,178 $ 265,778 $ 347,684
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 1.21% 1.60% 1.73% 1.12% 0.99%
Portfolio turnover rate 69% 59% 111% 50% 49%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.08% 0.04% 0.06% 0.06% 0.21%
Purchase and redemption fees
consisted of the following per
share amounts:(b) $ 0.08 $ 0.01 $ 0.03 N/A N/A
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the period shown. Calculation excludes purchase
premiums and redemption fees.
(b) Effective March 1, 2000, the Fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
16 See accompanying notes to the financial statements.
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Small Cap Value Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks long-term growth of capital. The Fund's benchmark is
Russell 2500 Value Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount
17
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
payable in the event the Fund must deliver the full amount of the
contracts. Futures contracts are marked to market daily and an appropriate
payable or receivable for the change in value ("variation margin") is
recorded by the Fund. The payable or receivable is liquidated on the
following business day. Gains or losses are recognized but not considered
realized until the contracts expire or are closed. Futures contracts
involve, to varying degrees, risk of loss in excess of the variation
margin disclosed in the Statement of Assets and Liabilities. Losses may
arise from the changes in the value of the underlying instrument, if there
is an illiquid secondary market for the contracts, or if counterparties do
not perform under the contract terms. Futures contracts are valued at the
settlement price established each day by the board of trade or exchange on
which they are traded. See Note 6 for all open futures contracts as of
February 28, 2003.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003 the Fund held no open swap contracts.
18
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of collateral, the risk of delay in recovery or
loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $13,275,800, collateralized by cash in the amount of
$13,900,028, which was invested in short-term instruments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP.
19
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
During the years ended February 28, 2002 and February 28, 2003, the tax
basis of distributions paid from ordinary income were $5,446,644 and
$2,434,739, respectively. For the years ended February 28, 2002 and
February 28, 2003, the distributions paid from long-term capital gains
were $10,438,674 and $28,160,358, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $654,424 and $135,167 of undistributable ordinary
income and undistributed capital gains, respectively. The temporary
differences between book and tax basis distributable earnings are
primarily due to losses on wash sale transactions.
The Fund elected to defer to March 1, 2003 post-October losses of
$7,181,417.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to the classification of
distributions from REIT securities. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Distributions
Undistributed Net in Excess of
Investment Income Net Realized Gain
----------------- -----------------
$(51,541) $51,541
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost,
when the amount of the return of capital is conclusively determined.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
20
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases and fee on redemptions of Fund shares is
.50% of the amount invested or redeemed. If the Manager determines that
any portion of a cash purchase is offset by a corresponding cash
redemption occurring on the same day, the purchase premium or redemption
fee charged by the Fund will be reduced by 100% with respect to that
portion. In addition, the purchase premium or redemption fee charged by
the Fund may be waived if the Manager determines the Fund is either
substantially underweight/overweight in cash so that a purchase or
redemption will not require a securities transaction. All purchase
premiums and redemption fees are paid to and recorded by the Fund as
paid-in capital. For the years ended February 28, 2002 and February 28,
2003, the Fund received $60,393 and $202,204 in purchase premiums,
respectively and $200,901 and $891,984 in redemption fees, respectively.
There is no premium for reinvested distributions or in-kind transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, a significant portion of the Fund's shares were
held by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $3,834. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$124,797,684 and $257,947,860 respectively.
21
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$177,093,229 $11,295,052 $(23,969,913) $(12,674,861)
</Table>
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 28.1% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder may
have a material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- ------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ---------- ------------
Shares sold 3,311,518 $ 40,822,521 1,166,998 $ 16,074,205
Shares issued to shareholders
in reinvestment of distributions 2,715,424 30,055,774 993,426 14,156,265
Shares repurchased (12,087,686) (182,016,268) (3,149,015) (43,995,404)
----------- ------------- ---------- ------------
Net decrease (6,060,744) $(111,137,973) (988,591) $(13,764,934)
=========== ============= ========== ============
</Table>
22
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FUTURES CONTRACTS
<Table>
<Caption>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Depreciation
--------- --------------- ------------------ ------------ --------------
Buys
16 Russell 2000 March 2003 $2,884,000 $(74,173)
========
</Table>
At February 28, 2003, the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
23
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO SMALL CAP VALUE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Small Cap Value Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
24
<Page>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 2003, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 92.04% of the distributions as net capital gain
dividends.
25
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- --------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of 39 *(2)
c/o GMO Trust Trust Business
40 Rowes Wharf Administration
Boston, MA 02110 and Senior
Age: 61 Associate Dean,
Harvard
University.
Donald W. Glazer, Esq. Trustee of the Since December Advisory 39 None
c/o GMO Trust Trust 2000 Counsel,
40 Rowes Wharf Goodwin Procter
Boston, MA 02110 LLP; Secretary
Age: 58 and Consultant,
Provant, Inc.
(provider of
performance
improvement
training
services and
products)
(1998 -
present);
Consultant --
Business and
Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
26
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- --------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, 39 None
c/o GMO Trust Board of 1985. President Grantham, Mayo,
40 Rowes Wharf Trustees of the from February Van Otterloo &
Boston, MA 02110 Trust 2002 - October Co. LLC.
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
27
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Principal Occupation(s)
Name, Address, Position(s) Term of Office(4) and Length During Past
and Age Held with Fund of Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti-Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust 40 Rowes of the Trust 1999; Secretary since March Grantham, Mayo, Van
Wharf Boston, MA 02110 2001. Otterloo & Co. LLC (June
Age: 58 1999 - present); Associate/
Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti-Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
28
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Tax-Managed International Equities Fund returned -7.5% for the fiscal
year ended February 28, 2003, as compared to -17.5% for the MSCI EAFE benchmark
before taxes. On an after-tax basis, the Fund returned -8.3% to the benchmark's
- -17.3% for the same period. Consistent with the Fund's investment objectives and
policies, the Fund was invested substantially in international equity securities
throughout the period.
International stocks, like the U.S. market, suffered their third straight year
of negative returns in 2002. World equity markets were hit by the continued
global economic slowdown which came on top of valuation levels that remained
high by historical standards. With the addition of corporate governance scandals
and a perilous geopolitical situation, these factors combined to produce the
worst bear market since 1974.
In U.S. dollar terms, foreign stocks fared slightly better than domestic
equities. The MSCI EAFE Index outperformed the S&P 500 (which returned -22.7%)
solely due to weakness in the dollar. Foreign investors have been slowing their
inflows on declining confidence in the U.S. economy. With the continued large
U.S. trade deficit and lower U.S. interest rates, this seems to have put an end
to the long post 1995 dollar rally.
In local currency terms, European markets fell even further than the U.S.
Germany led the way down, with that country's DAX index falling a Nasdaq-like
- -44% in calendar year 2002. Europe continued to suffer from the unraveling of
the "TMT" bubble in the technology, media, and telecommunications sectors. Faith
has all but vanished that third generation mobile phone technology will deliver
pots of gold to these sectors. The insurance sector suffered from a brutal
combination of rising liabilities for natural (and unnatural) disasters with
deteriorating asset values as equity holdings declined in value. There were
questions about the viability of the Eurozone as a single currency region and
the appropriateness of its stability pact, which limits government deficits.
Adhering to this pact means, for example, that Germany has neither fiscal policy
nor monetary policy (now ceded to the ECB) available to stimulate its economy.
In Japan, frustration continued to mount over the lack of reform. GDP growth is
stagnant and some economic indicators forecast a return to recession in 2003.
The solvency of the financial sector remains a concern, and several big banks
have been forced to raise additional capital at the expense of current
shareholders. Prime Minister Koizumi appeared to practice business as usual with
the appointment of an establishment candidate to head the central bank.
Additionally, the strength of the yen against the dollar posed problems for
exporters. Despite the fact that the Nikkei 225 index hit a 20-year low, Japan
was the best performing major market. The MSCI Japan index fell "only" by 10%,
as the decline was at least somewhat anticipated in the prices.
Within this difficult environment, GMO's disciplined investment approach
produced strong relative performance. The focus on higher quality, reasonably
valued stocks helped ease the pain.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
Generally, the most defensive sectors performed strongest in these times of
uncertainty. Utility stocks led the way, and telecommunications stocks and
consumer staples also outperformed the benchmark (though all sectors fell in
absolute terms). Energy stocks outperformed only slightly despite a run up in
oil prices to nearly $40/barrel. The outperformance of the telecommunications
sector came after two dismal years, as share prices have fallen enough that the
basic revenue from the traditional business is providing some valuation support
even as hopes of future growth dissipate. Technology stocks performed the worst
of the major sectors. Sector allocation contributed positively to the portfolio
for the fiscal year, primarily due to an underweight of information technology
stocks and overweight of electric utilities.
Country allocation was also a positive. The portfolio benefited both from its 8%
allocation to emerging markets, which outperformed the MSCI EAFE Index by 5.8%
during the fiscal year, as well as from overweights in some of the smaller
markets that performed relatively well. Austria was the most notable of these,
as overweighting that market, which managed positive absolute return, added
close to a percentage point of relative return. Allocations to Canada and the
Pacific region outside Japan were also positive as those regions had relatively
strong growth. Within the emerging markets, allocations to Russia and Thailand
were the strongest contributors to value added.
OUTLOOK
The silver lining to the pain of a tough bear market is that the bad news is now
out in the open. With lower stock prices, dividend yields are now meaningful and
there is a lower hurdle on earnings growth required to deliver capital gains.
Also, many CEOs have been replaced by a more prudent generation focused on
reducing debt and other more conservative means of enhancing shareholder value.
Lower valuations and continued dollar weakness position international equities
both to enjoy positive returns and to outperform the U.S. market.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND CLASS III SHARES
AND THE
MSCI EAFE INDEX
AS OF FEBRUARY 28, 2003
GMO Tax-Managed International Equities Fund* MSCI EAFE Index*
7/29/98 $10,000 $10,000
9/30/98 $8,700 $8,513
12/31/98 $10,158 $10,271
3/31/99 $10,118 $10,414
6/30/99 $11,112 $10,679
9/30/99 $11,143 $11,148
12/31/99 $11,707 $13,041
3/31/2000 $11,077 $13,027
6/30/2000 $11,270 $12,511
9/30/2000 $10,800 $11,502
12/31/2000 $11,205 $11,193
3/31/2001 $10,338 $9,659
6/30/2001 $10,854 $9,558
9/30/2001 $9,685 $8,220
12/31/2001 $10,229 $8,793
3/31/2002 $10,879 $8,838
6/30/2002 $11,177 $8,651
9/30/2002 $9,494 $6,944
12/31/2002 $9,991 $7,392
2/28/2003 $9,564 $6,920
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN*
Since
1 Year Inception
7/29/98
Class III -7.47% -0.97%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited. * Returns do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
COMMON STOCKS -- 96.1%
ARGENTINA -- 0.1%
5,033 Grupo Financiero Galicia SA ADR* 12,784
11,600 Perez Companc SA ADR* 84,564
10,500 Telecom Argentina SA ADR* 42,210
------------
139,558
------------
AUSTRALIA -- 3.3%
110,100 AMP Diversified Property Trust 173,049
26,905 Australia and New Zealand Banking Group Ltd 268,094
40,507 Boral Ltd 109,143
44,017 CSR Ltd 173,626
146,306 General Property Trust Units 245,937
54,765 National Australia Bank Ltd 960,467
22,203 Orica Ltd 110,890
5,188 Patrick Corp Ltd 35,639
39,504 Qantas Airways Ltd 73,837
49,944 Santos Ltd 177,305
10,407 St. George Bank Ltd 111,153
88,938 Telstra Corp Ltd 215,888
148,269 Westfield Trust Units 291,526
33,533 Woodside Petroleum Ltd 220,792
------------
3,167,346
------------
AUSTRIA -- 3.0%
7,208 Austrian Airlines* 49,720
658 Bau Holdings AG 48,580
2,793 Boehler Uddeholm (Bearer) 139,316
1,166 Brau Union AG 84,200
7,458 Erste Bank Der Oesterreichischen Sparkassen AG 499,174
4,667 Flughafen Wien AG 169,011
190 Generali Holding Vienna AG 31,946
13,703 Immofinanz Immobilien Anlagen AG* 87,433
446 Lenzing AG 42,061
2,444 Mayr-Melnhof Karton AG (Bearer) 191,291
1,661 Oesterreichische Brau Beteiligungs AG 135,789
7,299 OMV AG 788,653
9,588 Telekom Austria AG* 101,066
5,897 VA Technologie AG (Bearer) 92,159
627 Verbund-Oesterreichische Elektrizitaetswirtschafts AG 55,623
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
AUSTRIA -- CONTINUED
7,208 Voestalpine AG 172,079
10,046 Wienerberger AG 171,184
------------
2,859,285
------------
BELGIUM -- 2.8%
12,433 AGFA-Gevaert NV 267,872
10,875 Almanij NV 350,109
1,350 Bekaert SA 47,652
800 CMB SA 42,301
3,475 Colruyt SA 206,182
6,400 Delhaize Group 97,537
1,975 Electrabel SA 495,977
26,277 Fortis B 359,681
13,640 KBC Bancassurance Holding 412,221
2,327 Solvay Et Cie 137,942
9,116 UCB SA 208,393
------------
2,625,867
------------
BRAZIL -- 0.2%
10,953,000 Banco do Brasil SA 29,462
4,300 Petroleo Brasileiro SA (Petrobras) 57,602
3,200 Petroleo Brasileiro SA (Petrobras) ADR 42,784
1,400 Vale Do Rio Doce 40,796
------------
170,644
------------
CANADA -- 2.2%
7,300 Bank of Montreal 205,799
12,600 Bank of Nova Scotia 445,288
18,300 EnCana Corp 597,225
4,400 Imperial Oil Ltd 139,992
9,900 National Bank of Canada 215,969
9,500 Royal Bank of Canada 370,486
8,200 TransCanada PipeLines Ltd 122,246
------------
2,097,005
------------
CHINA -- 1.0%
268,000 Brilliance China Automotive Holdings Ltd 62,541
32,000 China International Marine Containers Co Ltd Class B 35,122
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CHINA -- CONTINUED
76,000 China Mobile Ltd* 163,711
502,000 China Petroleum & Chemical Corp 94,619
49,200 China Resources Enterprise Ltd 44,159
80,000 China Unicom* 48,467
78,000 CNOOC Ltd 109,513
68,000 Cosco Pacific Ltd 61,469
138,000 Denway Motors Ltd 53,083
88,000 Huaneng Power International Inc Class H 78,419
124,000 Legend Holdings Ltd 42,531
562,000 PetroChina Co Ltd Class H 117,457
54,000 Zhejiang Southeast Electric Power Co Class B 33,372
------------
944,463
------------
CZECH REPUBLIC -- 0.3%
28,200 CEZ AS 88,029
1,200 Komercni Banka AS 86,115
200 Philip Morris CR AS 74,783
------------
248,927
------------
DENMARK -- 0.0%
1,600 DFDS A/S 34,588
------------
FINLAND -- 1.2%
28,700 Finnair Class A 112,905
36,800 Fortum Oyj 241,945
12,900 Kemira Oyj 81,753
3,900 Orion-Yhtymae Oyj 60,950
22,600 Rautaruukki Oyj 86,472
39,300 Sampo Oyj 245,674
10,000 Stora Enso Oyj 97,972
6,000 UPM-Kymmene Oyj 172,017
------------
1,099,688
------------
FRANCE -- 4.8%
24,934 Arcelor* 249,658
25,754 BNP Paribas 1,065,894
3,285 Bongrain SA 132,771
8,804 Chargeurs SA 222,990
9,476 Cie de Saint-Gobain 286,277
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
FRANCE -- CONTINUED
2,834 Danone 335,382
1,128 Eiffage SA 79,024
786 Elf Gabon 138,933
2,476 Eramet 50,571
2,572 Esso S.A.F. 218,996
14,403 France Telecom SA 319,164
6,543 L'Oreal SA 422,418
5,582 Renault SA 235,958
14,361 Societe Generale Class A 770,819
------------
4,528,855
------------
GERMANY -- 5.1%
61,400 Bankgesellschaft Berlin AG* 94,633
17,650 BASF AG 641,081
12,550 Commerzbank AG 79,129
44,250 DaimlerChrysler AG (Registered) 1,349,702
5,809 Degussa AG 148,384
21,500 Deutsche Telekom 247,021
31,700 E. On AG 1,347,859
10,800 IWKA AG 126,995
4,400 Merck KGaA 106,228
3,900 Sudzucker AG 61,370
24,700 Thyssen Krupp AG 235,335
9,300 Volkswagen AG 372,375
------------
4,810,112
------------
HONG KONG -- 2.0%
124,000 Cathay Pacific Airways 173,302
98,400 CLP Holdings Ltd 403,739
165,000 Hang Lung Development Co Ltd 139,631
30,000 Henderson Land Development Co Ltd 85,010
129,500 Hong Kong Electric Holdings Ltd 493,983
52,000 Hong Kong Land Holdings 63,960
37,700 Jardine Matheson Holdings Ltd 214,890
123,500 Jardine Strategic Holdings Ltd 311,220
------------
1,885,735
------------
HUNGARY -- 0.1%
13,300 OTP Bank Rt 129,661
------------
</Table>
See accompanying notes to the financial statements.
4
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
INDIA -- 0.3%
13,100 ICICI Banking Ltd ADR* 93,141
5,000 Ranbaxy Laboratories Ltd GDR 72,000
6,000 State Bank of India GDR 85,200
------------
250,341
------------
INDONESIA -- 0.3%
274,000 Bank Central Asia Tbk 76,338
32,500 Gudang Garam 27,621
743,000 PT Matahari Putra Prima Tbk 32,619
349,000 Telekomunikasi IndonesiaTbk PT Class B 140,449
------------
277,027
------------
IRELAND -- 0.7%
28,801 Allied Irish Banks Plc 365,361
22,104 Bank of Ireland 243,478
16,000 Greencore Group 40,180
------------
649,019
------------
ISRAEL -- 0.1%
1,700 Teva Pharmaceutical Industries ADR 64,226
------------
ITALY -- 3.1%
119,184 ENI-Ente Nazionale Idrocarburi SPA 1,768,846
10,790 Fiat SPA (Savings Shares) 50,821
28,600 IFIL Finanziaria di Partecipazioni SPA (Savings Shares) 63,962
111,987 Telecom Italia Mobile SPA 504,524
54,363 Telecom Italia SPA 377,921
43,784 Telecom Italia SPA (Savings Shares) 214,716
------------
2,980,790
------------
JAPAN -- 21.1%
4,050 Acom Co Ltd 132,916
47,000 AIOI Insurance Co Ltd 95,014
18,000 Alps Electric Co Ltd 219,852
6,900 Aoki International 28,890
17,000 Banyu Pharmaceutical Co Ltd 200,736
17,000 Bridgestone Corp 191,964
33,000 Brother Industries Ltd 199,019
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
17,800 Chubu Electric Power Co Inc 326,716
12,700 Chugoku Electric Power Co Inc 194,219
141,000 Cosmo Oil Co Ltd 192,015
23,000 Daiichi Pharmaceuticals Co Ltd 308,158
18,000 Dainippon Printing Co Ltd 181,789
26,000 Daio Paper Corp 188,911
10,000 Daito Trust Construction Co Ltd 194,967
37,000 Daiwa House Industry Co Ltd 210,311
8,000 Denso Corp 119,704
95 East Japan Railway Co 437,936
27,000 Ezaki Glico Co Ltd 137,484
54,000 Fuji Heavy Industries Ltd 208,281
8,000 Fuji Photo Film Co Ltd 253,753
1,800 Hirose Electric Co Ltd 127,435
119,000 Itochu Corp 283,849
41,000 Itoham Foods Inc 116,524
18,000 Izumiya Co Ltd 71,863
37,000 JACCS Co 133,948
35 Japan Tobacco Inc 208,712
26,425 JFE Holdings Inc* 383,774
113,000 Kajima Corp 226,526
43,000 Kamigumi Co Ltd 199,679
41,000 Kandenko Co 126,927
20,600 Kansai Electric Power 312,420
61,000 Kansai Paint Co 172,332
77 KDDI Corp 241,632
34,000 Kirin Brewery Co Ltd 251,639
46,000 Kyudenko Corp 161,472
19,000 Kyushu Electric Power Co Inc 279,315
27,000 Maeda Road Construction 93,178
26,000 Matsushita Electric Industrial Co Ltd 230,696
110,000 Mazda Motor Corp 232,607
33,000 Minolta Co Ltd* 161,895
50,000 Misawa Homes 42,715
21,000 Mitsubishi Corp 140,503
123,000 Mitsubishi Electric Corp* 328,763
17,000 Mitsubishi Estate Co Ltd 117,767
90,000 Mitsubishi Motors* 218,482
72,000 Mitsubishi Paper Mills Ltd* 91,351
101 Mitsubishi Tokyo Finance Group Inc 447,655
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
24,000 Mitsui Chemicals Inc 92,163
68,000 Mitsui Trust Holding Inc 120,787
300 Mizuho Holding Inc* 266,441
34,000 Mizuno Corp 87,714
10,000 MOS Food Services 75,703
56,000 Nagase & Co 241,100
45,000 Nippon Express Co Ltd 177,754
34,000 Nippon Flour Mills Co Ltd 78,511
46,000 Nippon Hodo Co 213,221
27,000 Nippon Paint Co 68,742
53,000 Nippon Suisan Kaisha Ltd 118,351
140 Nippon Telegraph & Telephone Corp 506,830
27,000 Nipponkoa Insurance Co ltd 93,407
78,000 Nissan Motor Co 585,206
303,000 Nisshin Steel Co Ltd* 205,033
23,000 Nisshinbo Industries Inc 85,794
44,000 NOF Corp 116,118
13,000 Nomura Holdings Inc 152,844
40,000 Okumura Corp 147,854
12,000 Ono Pharmaceutical Co Ltd 376,570
7,600 Promise Co 248,137
2,400 Rohm Co Ltd 275,069
7,000 Ryosan Co 69,334
43,000 Sankyo Co Ltd 573,940
29,000 Seino Transportation Co Ltd 181,518
21,000 Sekisui House Ltd 148,141
71,000 Shimizu Corp 174,760
18,000 Shiseido Co Ltd 208,738
18,600 Sony Corp 706,399
137 Sumitomo Mitsui Financial Group Inc* 319,831
12,000 Suzuki Motor Corp 137,027
24,000 Taisho Pharmaceutical Co Ltd 350,789
17,000 Takeda Chemical Industries Ltd 626,940
7,640 Takefuji Corp 378,688
30,000 TOA Corp 31,973
36,600 Tohoku Electric Power Co Inc 530,309
36,000 TonenGeneral Sekiyu KK 218,634
20,000 Toppan Printing Co Ltd 137,704
160,000 Toshiba Corp* 465,553
45,000 Toyo Ink Manufacturing Co Ltd 130,937
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
JAPAN -- CONTINUED
22,900 Toyota Motor Corp 537,513
6,000 Yamanouchi Pharmaceutical Co Ltd 163,417
46,000 Yodogawa Steel Works 128,399
------------
19,980,187
------------
MEXICO -- 0.1%
3,600 Telefonos de Mexico Class L ADR 104,652
------------
NETHERLANDS -- 4.6%
85,886 ABN Amro Holdings NV 1,365,377
4,187 Boskalis Westminster NV 83,441
4,079 DSM NV 149,696
2,309 Gamma Holdings NV 64,705
33,891 ING Groep NV 458,423
14,632 Koninklijke Philips Electronics NV 244,125
2,003 Koninklijke Ten Cate 57,252
7,193 Koninklijke Wessanen NV 37,368
175,931 Ron KPN NV* 1,166,153
10,322 Unilever NV 585,178
4,088 Van Ommeren Vopak* 46,263
1,872 Wereldhave NV 107,036
------------
4,365,017
------------
NEW ZEALAND -- 0.6%
50,768 Fletcher Building Ltd 100,031
199,828 Telecom Corp of New Zealand 468,254
------------
568,285
------------
NORWAY -- 2.2%
107,586 DNB Holdings Class A 406,917
2,550 Gjensidige NOR ASA 64,061
174,800 Kvaerner ASA* 70,749
16,371 Norsk Hydro AS 627,189
12,318 Norske Skogindustrier AS Class A 157,305
17,064 Orkla ASA 238,156
68,800 Statoil ASA 528,119
------------
2,092,496
------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
PHILIPPINES -- 0.3%
1,287,000 Ayala Land Inc 109,758
36,000 Equitable Banking Corp* 15,186
51,520 La Tondena Distillers Inc 30,236
8,940 Philippine Long Distance Telephone* 47,959
33,000 San Miguel Corp Class B 40,550
------------
243,689
------------
POLAND -- 0.3%
25,800 Bank Millennium SA* 17,538
3,500 BRE Bank SA 60,822
19,000 KGHM Polska Miedz SA* 60,694
10,200 Polifarb-Cieszyn Wroclaw SA* 19,550
13,300 Polski Koncern Naftowy Orlen 58,291
29,000 Telekomunikacja Polska SA* 86,339
------------
303,234
------------
RUSSIA -- 0.5%
1,790 JSC Mining & Smelting Co ADR* 44,526
2,450 Lukoil Holding Co ADR 146,387
2,600 Sibneft ADR* 55,900
16,700 Yukos Oil 182,447
------------
429,260
------------
SINGAPORE -- 2.2%
15,550 Creative Technology Ltd 98,353
35,000 DBS Group Holdings Ltd 193,198
32,000 Fraser & Neave Ltd 147,198
5,839 Haw Par Corp Ltd 11,617
93,000 Keppel Corp Ltd 221,384
63,100 Singapore Airlines Ltd 342,866
22,000 Singapore Press Holdings Ltd 230,227
413,100 Singapore Telecom 308,789
173,680 Straits Trading Co Ltd 140,809
45,000 United Overseas Bank 269,097
12,478 Van Der Horst Ltd*(a) 5,323
19,000 Venture Corp Ltd 146,393
------------
2,115,254
------------
</Table>
See accompanying notes to the financial statements.
9
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SOUTH AFRICA -- 0.8%
16,771 ABSA Group Ltd 69,454
12,000 Gencor Ltd 62,119
1,000 Impala Platinum Holdings Ltd 60,780
20,278 Iscor Ltd 44,629
6,327 Nedcor Ltd 75,311
13,000 Remgro Ltd 94,295
79,900 Sanlam Ltd 70,339
13,000 Sasol Ltd 153,048
19,000 Standard Bank Investment Corp 67,730
7,000 Tiger Brands Ltd 54,940
35,000 Woolworths Holdings Ltd 22,349
------------
774,994
------------
SOUTH KOREA -- 1.3%
4,600 Hyundai Department Store Co Ltd* 38,229
600 Kangwon Land Inc 64,592
6,100 KIA Motors Corp 38,583
1,700 Kookmin Credit Card Co Ltd* 25,351
5,700 Korea Electric Power Corp 85,716
2,100 KT Corp 76,794
5,800 LG Engineering & Construction Ltd 68,513
1,100 POSCO 101,831
2,140 Samsung Electronics 501,093
1,100 Samsung SDI Co Ltd 62,665
6,100 SK Corp 64,391
500 SK Telecom 69,116
------------
1,196,874
------------
SPAIN -- 2.4%
11,103 Altadis SA 263,150
9,053 CIA ESP Petroleos 185,389
28,507 Endesa SA 341,046
13,250 Iberdrola SA 203,074
91,653 Repsol YPF SA 1,284,187
8,620 Tableros Defibras Class B* 32,053
------------
2,308,899
------------
SWEDEN -- 1.7%
10,500 Electrolux AB 182,013
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
SWEDEN -- CONTINUED
23,400 Gambro AB Class A 97,901
7,900 Hennes & Mauritz AB 166,653
42,300 Nordea AB 184,432
4,700 SSAB Swedish Steel Class A 57,169
5,700 SSAB Swedish Steel Class B 64,978
5,500 Svenska Handelsbanken Class B 72,717
44,000 Swedish Match AB 330,944
120,383 TeliaSonera AB 404,625
------------
1,561,432
------------
SWITZERLAND -- 5.8%
6,497 Bobst Group AG (Registered)* 162,904
1,973 Centerpulse Ltd* 379,759
6,743 Micronas Semiconductor Hold* 144,209
263 Movenpick Holdings (Bearer)* 109,583
30,927 Novartis AG 1,135,815
4,392 Roche Holding AG (Bearer) 422,681
32,101 Roche Holding AG (Genusschein) 1,928,191
840 SIG Holding AG 70,310
2,793 Swisscom AG 830,073
429 Valora Holding AG 71,025
692 ZKB Finanz Vision AG* 56,391
2,163 Zurich Financial Services AG 183,440
------------
5,494,381
------------
TAIWAN -- 0.9%
103,100 Arima Computer Corp* 31,746
84,000 Cheng Loong Corp* 25,260
203,623 China Development Financial Holding Corp* 76,761
85,000 China Steel Corp 52,835
114,700 Chinatrust Financial Holding Co* 92,090
67,000 Compal Electronics Inc 64,590
98,000 Fubon Financial Holding Co Ltd 76,990
15,200 Hon Hai Precision Industry Co Ltd 48,990
144,000 International Bank of Taipei 62,158
90,200 Inventec Co Ltd 51,914
11,000 MediaTek Inc 81,036
23,000 Micro-Star International Co Ltd 36,072
66,000 Taiwan Semiconductor* 79,770
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
TAIWAN -- CONTINUED
213,000 Walsin Lihwa Corp* 62,827
------------
843,039
------------
THAILAND -- 0.5%
68,000 Advanced Info Service Pcl (Foreign Registered) 61,984
174,300 Bangkok Expressway Pcl (Foreign Registered)(a) 61,108
68,000 Electricity Generating Pcl (Foreign Registered) NVDR 63,574
424,100 Land & House Pcl (Foreign Registered) 76,821
22,000 PTT Exploration & Production Pcl (Foreign
Registered)(a) 66,332
61,000 PTT Pcl (Foreign Registered)(a) 62,376
3,000 Siam Cement Pcl NVDR 86,385
68,000 Thai Union Frozen Products Pcl (Foreign Registered) 29,244
------------
507,824
------------
TURKEY -- 0.4%
13,950,661 Akbank TAS* 53,303
8,117,000 Aksa Akrilik Kimya Sanayii 78,806
20,232,000 Aksigorta AS 70,967
8,497,000 Arcelik AS 77,173
3,902,000 Eregli Demir ve Celik Fabrikalari TAS* 42,772
2,460,932 Finansbank* 1,480
34,056,000 Is Gayrimenkul Yatirim Ortakligi AS* 18,772
2,201,662 Turkiye Garanti Bankasi* 3,103
26,202,000 Vestel Elektronik Sanayi* 59,904
------------
406,280
------------
UNITED KINGDOM -- 19.8%
82,159 Abbey National Plc 504,694
17,607 Alliance & Leicester Plc 214,929
21,900 Allied Domecq Plc 103,312
28,069 Associated British Food 224,373
8,000 AstraZeneca Plc 258,064
73,003 Aviva Plc 455,061
9,436 AWG Plc* 78,178
30,956 BAA Plc 211,126
64,070 BAE Systems Plc 111,008
125,762 Barclays Plc 726,982
70,499 Boots Group Plc 601,853
23,873 BP Plc 150,409
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
66,675 British American Tobacco 651,123
480,108 BT Group Plc 1,236,417
13,100 De Vere Group Plc 53,699
21,912 Diageo Plc 217,436
30,906 Gallaher Group Plc 303,277
24,063 Great Portland Estates Plc 83,384
57,428 GUS Plc 459,058
37,704 HBOS Plc 393,146
78,250 HSBC Holdings Plc 843,041
61,910 Imperial Chemical Industries Plc 148,222
24,431 Imperial Tobacco Group Plc 381,157
15,679 Inchcape Plc 176,206
168,900 Invensys Plc 42,565
19,548 Kelda Group Plc 126,239
131,625 Kingfisher Plc 474,250
33,901 Laird Group 80,897
22,529 Land Securities Group Plc 264,012
151,429 Lloyds TSB Group Plc 844,346
1 Marks & Spencer Group Plc 5
160,685 National Grid Transco Plc 1,032,627
24,600 Next Plc 309,980
16,819 Northern Rock Plc 178,553
21,482 Reckitt Benckiser Plc 338,701
32,570 Reed Elsevier Plc 237,780
22,450 RMC Group 130,128
222,340 Rolls-Royce 278,415
162,342 Royal & Sun Alliance Insurance Group 182,829
16,913 Royal Bank of Scotland Group 387,074
54,735 Sainsbury (J) 200,014
43,538 Scottish & Newcastle Plc 230,418
38,256 Scottish & Southern Energy Plc 379,619
82,060 Scottish Power Plc 471,126
23,105 Severn Trent Plc 256,205
75,410 Shell Transport & Trading (Registered) 436,807
54,046 Six Continents Plc 526,941
17,243 Standard Chartered Plc 189,301
28,471 Tate & Lyle 124,556
44,813 Taylor Woodrow Plc 127,406
36,252 Thistle Hotels Plc 63,953
31,500 Unilever Plc 280,825
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
UNITED KINGDOM -- CONTINUED
25,696 United Utilities 238,795
720,162 Vodafone Group Plc 1,290,297
23,682 Whitbread Plc 194,341
29,032 Wilson (Connolly) Holdings 74,080
26,223 Wolseley 206,932
------------
18,786,172
------------
TOTAL COMMON STOCKS (COST $103,663,952) 91,045,106
------------
PREFERRED STOCKS -- 1.6%
AUSTRALIA -- 0.2%
39,613 News Corporation Ltd 0.93% 205,294
------------
BRAZIL -- 0.4%
12,164,000 Bombril SA 3.53% 18,745
5,312,710 Gerdau SA 49,465
76,363 Investimentos Itau SA 38,941
896,000 Itaubanco SA (Registered) 39,415
13,181 Petroleo Brasileiro SA (Petrobras) 3.01% 157,662
29,146,000 Tele Centro Oeste Celular SA 6.78% 35,116
------------
339,344
------------
GERMANY -- 0.8%
15,100 Dyckerhoff AG (Non Voting) 11.72% 72,423
3,000 Krones AG 2.00% 129,983
2,168 RWE AG 4.35% 43,929
24,807 Villeroy & Boch AG (Non Voting) 5.78% 213,896
11,714 Volkswagen AG 5.30% 343,409
------------
803,640
------------
ITALY -- 0.1%
13,860 Fiat SPA 4.95% 65,729
------------
SOUTH KOREA -- 0.1%
700 Samsung Electronics (Non Voting) 4.08% 78,583
------------
TOTAL PREFERRED STOCKS (COST $2,131,456) 1,492,590
------------
</Table>
See accompanying notes to the financial statements.
14
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
INVESTMENT FUNDS -- 0.1%
TAIWAN -- 0.1%
10,000 Taiwan Fund* 83,800
------------
TOTAL INVESTMENT FUNDS (COST $119,490) 83,800
------------
MUTUAL FUNDS -- 0.1%
TAIWAN -- 0.1%
23,000 R.O.C. Taiwan Fund* 84,870
------------
TOTAL MUTUAL FUNDS (COST $123,970) 84,870
------------
RIGHTS AND WARRANTS -- 0.0%
THAILAND -- 0.0%
75,000 Quality House Co Ltd Warrants, Expires 04/19/03* 456
------------
TOTAL RIGHTS AND WARRANTS (COST $0) 456
------------
SHORT-TERM INVESTMENTS -- 0.1%
CASH EQUIVALENTS -- 0.1%
$ 100,000 Dresdner GC Time Deposit, 1.31%, due 3/03/03 100,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $100,000) 100,000
------------
TOTAL INVESTMENTS -- 98.0%
(Cost $106,138,868) 92,806,822
Other Assets and Liabilities (net) -- 2.0% 1,901,920
------------
TOTAL NET ASSETS -- 100.0% $ 94,708,742
============
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
ADR - American Depositary Receipt
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
See accompanying notes to the financial statements. 15
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Financials 23.5%
Consumer Discretionary 12.8
Telecommunication Services 10.1
Energy 10.0
Consumer Staples 8.9
Utilities 8.7
Health Care 7.9
Industrials 7.9
Materials 6.7
Information Technology 3.3
Miscellaneous 0.2
-----
100.0%
=====
</Table>
16 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $106,138,868) (Note 1) $92,806,822
Cash 25,825
Foreign currency, at value (cost $1,284,738) (Note 1) 1,288,354
Dividends and interest receivable 162,303
Foreign taxes receivable 62,079
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 458,365
Receivable for expenses reimbursed by Manager (Note 2) 51,268
-----------
Total assets 94,855,016
-----------
LIABILITIES:
Payable for investments purchased 1,479
Payable to affiliate for (Note 2):
Management fee 39,715
Shareholder service fee 11,032
Accrued expenses 94,048
-----------
Total liabilities 146,274
-----------
NET ASSETS $94,708,742
===========
NET ASSETS CONSIST OF:
Paid-in capital $121,780,575
Accumulated undistributed net investment income 122,674
Accumulated net realized loss (14,338,491)
Net unrealized depreciation (12,856,016)
-----------
$94,708,742
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $94,708,742
===========
SHARES OUTSTANDING:
Class III 10,850,631
===========
NET ASSET VALUE PER SHARE:
Class III $ 8.73
===========
</Table>
See accompanying notes to the financial statements. 17
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $291,924) $ 2,276,660
Interest 76,343
-----------
Total income 2,353,003
-----------
EXPENSES:
Management fee (Note 2) 475,127
Custodian fees 323,594
Audit fees 34,673
Transfer agent fees 27,285
Legal fees 3,740
Registration fees 3,461
Trustees fees and related expenses (Note 2) 2,730
Miscellaneous 1,924
Fees reimbursed by Manager (Note 2) (392,074)
-----------
480,460
Shareholder service fee (Note 2) - Class III 131,980
-----------
Net expenses 612,440
-----------
Net investment income 1,740,563
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (3,693,511)
Closed futures contracts (245,611)
Foreign currency, forward contracts and foreign
currency related transactions 870,280
-----------
Net realized loss (3,068,842)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (6,498,637)
Foreign currency, forward contracts and foreign
currency related transactions 313,981
-----------
Net unrealized loss (6,184,656)
-----------
Net realized and unrealized loss (9,253,498)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(7,512,935)
===========
</Table>
18 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,740,563 $ 1,808,064
Net realized loss (3,068,842) (5,585,599)
Change in net unrealized appreciation (depreciation) (6,184,656) (1,474,411)
----------- -----------
Net decrease in net assets from operations (7,512,935) (5,251,946)
----------- -----------
Distributions to shareholders from:
Net investment income
Class III (2,648,333) (2,315,695)
----------- -----------
Total distributions from net investment income (2,648,333) (2,315,695)
----------- -----------
Net share transactions (Note 5):
Class III 29,583,367 7,316,648
----------- -----------
Increase in net assets resulting from net share
transactions 29,583,367 7,316,648
----------- -----------
Total increase (decrease) in net assets 19,422,099 (250,993)
NET ASSETS:
Beginning of period 75,286,643 75,537,636
----------- -----------
End of period (including accumulated undistributed
net investment income of $122,674 and $76,858,
respectively) $94,708,742 $75,286,643
=========== ===========
</Table>
See accompanying notes to the financial statements. 19
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------
2003 2002 2001 2000 1999+
---------- ---------- ---------- ----------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.70 $ 10.79 $ 10.43 $ 9.71 $ 10.00
------- ------- ------- -------- -------
Income from investment operations:
Net investment income 0.19(b) 0.25(b) 0.23(b) 0.15(b) 0.04
Net realized and unrealized gain
(loss) (0.90) (1.03) 0.29 0.70 (0.28)
------- ------- ------- -------- -------
Total from investment operations (0.71) (0.78) 0.52 0.85 (0.24)
------- ------- ------- -------- -------
Less distributions to shareholders:
From net investment income (0.26) (0.31) (0.16) (0.13) (0.05)
------- ------- ------- -------- -------
Total distributions (0.26) (0.31) (0.16) (0.13) (0.05)
------- ------- ------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 8.73 $ 9.70 $ 10.79 $ 10.43 $ 9.71
======= ======= ======= ======== =======
TOTAL RETURN(a) (7.47)% (7.16)% 5.03% 8.65% (2.44)%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $94,709 $75,287 $75,538 $112,623 $18,529
Net expenses to average daily net
assets 0.70% 0.69% 0.69% 0.69% 0.69%*
Net investment income to average
daily net assets 1.98% 2.49% 2.11% 1.36% 0.87%*
Portfolio turnover rate 48% 50% 56% 5% 20%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.45% 0.41% 0.34% 0.34% 2.34%*
</Table>
+ Period from July 29, 1998 (commencement of operations) to February 28,
1999.
* Annualized.
** Not Annualized.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(b) Computed using average shares outstanding throughout the period.
20 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Tax-Managed International Equities Fund (the "Fund") is a series of
GMO Trust (the "Trust"). The Fund is registered under the Investment
Company Act of 1940, as amended, as an open-end, non-diversified
management investment company. The Fund is advised and managed by
Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust
was established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a
series of shares into classes.
The Fund seeks high after-tax total return primarily through investment in
non-U.S. equity securities. The Fund's benchmark is the MSCI EAFE Index
(after-tax).
The Fund's benchmark is computed by the Manager by applying a 38.6% tax
(credit) on short-term realized capital gains (losses), a 38.6% tax on
income, and a 20% tax (credit) on long-term realized capital gains
(losses) on the securities comprised in the MSCI EAFE Index, a large
capitalization international stock index, which is independently
maintained and published by Morgan Stanley Capital International.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of underlying funds and other mutual funds are valued at their net
asset value as reported on each business day. Portfolio securities listed
on a securities exchange for which market quotations are readily available
are valued at the last sale price or official closing price on each
business day, or if there is no such reported sale or official closing
price, at the most recent quoted bid price. Unlisted securities for which
market quotations are readily available are valued at the most recent
quoted bid price. Securities which are primarily traded on foreign
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, and those values are then
translated into U.S. dollars at the current exchange rate. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Securities for which
quotations are not readily available, or whose values the Manager has
determined to be unreliable, are valued at fair value as determined in
good faith by the Trustees or
21
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
other persons acting at their direction. A security's value may be deemed
unreliable if, for example, the Manager becomes aware of information or
events occurring after the close of a foreign market that would materially
affect that security's value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if there are movements in foreign currency values that are
unfavorable to the Fund. The value of the currencies the Fund has
committed to buy or sell is shown under Note 6 and represents the currency
exposure the Fund has acquired or hedged through currency contracts as of
February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures
22
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
tends to decrease the Fund's exposure to the underlying instrument or
hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. In addition, the Fund maintains cash or securities
in an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. At February
28, 2003, there were no open futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency
23
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
transaction to determine the realized gain or loss. The risk associated
with purchasing put and call options is limited to the premium paid. At
February 28, 2003, there were no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003, there were no open swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities
24
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
on loan. As with other extensions of credit, the Fund may bear the risk of
loss with respect to the investment of the collateral, the risk of delay
in recovery or loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 28, 2003, the Fund had no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid were as follows: ordinary income --
$2,315,695 and $2,648,333, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $689,274 of undistributed ordinary income. These
temporary differences between book and tax basis distributable earnings
are primarily due to foreign currency transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $323,163, $1,004,023, $6,951,109 and $4,807,000 expiring in 2008,
2009, 2010 and 2011, respectively. The Fund has elected to defer to
March 1, 2003 post-October capital losses of $1,229,777.
25
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions. The financial highlights exclude these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss
----------------- ---------------
$953,586 $(953,586)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities 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 securities markets of the U.S. and developed
foreign markets.
26
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal fees),
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain unusual
expenses (including taxes), securities lending fees and expenses, interest
expense and transfer taxes) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003, was $2,180. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$67,837,120 and $40,103,188, respectively.
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$106,242,351 $4,439,333 $(17,874,862) $(13,435,529)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 46.6% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the outstanding
shares of the Fund. Investment activities of these shareholders may have a
material effect on the Fund.
27
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
----------------------- --------------------
Shares Amount Shares Amount
---------- ----------- -------- ----------
Class III:
Shares sold 3,123,659 $29,900,170 597,030 $5,719,988
Shares issued to shareholders
in reinvestment of distributions 194,117 1,784,356 171,255 1,632,167
Shares repurchased (229,938) (2,101,159) (3,659) (35,507)
---------- ----------- -------- ----------
Net increase 3,087,838 $29,583,367 764,626 $7,316,648
========== =========== ======== ==========
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CROSS CURRENCY CONTRACTS
<Table>
<Caption>
Settlement Deliver/Units Receive/in Net Unrealized
Date of Currency Exchange for Appreciation
---------- ---------------- ------------------ --------------
4/17/03 EUR 3,500,000 JPY 390,425,000 $ 458,365
</Table>
CURRENCY ABBREVIATIONS:
<Table>
EUR - Euro
JPY - Japanese Yen
</Table>
28
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tax-Managed International
Equities Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
29
<Page>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
During the year ended February 28, 2003, the Fund paid foreign taxes of
$291,924 and recognized foreign source income of $2,568,584.
30
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- --------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of 39 *(2)
c/o GMO Trust Trust Business
40 Rowes Wharf Administration
Boston, MA 02110 and Senior
Age: 61 Associate Dean,
Harvard
University.
Donald W. Glazer, Esq. Trustee of the Since December Advisory 39 None
c/o GMO Trust Trust 2000 Counsel,
40 Rowes Wharf Goodwin Procter
Boston, MA 02110 LLP; Secretary
Age: 58 and Consultant,
Provant, Inc.
(provider of
performance
improvement
training
services and
products)
(1998 -
present);
Consultant --
Business and
Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
31
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- --------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, 39 None
c/o GMO Trust Board of 1985. President Grantham, Mayo,
40 Rowes Wharf Trustees of the from February Van Otterloo &
Boston, MA 02110 Trust 2002 - October Co. LLC.
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
32
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------------------ -------------- -------------- --------------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present), Chief
c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member,
40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer of the Officer since
Age: 47 Trust October 2002;
Vice President
from August
1998 -
October 2002.
Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Financial Financial
40 Rowes Wharf Officer and Officer Since
Boston, MA 02110 Treasurer of February 2000;
Age: 45 the Trust Treasurer
since February
1998.
Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust Treasurer of September Otterloo & Co. LLC.
40 Rowes Wharf the Trust 1998.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting
c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 since March
Age: 37 2001; May
1999 - August
1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP
Boston, MA 02110 Secretary (1991 - 1999).
Age: 58 since March
2001.
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Laundering
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
33
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Tax-Managed Small Companies Fund returned -17.0% for the fiscal year
ended February 28, 2003, as compared to -19.5% for the Russell 2500 Index before
taxes. On an after-tax basis, the Fund returned -17.3% to the benchmark's -20.0%
for the same period. Consistent with the Fund's investment objectives and
policies, the Fund was invested substantially in U.S. equity securities
throughout the period.
U.S. equities were no place to be if one was looking to avoid the downward slide
of global equity markets in 2002 or the start of 2003. Across the board, all
sectors posted negative absolute returns, and large capitalization stocks fared
worst of all. From accounting fraud to war anticipation anxiety, there was no
shortage of reasons to worry, and the markets reflected this both in volatility
and retrenchment towards companies with tangible products and transparent
processes. Value stocks provided a little traction on the downward skid relative
to growth stocks, and generally outperformed by 6% to 8% on a relative basis
across market capitalization groups. Within the smaller companies universe,
integrated oils and other energy stocks posted the strongest returns, reflecting
soaring energy costs. REITs were the only bright spot, as REITs remarkably
resisted the downward slide, posting flat returns for the period. The strongest
relative returns by sector came from financial services stocks, which include
REITs, and integrated oils and other energy stocks, which profited from soaring
energy costs.
The Fund's outperformance of the benchmark for the period is attributed to stock
selection, and a continued tilt towards value stocks. The portfolio uses two
value-based stock selection strategies and one momentum-based stock selection
strategy. Our price-to-normalized earnings strategy, which focuses on
traditional value measures, worked especially well in the back-to-basics
mentality of the past year. Our intrinsic value stock selection model, which has
a strong record of selecting relatively undervalued stocks outside traditional
value filters, underperformed for the period. Our momentum-based stock selection
strategy had a neutral effect on the portfolio for the year, underperforming in
the first half, but adding value in the second. For the year, stock selection
was strongest within producer durable and healthcare stocks. Generally strong
across most sectors, selection was weakest within materials processing stocks.
In combination, stock selection added 2.0% to relative performance for the
period.
Sector selection, which reflected the Fund's bias towards value stocks, also
contributed positively to relative performance. A combined 11% underweight in
technology and healthcare stocks contributed over 1.0% to relative performance
for the fiscal year. This return was tempered by less productive overweights in
automotive and consumer discretionary stocks, which underperformed relative to
the benchmark. In combination, sector selection contributed 0.5% to relative
performance for the period.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
Small capitalization value stocks remain undervalued relative to the broader
U.S. equity market. The portfolio is still positioned to take advantage of this
valuation spread, but has been slowly reining in its overweight of value
relative to the benchmark. The Fund remains underweight in healthcare and
technology stocks, but has been slowly increasing its weight in technology. In
addition, the Fund is underweight financial services and utilities stocks in
favor of consumer discretionary and producer durable stocks
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TAX-MANAGED SMALL COMPANIES FUND CLASS III SHARES AND THE
RUSSELL 2500 INDEX
AS OF FEBRUARY 28, 2003 GMO TAX-MANAGED SMALL COMPANIES FUND* RUSSELL 2500 INDEX*
6/1/99 $9,950 $10,000
6/30/99 $10,378 $10,556
9/30/99 $9,594 $9,875
12/31/99 $9,947 $11,818
3/31/2000 $10,128 $13,012
6/30/2000 $9,289 $12,491
9/30/2000 $10,044 $12,791
12/31/2000 $10,722 $12,322
3/31/2001 $10,439 $11,254
6/30/2001 $11,488 $12,800
9/30/2001 $10,254 $10,390
12/31/2001 $11,716 $12,473
3/31/2002 $12,786 $12,939
6/30/2002 $12,512 $11,822
9/30/2002 $10,188 $9,615
12/31/2002 $10,633 $10,253
2/28/2003 $10,041 $9,741
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN*
SINCE
INCEPTION
1 YEAR 6/1/99
Class III -17.41% 0.11%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase. Transaction fees are retained by the
Fund to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
* Returns are before taxes.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
COMMON STOCKS -- 99.4%
AUTO & TRANSPORTATION -- 5.7%
1,800 American Axle & Manufacturing Holdings Inc* 42,570
4,200 Arctic Cat Inc 60,274
5,425 ArvinMeritor Inc 82,894
4,300 Autoliv Inc 89,010
1,300 Borg Warner Automotive Inc 67,886
2,100 CNF Inc 60,417
4,100 Cooper Tire & Rubber Co 57,441
6,500 Dana Corp 55,640
3,600 Expeditors International Washington Inc 123,084
3,300 Kansas City Southern* 40,095
1,100 Keystone Automotive Industries Inc* 18,260
3,800 Lear Corp* 144,324
3,000 Offshore Logistics Inc* 55,380
800 Oshkosh Truck Corp 48,880
1,200 P.A.M. Transportation Services* 26,820
1,700 Polaris Industries Inc 82,280
1,300 Tidewater Inc 39,806
8,300 Tower Automotive Inc* 27,805
1,700 US Freightways Corp 41,327
2,200 Wabtec Corp 24,200
------------
1,188,393
------------
CONSUMER DISCRETIONARY -- 22.7%
3,700 Abercrombie & Fitch Co, Class A* 101,750
3,400 American Eagle Outfitters Inc* 49,198
4,200 American Greetings Corp* 55,104
3,100 Applebees International Inc 79,484
2,500 Banta Corp 71,225
4,900 Big Lots Inc* 54,145
3,300 Blyth Industries Inc 82,005
1,800 Bob Evans Farms Inc 42,120
3,700 Bowne and Co Inc 36,260
4,800 Boyd Gaming Corp* 60,048
3,300 Burlington Coat Factory Warehouse 51,810
3,700 Callaway Golf Co 42,476
1,500 Career Education Corp* 69,750
2,500 Catalina Marketing Corp* 45,250
1,500 CDW Computer Centers Inc* 65,490
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
3,000 Central Garden and Pet Co* 68,700
3,000 CKE Restaurants Inc* 12,510
3,000 Claire's Stores Inc 68,460
4,200 Coach Inc* 150,066
2,900 Consolidated Graphics Inc* 70,035
3,600 Corinthian Colleges Inc* 134,928
1,200 Corrections Corporation of America, REIT* 20,736
3,200 Dillard's Inc, Class A 44,640
7,500 DoubleClick Inc* 48,300
3,500 Dress Barn Inc* 45,220
5,400 Fossil Inc* 97,092
2,100 Furniture Brands International Inc* 38,241
3,400 G TECH Holdings Corp* 98,940
3,100 Getty Images Inc* 90,985
1,600 Global Imaging Systems Inc* 29,616
10,600 IKON Office Solutions Inc 74,306
3,300 infoUSA Inc* 14,949
2,800 Isle of Capri Casinos Inc* 33,180
1,800 Jo-ann Stores Inc, Class A* 36,198
1,900 Kellwood Co 48,640
2,000 Kelly Services, Class A 41,440
3,600 Lone Star Steakhouse and Saloon Inc 73,044
4,000 Magna Entertainment Corp* 19,600
7,300 Mail-Well Inc* 15,622
2,200 Mandalay Resort Group* 55,528
2,300 Manpower Inc 69,851
1,600 Mohawk Industries Inc* 79,008
8,400 MPS Group Inc* 41,244
4,200 Nautilus Group Inc 61,656
2,700 Neiman Marcus Group Inc, Class A* 73,116
2,300 Neoforma Inc* 23,598
6,700 Nu Skin Enterprises Inc 70,484
8,600 OfficeMax Inc* 41,194
2,600 Outback Steakhouse Inc 83,720
4,200 Pacific Sunwear of California* 74,382
2,300 Papa Johns International Inc* 54,671
1,200 Payless ShoeSource Inc* 55,932
2,500 Pegasus Solutions Inc* 24,225
3,600 Pier 1 Imports Inc 57,492
5,600 Pinnacle Entertainment Inc* 22,232
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
2,000 Pixar Inc* 107,980
2,000 Pre-Paid Legal Services Inc* 34,300
5,900 Prime Hospitality Corp* 30,444
2,100 Quiksilver Inc* 52,710
2,100 R.R. Donnelley and Sons 38,346
300 Racing Champions Corp* 4,305
3,200 Radio One Inc, Class A* 44,992
2,200 Rent-A-Center Inc* 109,890
3,500 Rex Stores Corp* 35,525
2,900 Ross Stores Inc 99,209
4,400 Ryan's Family Steak Houses Inc* 45,452
3,000 Saks Inc* 23,070
1,500 Sharper Image Corp* 23,100
1,800 Shoe Carnival Inc* 22,718
2,900 Shopko Stores Inc* 31,755
6,500 Sinclair Broadcast Group, Class A* 56,810
1,800 Snap-On Inc 44,982
2,200 Sonic Automotive Inc* 33,484
3,000 Spanish Broadcasting System* 18,270
7,400 Spherion Corp* 44,918
2,500 Station Casinos Inc* 45,375
1,400 Steinway Musical Instruments* 20,874
2,800 Steven Madden Ltd* 47,460
10,500 Stewart Enterprises Inc* 33,495
4,100 Take-Two Interactive Software* 85,731
1,400 Tractor Supply Co* 46,298
1,500 United Automotive Group Inc* 16,695
6,900 United Online Inc* 98,394
2,400 United Stationers Inc* 49,896
2,800 Universal Electronics Inc* 26,880
2,200 Wallace Computer Services 56,078
3,200 Whitehall Jewellers Inc* 26,912
3,400 World Fuel Services Corp 68,000
------------
4,694,244
------------
CONSUMER STAPLES -- 3.5%
1,200 Constellation Brands Inc, Class B* 29,400
1,100 Coors (Adolph) Co, Class B 52,910
2,400 Dean Foods Co* 101,208
1,200 Dole Food Co 39,360
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CONSUMER STAPLES -- CONTINUED
1,000 Dreyers Grand Ice Cream Inc 72,800
3,100 Ingles Markets Inc, Class A 30,690
4,700 Natures Sunshine Products Inc 39,626
6,700 PepsiAmericas Inc 81,874
900 Sanderson Farms Inc 17,317
2,800 Smithfield Foods Inc* 51,884
2,000 Standard Commercial Corp 33,600
3,367 Tyson Foods Inc, Class A 30,976
2,800 Universal Corp 106,708
2,700 Winn-Dixie Stores Inc 32,940
------------
721,293
------------
FINANCIAL SERVICES -- 23.8%
1,900 American Financial Group Inc 37,677
700 American National Insurance Co 54,803
1,800 AmerUs Group Co 47,214
1,200 Associated Banc Corp 41,472
3,000 Astoria Financial Corp 75,360
3,400 BankAtlantic Bancorp Inc 30,838
1,200 Bedford Property Investors, REIT 30,492
1,021 BOK Financial Corp* 33,152
2,500 Capstead Mortgage Corp, REIT 31,500
1,000 CBL & Associates Properties Inc, REIT 39,850
3,700 CCC Information Services Group* 63,603
5,600 Checkfree Corp* 117,488
1,700 Colonial BancGroup Inc 19,703
900 Colonial Properties Trust, REIT 28,818
2,500 Commerce Group Inc 85,050
1,500 Commercial Federal Corp 33,405
4,400 Commercial Net Lease Realty Inc, REIT 65,340
1,100 Community First Bankshares 27,269
1,210 Community Trust Bancorp 30,589
1,500 Compass Bankshares Inc 47,730
2,500 Cullen/Frost Bankers Inc 77,900
1,936 Delphi Financial Group Inc, Class A 71,342
3,150 Doral Financial Corp 102,091
1,000 Downey Financial Corp 40,150
1,400 East West Bancorp Inc 46,550
1,900 Entertainment Properties Trust, REIT 47,120
2,250 Equity One Inc, REIT 33,187
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
3,300 Espeed Inc* 34,056
4,300 Felcor Lodging Trust Inc, REIT 29,541
6,205 Fidelity National Financial Inc 203,710
1,900 First American Financial Corp 43,890
2,950 First Bancorp Puerto Rico 73,957
700 First Citizens Bancshares, Class A 65,317
1,300 Firstmerit Corp 25,739
1,300 Flagstar Bancorp Inc 31,525
3,100 General Growth Properties, REIT 162,037
1,785 German American Bancorp 35,057
1,600 Glacier Bancorp Inc 38,592
1,600 Glenborough Realty Trust Inc, REIT 25,920
3,100 Greater Bay Bancorp 49,631
700 Health Care Inc, REIT 18,032
3,200 Hibernia Corp, Class A 57,984
2,400 Highwood Properties Inc, REIT 50,424
1,600 Hospitality Properties Trust, REIT 48,896
8,500 Host Marriott Corp, REIT* 58,820
14,200 HRPT Properties Trust, REIT 120,842
2,600 Hudson City Bancorp Inc 49,374
2,000 Hudson United Bancorp 63,080
3,000 Huntington Bancshares Inc 57,600
6,300 Hypercom Corp* 24,444
5,100 iDine Rewards Network Inc* 35,700
1,500 IndyMac Bancorp Inc, REIT 28,650
2,400 Interpool Inc 38,400
1,700 iStar Financial Inc, REIT 48,280
5,800 JDN Realty Corp, REIT 69,774
900 Kansas City Life Insurance Co 35,559
14,800 La Quinta Corp, REIT 48,692
500 Landamerica Financial Group Inc 18,850
3,800 Lasalle Hotel Properties, REIT 45,980
2,000 Lexington Corporate Properties Trust, REIT 33,000
2,400 Mack-Cali Realty Corp, REIT 69,360
3,400 Meristar Hospitality Corp, REIT 9,078
5,600 National Health Investors, REIT 88,200
3,200 Nationwide Financial Services, Class A 77,760
2,800 New Century Financial Corp 74,564
1,300 New Plan Excel Realty Trust, REIT 25,298
1,200 Novastar Financial Inc, REIT 39,360
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
3,000 Old Republic International Corp 81,900
2,300 PMI Group Inc 62,330
1,000 Prentiss Properties Trust, REIT 26,210
2,300 Presidential Life Corp 22,080
2,800 Protective Life Corp 75,936
3,300 Provident Financial Group 95,403
22,700 Providian Financial Corp* 138,470
1,200 PS Business Parks Inc, REIT 37,680
4,200 RFS Hotel Investors Inc, REIT 40,362
3,500 Riggs National Corp 48,825
2,600 Ryder System Inc 58,994
3,100 Seacoast Banking Corp of Florida 59,923
2,100 Silicon Valley Bancshares* 36,435
1,700 Southwest Bancorporation of Texas Inc* 53,754
5,900 Sovereign Bancorp Inc 80,122
1,200 Sovran Self Storage, REIT 32,592
1,200 Student Loan Group 113,160
700 Texas Regional Bancshares, Class A 23,163
700 Trustmark Corp 16,926
1,300 UCBH Holdings Inc 54,730
1,133 UMB Financial Corp 41,796
4,090 Washington Federal Inc 90,798
900 Webster Financial Corp 32,040
2,990 Westcorp 56,780
1,600 WFS Financial Inc* 30,032
------------
4,925,107
------------
HEALTH CARE -- 6.5%
2,100 Accredo Health Inc* 49,875
6,200 Allos Therapeutics Inc* 27,280
1,300 American Med Security Group* 16,822
6,000 Amylin Pharmaceuticals Inc* 92,040
2,400 Biosite Inc* 75,048
2,200 Chattem Inc* 34,144
1,700 Cooper (The) Companies Inc 49,385
2,400 Coventry Health Care Inc* 67,992
2,000 Hanger Orthopedic Group Inc* 20,860
4,300 Health Net Inc* 107,973
1,100 Hologic Inc* 7,953
4,700 Humana Inc* 46,060
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
HEALTH CARE -- CONTINUED
3,100 Immucor Inc* 61,163
1,400 Invacare Corp 42,840
3,000 Mid Atlantic Medical Services Inc* 107,250
1,350 Odyssey HealthCare Inc* 31,199
3,500 Pacificare Health Systems Inc* 75,600
1,300 PolyMedica Corp 37,947
3,900 Prime Medical Service Inc* 30,190
7,200 Res-Care Inc* 20,520
2,500 Scios Inc* 109,100
2,800 United Surgical Partners International Inc* 51,408
2,000 Varian Medical Systems Inc* 101,100
5,500 VitalWorks Inc* 21,120
6,900 WebMD Corp* 66,212
------------
1,351,081
------------
INTEGRATED OILS -- 0.4%
3,800 Holly Corp 84,550
------------
MATERIALS & PROCESSING -- 7.6%
2,600 A. Schulman Inc 37,570
3,700 AK Steel Holding Corp* 20,313
2,600 Albemarle Corp 63,674
3,600 Ashland Inc 100,116
1,400 Barnes Group Inc 26,880
4,700 Caraustar Industries Inc* 35,062
1,400 Cleveland Cliffs Inc* 29,512
3,000 Commercial Metals Co 42,210
11,700 Crown Holdings Inc* 66,924
2,800 Cytec Industries Inc* 81,060
3,500 Energizer Holdings Inc* 92,925
800 Harsco Corp 24,136
3,900 Hercules Inc* 31,317
1,700 IMC Global Inc 14,977
4,400 Imco Recycling Inc* 26,400
2,700 Jones Lang Lasalle Inc* 37,395
1,000 Kaydon Corp 18,000
3,900 Lafarge Corp 110,292
800 LNR Property Corp 26,448
4,100 Material Sciences Corp* 42,066
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- CONTINUED
2,600 Olin Corp 42,900
11,800 Owens Illinois Inc* 106,200
1,000 Phelps Dodge Corp* 35,960
2,000 Precision Castparts Corp 47,200
1,100 Quanex Corp 34,760
1,950 Reliance Steel and Aluminum Co 31,883
1,900 Royal Gold Inc 36,955
1,900 Sealed Air Corp* 68,913
800 Silgan Holdings Inc* 16,256
1,800 Sonoco Products Co 37,350
2,400 Standard Register Co 38,952
1,400 Texas Industries Inc 27,790
3,300 Timken Co 52,899
700 Trex Company Inc* 22,750
6,500 Unifi Inc* 33,150
1,000 York International Corp 21,400
------------
1,582,595
------------
OTHER -- 1.3%
2,400 Brunswick Corp 45,360
3,600 FMC Corp* 55,908
3,200 Kaman Corp, Class A 31,456
2,600 Lancaster Colony Corp 98,748
700 Sequa Corp, Class A* 24,675
1,001 Trinity Industries Inc 16,226
------------
272,373
------------
OTHER ENERGY -- 5.5%
9,400 Chesapeake Energy Corp 76,328
2,000 Cooper Cameron Corp* 104,000
5,300 Denbury Resources Inc* 60,844
7,500 Harvest Natural Resources Inc* 43,275
2,000 Helmerich & Payne Inc 55,000
4,000 National-Oilwell Inc* 90,000
2,400 Patina Oil & Gas Corp 79,872
3,100 Patterson-UTI Energy Inc* 102,734
8,900 Petroquest Energy Inc* 17,622
4,500 Pioneer Natural Resources Co* 117,675
3,000 Pogo Producing Co 119,250
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
OTHER ENERGY -- CONTINUED
5,200 Pride International Inc* 75,400
4,600 Rowan Cos Inc 90,298
7,300 TransMontaigne Inc* 28,470
4,000 Varco International Inc* 75,840
------------
1,136,608
------------
PRODUCER DURABLES -- 10.4%
700 Actuant Corp* 25,900
8,500 American Power Conversion Corp* 132,940
1,600 Ametek Inc 52,768
1,200 Beazer Homes USA, Inc* 70,032
2,200 Belden Inc 28,380
400 Briggs & Stratton Corp 15,800
3,200 C-cor Electronics Inc* 9,504
4,200 Cable Design Technologies Corp* 23,058
3,500 Centex Corp 193,480
4,000 Columbus McKinnon Corp* 7,000
1,300 Donaldson Co Inc 45,305
5,432 DR Horton Inc 99,460
5,000 General Cable Corp 19,450
1,700 Headwaters Inc* 23,834
1,400 Hovnanian Enterprises Inc* 45,962
3,300 Interdigital Communications Corp* 47,454
3,900 KB HOME 182,910
2,800 Kimball International, Class B 37,884
4,900 Ladish Co Inc* 24,010
1,678 Lennar Corp 90,595
3,128 MDC Holdings Inc 117,425
300 NVR Inc* 99,585
3,200 Plantronics Inc* 46,112
2,800 Pulte Corp 142,324
2,200 Ryland Group Inc 90,860
1,800 Smith (AO) Corp, Class B 46,404
3,400 Standard Pacific Corp 87,618
1,500 Standex International Corp 28,650
1,200 Tecumseh Products Co, Class A 53,400
1,100 Tecumseh Products Co, Class B 46,475
6,700 Toll Brothers Inc* 129,779
2,900 Watts Industries Inc, Class A 43,500
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
PRODUCER DURABLES -- CONTINUED
2,000 William Lyon Homes* 46,540
------------
2,154,398
------------
TECHNOLOGY -- 7.5%
8,400 3 Com Corp* 35,196
5,700 Acxiom Corp* 86,982
8,000 Adaptec Inc* 48,720
3,800 American Management Systems Inc* 40,280
6,000 Answerthink Inc* 15,300
3,000 Arrow Electronics Inc* 43,140
1,800 Benchmark Electronics Inc* 62,712
1,900 Black Box Corp 77,254
2,500 Ceridian Corp* 34,500
4,400 Ciber Inc* 23,760
1,300 Cognizant Technology Solutions Corp* 91,260
3,600 Cray Inc* 30,708
3,400 Digital River Inc* 30,532
6,500 Foundry Networks Inc* 57,655
2,200 Gartner Group Inc, Class A* 16,104
5,100 Ingram Micro Inc, Class A* 52,836
2,100 j2 Global Communications Inc* 50,169
6,900 Kemet Corp* 55,062
7,700 Manufacturers Services Ltd* 38,346
1,700 MCSi Inc* 1,088
2,800 Mercury Interactive Corp* 90,860
3,300 Omnivision Technologies* 62,700
5,800 Pegasystems Inc* 24,012
6,900 Pinnacle Systems Inc* 66,999
4,700 Radiant Systems Inc* 36,660
6,800 Red Hat Inc* 40,052
2,900 Siliconix Inc* 64,963
3,900 SPSS Inc* 42,510
1,700 SS&C Technologies Inc* 17,748
2,200 Supertex Inc* 32,428
4,500 Syntel Inc* 85,275
1,200 Systems & Computer Technology Corp* 9,564
3,500 Trikon Technologies Inc* 16,275
7,100 Tyler Technologies Inc* 26,838
5,200 White Electronic Designs Corp* 36,816
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
TECHNOLOGY -- CONTINUED
5,100 Zomax Inc* 17,187
------------
1,562,491
------------
UTILITIES -- 4.5%
2,500 Alliant Energy Corp 39,400
4,300 Avista Corp 43,903
1,100 CH Energy Group Inc 45,298
1,900 DPL Inc 22,990
3,100 DQE Inc 41,850
3,900 El Paso Electric Co* 40,170
4,906 Energy East Corp 92,331
800 Great Plains Energy Inc 18,136
900 Hawaiian Electric Industries Inc 35,820
13,000 Level 3 Communications Inc* 64,220
1,600 National Fuel Gas Co 31,264
800 NSTAR 32,336
2,400 OGE Energy Corp 41,688
3,800 Oneok Inc 65,474
3,600 PNM Resources Inc 75,888
8,300 PTEK Holdings Inc* 29,050
2,900 Puget Energy Inc 58,696
2,800 SCANA Corp 83,972
2,800 Wisconsin Energy Corp 63,980
------------
926,466
------------
TOTAL COMMON STOCKS (COST $19,906,745) 20,599,599
------------
SHORT-TERM INVESTMENTS -- 10.9%
CASH EQUIVALENTS -- 10.2%
918,427 Dreyfus Money Market Fund(a) 918,427
$ 648,999 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(a) 648,999
535,424 Merrimac Money Market Fund(a) 535,424
------------
2,102,850
------------
</Table>
See accompanying notes to the financial statements.
11
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.7%
$ 147,213 Salomon Smith Barney Inc. Repurchase Agreement, dated
02/28/03, due 03/03/03, with a maturity value of
$147,217, and an effective yield of 0.36%,
collateralized by a U.S. Treasury Bond with a rate of
3.625%, maturity date of 03/31/04, and a market value,
including accrued interest of $158,397. 147,213
------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,250,063) 2,250,063
------------
TOTAL INVESTMENTS -- 110.3%
(Cost $22,156,808) 22,849,662
Other Assets and Liabilities (net) -- (10.3%) (2,126,486)
------------
TOTAL NET ASSETS -- 100.0% $ 20,723,176
============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
<Table>
REIT - Real Estate Investment Trust
</Table>
* Non-income producing security.
(a) Represents investment of security lending collateral (Note 1).
12 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$2,014,215 (cost $22,156,808) (Note 1) $22,849,662
Dividends and interest receivable 18,598
Receivable for expenses reimbursed by Manager (Note 2) 2,632
-----------
Total assets 22,870,892
-----------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 2,102,850
Payable to affiliate for (Note 2):
Management fee 9,027
Shareholder service fee 2,462
Accrued expenses 33,377
-----------
Total liabilities 2,147,716
-----------
NET ASSETS $20,723,176
===========
NET ASSETS CONSIST OF:
Paid-in capital $27,988,560
Accumulated net realized loss (7,958,238)
Net unrealized appreciation 692,854
-----------
$20,723,176
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $20,723,176
===========
SHARES OUTSTANDING:
Class III 2,145,777
===========
NET ASSET VALUE PER SHARE:
Class III $ 9.66
===========
</Table>
See accompanying notes to the financial statements. 13
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $230) $ 465,400
Interest (including securities lending income of $5,141) 9,872
-----------
Total income 475,272
-----------
EXPENSES:
Management fee (Note 2) 162,753
Audit fees 28,296
Custodian and transfer agent fees 22,030
Trustees fees and related expenses (Note 2) 1,628
Legal fees 1,613
Registration fees 966
Miscellaneous 1,376
Fees reimbursed by Manager (Note 2) (53,737)
-----------
164,925
Shareholder service fee (Note 2) - Class III 44,387
-----------
Net expenses 209,312
-----------
Net investment income 265,960
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments 1,866,002
-----------
Change in net unrealized appreciation (depreciation) on
investments (7,054,887)
-----------
Net realized and unrealized loss (5,188,885)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,922,925)
===========
</Table>
14 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 265,960 $ 468,124
Net realized gain 1,866,002 2,873,008
Change in net unrealized appreciation (depreciation) (7,054,887) 1,594,048
------------ -----------
Net increase (decrease) in net assets from
operations (4,922,925) 4,935,180
------------ -----------
Distributions to shareholders from:
Net investment income
Class III (261,359) (523,894)
------------ -----------
Total distributions from net investment income (261,359) (523,894)
------------ -----------
Net share transactions (Note 5):
Class III (11,636,058) (7,909,373)
------------ -----------
Decrease in net assets resulting from net share
transactions (11,636,058) (7,909,373)
------------ -----------
Total decrease in net assets (16,820,342) (3,498,087)
NET ASSETS:
Beginning of period 37,543,518 41,041,605
------------ -----------
End of period $ 20,723,176 $37,543,518
============ ===========
</Table>
See accompanying notes to the financial statements. 15
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------
2003 2002 2001 2000*
--------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.76 $ 10.54 $ 9.52 $ 10.00
------- ------- ------- -------
Income from investment operations:
Net investment income 0.11 0.15 0.12 0.08
Net realized and unrealized gain (loss) (2.10) 1.23 1.02 (0.50)
------- ------- ------- -------
Total from investment operations (1.99) 1.38 1.14 (0.42)
------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.11) (0.16) (0.12) (0.06)
------- ------- ------- -------
Total distributions (0.11) (0.16) (0.12) (0.06)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.66 $ 11.76 $ 10.54 $ 9.52
======= ======= ======= =======
TOTAL RETURN(a) (17.00)% 13.25% 12.12% (4.25)%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $20,723 $37,544 $41,042 $39,000
Net expenses to average daily net assets 0.71% 0.70% 0.70% 0.70%**
Net investment income to average daily net
assets 0.90% 1.30% 1.25% 1.08%**
Portfolio turnover rate 55% 65% 131% 18%
Fees and expenses reimbursed by the
Manager to average daily net assets: 0.18% 0.20% 0.17% 0.21%**
Purchase and redemption fees consisted of
the following per share amounts:(b) $ 0.01 --(c) $ 0.01 $ N/A
</Table>
(a) The total return would have been lower had certain expenses not been
reimbursed during the period shown. Calculation excludes purchase
premiums.
(b) Effective March 1, 2000, the Fund adopted the provisions of the revised
AICPA Audit and Accounting Guide for Investment Companies which requires
the disclosure of the per share effect of purchase and redemption fees.
Periods prior to March 1, 2000 have not been restated to reflect this
change. Amounts calculated using average shares outstanding throughout
the period.
(c) Purchase premiums were less than $0.01 per share.
* Period from June 1, 1999 (commencement of operations) through February
29, 2000.
** Annualized.
++ Not annualized.
16 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Tax Managed Small Companies Fund (the "Fund"), is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks to maximize after-tax total return through investment in a
portfolio of common stocks of smaller companies principally traded in the
U.S.
The Fund's benchmark is the GMO Russell 2500 Index (After Tax), which is
computed by the Manager by applying a 38.6% tax on income on the
securities compromising the Russell 2500 Index, which is independently
maintained and published by Frank Russell Company.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
17
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. At February
28, 2003, the Fund held no open futures contracts.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a
18
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. As of February 28,
2003, the Fund held no open swap agreements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $2,014,215 collateralized by cash in the amount of
$2,102,850, which was invested in short-term investments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
19
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
US. GAAP. For the years ended February 28, 2002 and February 28, 2003, the
tax basis of distributions paid from ordinary income were $523,894 and
$261,359, respectively.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $640,309, $5,176,933, $1,587,943 and $393,614 expiring in 2008,
2009, 2010 and 2011, respectively. The Fund elected to defer to March 1,
2003 post-October losses of $159,438.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to differing treatments
for redemption in kind transactions. The net gain resulting from
redemption in kind transactions were $1,932,388. The financial highlights
exclude these adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Loss Paid-in Capital
----------------- ----------------- ---------------
$(4,601) $(1,919,529) $1,924,130
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost,
when the amount of the return of capital is conclusively determined.
20
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .50% of the amount
invested. If the Manager determines that any portion of a cash purchase is
offset by a corresponding cash redemption occurring on the same day, the
purchase premium charged by the Fund will be reduced by 100% with respect
to that portion. In addition, the purchase premium charged by the Fund may
be waived if the Manager determines the Fund is substantially
underweighted in cash so that a purchase will not require a securities
transaction. All purchase premiums are paid and recorded by the Fund as
paid-in capital. For the years ended February 28, 2002 and February 28,
2003, the fund received $7,812 and $15,074 in purchase premiums,
respectively. There is no fee for redemptions, reinvested distributions or
in-kind transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .55% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the period ended February 28, 2003 was $1,447. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 28, 2003, aggregated
$15,899,657 and $26,817,803, respectively.
21
<Page>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
$22,156,808 $2,770,943 $(2,078,089) $692,854
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 36.7% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------ ---------------------
Shares Amount Shares Amount
Class III: ---------- ------------ -------- -----------
Shares sold 317,367 $ 3,014,863 141,701 $ 1,562,447
Shares issued to shareholders
in reinvestment of distributions 15,201 154,941 8,017 85,606
Shares repurchased (1,378,358) (14,805,862) (853,209) (9,557,426)
---------- ------------ -------- -----------
Net decrease (1,045,790) $(11,636,058) (703,491) $(7,909,373)
========== ============ ======== ===========
</Table>
22
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO TAX-MANAGED SMALL COMPANIES FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tax-Managed Small Companies
Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
23
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
24
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
25
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
26
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Tax-Managed U.S. Equities Fund returned -22.3% for the fiscal year ended
February 28, 2002, as compared to -22.7% for the S&P 500 before taxes. On an
after-tax basis, the Fund returned -22.7% to the benchmark's -22.9% for the same
period. Consistent with the Fund's investment objectives and policies, the Fund
was invested substantially in U.S. equity securities throughout the period.
U.S. equities were no place to be if one were looking to avoid the downward
slide of global equity markets in 2002 or the start of 2003. Across the board,
all sectors posted negative absolute returns, and large capitalization stocks
fared worst of all. From accounting fraud to war anticipation anxiety, there was
no shortage of reasons to worry, and the markets reflected this both in
volatility and retrenchment towards companies with tangible products and
transparent processes. For the period, consumer staples was the strongest
sector, but posted a return of -15.3%. Integrated oils, reflecting soaring oil
prices, came in close behind at -16.5%. Value stocks provided a little traction
on the downward skid relative to growth stocks, and generally outperformed by 6%
to 8% on a relative basis across market capitalization groups.
The Fund's moderate outperformance of the benchmark for the period is attributed
to stock selection. The portfolio uses two value-based stock selection
strategies and one momentum-based stock selection strategy. Our
price-to-normalized earnings strategy, which focuses on traditional value
measures, worked especially well in the back-to-basics mentality of the past
year. Our intrinsic value stock selection model, which has a strong record of
selecting relatively undervalued stocks outside traditional value filters,
underperformed for the period. Our momentum-based stock selection strategy had a
neutral effect on the portfolio for the year, underperforming in the first half,
but adding value in the second. For the year, stock selection was strongest
within financial services, healthcare and technology. Selection was weakest
within consumer staples and automotive and transportation stocks. In
combination, stock selection added 1.6% to relative performance for the period.
Sector selection, however, detracted from relative performance for the fiscal
year, primarily due to an underweight in technology during technology's October
and November gains. An underweight in integrated oils stocks, and overweight in
utilities (primarily telephone stocks) also detracted from performance. For the
period, sector selection detracted 1.2% from performance relative to the S&P 500
benchmark.
OUTLOOK
Our focus continues to be on adding value over the long term with proven
investment strategies that have demonstrated effectiveness. We believe that our
process of combining value and momentum in varying
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
proportions in each quantitative equity strategy will continue to add value over
the long term. The Fund is overweight in utilities stocks, especially
telephones, and underweight technology and healthcare stocks. The Fund continues
to hold an overweight of value versus growth stocks.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TAX-MANAGED U.S. EQUITIES FUND CLASS III SHARES AND THE S&P 500 INDEX
AS OF FEBRUARY 28, 2003
GMO TAX-MANAGED U.S.
EQUITIES FUND* S&P 500 INDEX*
7/23/98 $10,000 $10,000
9/30/98 $9,510 $8,953
12/31/98 $10,960 $10,860
3/31/99 $10,970 $11,401
6/30/99 $11,991 $12,204
9/30/99 $11,069 $11,442
12/31/99 $12,819 $13,145
3/31/2000 $13,675 $13,446
6/30/2000 $13,090 $13,089
9/30/2000 $13,831 $12,962
12/31/2000 $13,230 $11,948
3/31/2001 $11,819 $10,531
6/30/2001 $12,366 $11,148
9/30/2001 $11,026 $9,511
12/31/2001 $11,937 $10,528
3/31/2002 $12,114 $10,557
6/30/2002 $10,608 $9,142
9/30/2002 $8,748 $7,563
12/31/2002 $9,587 $8,201
2/28/2003 $9,101 $7,866
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN*
SINCE
INCEPTION
1 YEAR 7/23/98
Class III -22.33% -2.02%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
* Returns are before taxes.
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
COMMON STOCKS -- 99.1%
AUTO & TRANSPORTATION -- 4.0%
8,700 AMR Corp* 20,358
7,900 Burlington Northern Santa Fe Railroad Co 197,500
1,900 CSX Corp 51,034
7,100 Delta Air Lines Inc 59,640
2,500 Expeditors International Washington Inc 85,475
1,200 FedEx Corp 61,680
23,169 Ford Motor Co 192,766
13,541 General Motors Corp 457,280
4,400 Goodyear Tire & Rubber Co 17,600
2,200 Harley Davidson Inc 87,098
600 Union Pacific Corp 33,114
6,300 United Parcel Service, Class B 362,502
-------------
1,626,047
-------------
CONSUMER DISCRETIONARY -- 10.6%
10,700 Amazon.com Inc* 235,507
3,800 Apollo Group Inc, Class A* 176,092
3,000 Autonation Inc* 39,690
2,500 Black and Decker Corp 91,750
2,600 CDW Computer Centers Inc* 113,516
600 ChoicePoint Inc* 20,250
6,400 Circuit City Stores Inc 28,288
3,800 Clear Channel Communications Inc* 138,738
3,400 Dollar Tree Stores Inc* 70,210
8,000 Eastman Kodak Co 236,800
2,700 eBay Inc* 211,734
2,500 Electronic Arts Inc* 132,000
3,900 Federated Department Stores Inc* 99,450
3,100 Fox Entertainment Group Inc, Class A* 82,863
1,200 Gannett Co Inc 86,604
2,400 Harrahs Entertainment Inc* 78,816
3,100 Hilton Hotels Corp 34,069
3,100 Jones Apparel Group Inc* 87,916
700 Liberty Media Corp, Series B* 6,538
6,100 Limited Brands Inc 72,468
1,400 Manpower Inc 42,518
2,500 May Department Stores Co 49,050
2,000 MGM Mirage* 51,240
1,300 Michaels Stores Inc* 30,550
700 Mohawk Industries Inc* 34,566
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
2,300 New York Times Co, Class A 106,858
5,300 Newell Rubbermaid Inc 149,460
600 Outback Steakhouse Inc 19,320
2,500 Penney (JC) Co Inc 49,625
1,400 Pixar Inc* 75,586
1,400 R.R. Donnelley and Sons 25,564
2,000 RadioShack Corp 39,280
1,700 Ross Stores Inc 58,157
7,500 Sears Roebuck & Co 163,350
4,700 Starbucks Corp* 110,215
13,700 The Gap Inc 178,648
3,900 Toys R Us Inc* 31,512
4,500 Tribune Co 201,825
800 VF Corp 27,080
3,300 Viacom Inc, Class A* 122,793
13,000 Viacom Inc, Class B* 482,690
2,100 Weight Watchers International Inc* 87,885
1,000 Whirlpool Corp 49,260
2,800 Williams-Sonoma Inc* 65,184
-------------
4,295,515
-------------
CONSUMER STAPLES -- 8.1%
1,900 Albertsons Inc 35,777
28,000 Altria Group Inc 1,082,200
4,900 Anheuser Busch Cos Inc 227,850
2,100 Campbell Soup Co 43,554
13,800 Coca Cola Co 555,036
9,300 Coca Cola Enterprises Inc 187,674
2,800 Colgate-Palmolive Co 140,868
6,900 CVS Corp 171,810
1,000 Heinz (HJ) Co 30,700
4,300 Pepsi Bottling Group Inc 99,975
8,800 Rite Aid Corp* 21,120
1,900 RJ Reynolds Tobacco Holdings 75,829
10,400 Safeway Inc* 206,856
3,700 Sara Lee Corp 73,260
2,700 Sysco Corp 73,224
1,500 UST Inc 43,245
7,800 Walgreen Co 219,492
-------------
3,288,470
-------------
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 24.8%
8,000 AFLAC Corp 250,000
9,400 Allstate Corp 297,322
250 AMBAC Financial Group 12,212
13,500 American Express Co 453,330
2,400 Automatic Data Processing Inc 78,000
11,800 Bank of America Corp 817,032
3,900 Bank One Corp 140,517
2,200 Bear Stearns Cos Inc 137,808
2,700 Capital One Financial Corp 83,619
2,460 Charter One Financial Inc 71,119
2,600 Cigna Corp 111,722
7,800 Citigroup Inc 260,052
2,200 CNA Financial Corp* 50,578
2,100 Comerica Inc 86,058
2,400 Countrywide Financial Corp 128,136
1,100 Dun & Bradstreet Corp* 39,490
1,100 Edwards (AG) Inc 29,337
1,400 Equifax Inc 26,852
16,700 Fannie Mae 1,070,470
1,700 Fidelity National Financial Inc 55,811
8,010 FleetBoston Financial Corp 196,726
2,900 Franklin Resources Inc 94,743
10,600 Freddie Mac 579,290
2,700 Golden West Financial Corp 195,480
2,200 Greenpoint Financial Corp 93,456
7,700 Household International Inc 215,061
2,800 Hudson City Bancorp Inc 53,172
3,000 Huntington Bancshares Inc 57,600
9,710 J.P. Morgan Chase & Co 220,223
5,500 Janus Capital Group Inc 65,065
7,000 KeyCorp 166,110
1,500 Lehman Brothers Holdings Inc 83,055
1,900 Lincoln National Corp 53,827
5,000 Loews Corp 218,550
1,300 MBIA Inc 49,569
6,400 Merrill Lynch & Co Inc 218,112
4,300 MGIC Investment Corp 169,678
2,100 Moody's Corp 92,610
8,200 Morgan Stanley 302,170
4,800 National City Corp 132,576
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
2,100 Old Republic International Corp 57,330
4,100 PMI Group Inc 111,110
1,000 PNC Financial Services Group 44,930
2,000 Principal Financial Group 55,140
2,600 Radian Group Inc 90,662
2,900 Regions Financial Corp 93,902
3,100 Sovereign Bancorp Inc 42,098
1,000 Suntrust Banks Inc 56,250
2,200 Torchmark Corp 79,882
1,800 Union Planters Corp 49,536
700 UnionBanCal Corp 29,134
6,600 Unumprovident Corp 85,800
3,100 US Bancorp 64,852
12,900 Wachovia Corp 457,692
9,900 Washington Mutual Inc 341,847
19,200 Wells Fargo & Co 870,720
-------------
9,987,423
-------------
HEALTH CARE -- 15.7%
4,900 Aetna Inc* 206,388
1,700 Anthem Inc* 101,337
4,400 Boston Scientific Corp* 194,348
22,300 Bristol Myers Squibb Co 519,590
2,100 Cardinal Health Inc 120,309
4,500 Guidant Corp* 160,920
3,700 HCA - The Healthcare Company 152,588
3,200 Healthsouth Corp* 11,456
4,900 Lincare Holdings Inc* 146,510
1,900 Medtronic Inc 84,930
34,700 Merck & Co Inc 1,830,425
1,800 Oxford Health Plans Inc* 50,400
900 Patterson Dental Co* 39,609
42,150 Pfizer Inc 1,256,913
6,700 Pharmacia Corp 276,844
28,400 Schering Plough Corp 511,768
1,400 Stryker Corp 91,280
2,600 UnitedHealth Group Inc 215,540
1,600 Varian Medical Systems Inc* 80,880
2,500 Wellpoint Health Network Inc* 170,025
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
HEALTH CARE -- CONTINUED
2,700 Zimmer Holdings Inc* 119,853
-------------
6,341,913
-------------
INTEGRATED OILS -- 2.1%
9,383 ConocoPhillips 475,718
10,900 Marathon Oil Corp 251,681
3,400 Occidental Petroleum Corp 101,660
-------------
829,059
-------------
MATERIALS & PROCESSING -- 1.9%
2,000 Ashland Inc 55,620
1,700 Avery Dennison Corp 97,580
3,200 Du Pont (E.I.) De Nemours 117,344
900 Eastman Chemical Co 28,971
2,400 Ecolab Inc 117,720
1,200 Energizer Holdings Inc* 31,860
1,800 Engelhard Corp 37,350
800 Phelps Dodge Corp* 28,768
1,400 PPG Industries Inc 64,960
3,200 Sealed Air Corp* 116,064
2,600 Sherwin Williams Co 69,420
-------------
765,657
-------------
OTHER -- 3.1%
3,600 3 M Co 451,332
400 Eaton Corp 28,380
2,800 Fortune Brands Inc 122,752
15,900 Honeywell International Inc 363,951
1,900 ITT Industries Inc 106,837
1,500 Johnson Controls Inc 116,940
1,500 Textron Inc 54,195
-------------
1,244,387
-------------
OTHER ENERGY -- 3.1%
3,300 Apache Corp 215,424
2,100 BJ Services Co* 72,177
2,900 Burlington Resources Inc 134,415
1,400 Cooper Cameron Corp* 72,800
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
OTHER ENERGY -- CONTINUED
3,900 Devon Energy Corp 187,980
2,600 Ensco International Inc 72,748
1,700 EOG Resources Inc 70,210
2,900 Nabors Industries Ltd* 114,985
2,700 Smith International Inc* 94,122
500 Sunoco Inc 17,695
4,100 Transocean Inc 93,070
1,700 Weatherford International Ltd* 68,068
1,600 XTO Energy Inc 40,336
-------------
1,254,030
-------------
PRODUCER DURABLES -- 5.3%
6,300 American Power Conversion Corp* 98,532
9,000 Applied Materials Inc* 116,820
13,000 Boeing Co 358,280
1,500 Caterpillar Inc 70,500
2,800 Centex Corp 154,784
1,900 Cooper Industries Ltd 71,915
1,000 Deere & Co 41,380
2,300 DR Horton Inc 42,113
1,200 Emerson Electric Co 56,484
2,200 Lennar Corp 118,778
700 Lexmark International Group Inc* 43,687
3,300 Lockheed Martin Corp 150,876
1,560 Northrop Grumman Corp 135,252
200 NVR Inc* 66,390
1,600 Pitney Bowes Inc 49,664
1,100 Pulte Corp 55,913
11,900 Tyco International Ltd 176,120
4,600 United Technologies Corp 269,468
2,100 Waters Corp* 48,657
3,700 Xerox Corp* 33,300
-------------
2,158,913
-------------
TECHNOLOGY -- 9.1%
2,400 Applera Corp-Applied Biosystems Group 44,040
1,700 AVX Corp 16,082
11,900 BMC Software Inc* 230,860
3,000 Brocade Communications Systems Inc* 12,090
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
TECHNOLOGY -- CONTINUED
15,800 Cisco Systems Inc* 220,884
3,000 Computer Associates International Inc 40,050
21,600 Compuware Corp* 79,704
7,800 Corning Inc* 38,376
14,000 Dell Computer Corp* 377,440
15,000 EMC Corp* 110,850
5,300 Gateway Inc* 11,554
13,500 Hewlett-Packard Co 213,975
1,500 IBM Corp 116,925
20,500 Intel Corp 353,830
1,900 Intuit Inc* 90,288
10,600 Microsoft Corp 251,220
72,700 Oracle Corp* 869,492
5,600 Qualcomm Inc* 193,648
3,300 Raytheon Co 89,364
2,400 Rockwell Automation 55,224
2,500 Symantec Co* 101,175
22,900 Tellabs Inc* 139,461
-------------
3,656,532
-------------
UTILITIES -- 11.3%
1,400 Ameren Corp 54,586
2,300 American Electric Power Inc 50,094
18,880 AT & T Corp 350,035
19,300 Bellsouth Corp 418,231
5,700 Broadwing Inc* 21,432
4,700 Centerpoint Energy Inc 21,855
900 Cinergy Corp 29,007
5,927 Comcast Corp, Class A* 173,187
2,100 Consolidated Edison Inc 81,900
1,700 Constellation Energy Group Inc 44,574
1,200 DTE Energy Co 49,728
7,200 Edison International* 88,992
4,500 Exelon Corp 221,175
1,900 FPL Group Inc 106,419
10,500 PG & E Corp* 133,875
1,600 Pinnacle West Capital Corp 48,864
1,700 PPL Corp 59,789
2,100 Public Service Enterprise Group Inc 72,723
40,126 SBC Communications Inc 834,621
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
UTILITIES -- CONTINUED
2,200 Sempra Energy 51,040
4,000 Southern Co 112,840
24,500 Sprint Corp (Fon Group) 311,150
1,500 TXU Corp 23,955
34,242 Verizon Communications Inc 1,184,088
-------------
4,544,160
-------------
TOTAL COMMON STOCKS (COST $45,662,778) 39,992,106
-------------
SHORT-TERM INVESTMENTS -- 4.3%
CASH EQUIVALENTS -- 2.9%
499,864 Dreyfus Money Market Fund(a) 499,864
353,225 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(a) 353,225
291,411 Merrimac Money Market Fund(a) 291,411
-------------
1,144,500
-------------
REPURCHASE AGREEMENT -- 1.4%
$ 573,485 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/3/03, with a maturity value of $573,503
and an effective yield of 0.36%, collateralized by a
U.S. Treasury Bond with a rate of 3.625%, maturity date
of 3/31/04 and a market value, including accrued
interest of $617,058. 573,485
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,717,985) 1,717,985
-------------
TOTAL INVESTMENTS -- 103.4%
(Cost $47,380,763) 41,710,091
Other Assets and Liabilities (net) -- (3.4%) (1,362,851)
-------------
TOTAL NET ASSETS -- 100.0% $ 40,347,240
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
(a) Represents investment of security lending collateral (Note 1).
8 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$1,083,169 (cost $47,380,763) (Note 1) $41,710,091
Receivable for investments sold 2,504,465
Dividends and interest receivable 69,425
Receivable for expenses reimbursed by Manager (Note 2) 6,748
-----------
Total assets 44,290,729
-----------
LIABILITIES:
Payable for investments purchased 2,755,184
Payable upon return of securities loaned (Note 1) 1,144,500
Payable to affiliate for (Note 2):
Management fee 10,237
Shareholder service fee 4,653
Accrued expenses 28,915
-----------
Total liabilities 3,943,489
-----------
NET ASSETS $40,347,240
===========
NET ASSETS CONSIST OF:
Paid-in capital $51,337,834
Accumulated undistributed net investment income 104,827
Accumulated net realized loss (5,424,749)
Net unrealized depreciation (5,670,672)
-----------
$40,347,240
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $40,347,240
===========
SHARES OUTSTANDING:
Class III 4,679,955
===========
NET ASSET VALUE PER SHARE:
Class III $ 8.62
===========
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends $ 697,799
Interest (including securities lending income of $2,178) 9,683
-----------
Total income 707,482
-----------
EXPENSES:
Management fee (Note 2) 123,130
Audit fees 35,938
Custodian and transfer agent fees 21,104
Registration fees 1,934
Trustees fees and related expenses (Note 2) 1,819
Legal fees 1,438
Miscellaneous 1,191
Fees reimbursed by Manager (Note 2) (61,050)
-----------
125,504
Shareholder service fee (Note 2) - Class III 55,968
-----------
Net expenses 181,472
-----------
Net investment income 526,010
-----------
REALIZED AND UNREALIZED LOSS:
Net realized loss on:
Investments (3,773,602)
Closed futures contracts (290,507)
-----------
Net realized loss (4,064,109)
-----------
Change in net unrealized appreciation (depreciation) on
investments (5,886,181)
-----------
Net realized and unrealized loss (9,950,290)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(9,424,280)
===========
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 526,010 $ 208,046
Net realized loss (4,064,109) (883,849)
Change in net unrealized appreciation (depreciation) (5,886,181) (72,583)
----------- -----------
Net decrease in net assets from operations (9,424,280) (748,386)
----------- -----------
Distributions to shareholders from:
Net investment income
Class III (478,306) (180,097)
----------- -----------
Total distributions from net investment income (478,306) (180,097)
----------- -----------
Net share transactions (Note 5):
Class III 22,755,004 17,005,362
----------- -----------
Increase in net assets resulting from net share
transactions 22,755,004 17,005,362
----------- -----------
Total increase in net assets 12,852,418 16,076,879
NET ASSETS:
Beginning of period 27,494,822 11,417,943
----------- -----------
End of period (including accumulated undistributed
net investment income of $104,827 and $57,123,
respectively) $40,347,240 $27,494,822
=========== ===========
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------
2003 2002 2001 2000 1999*
--------- --------- --------- --------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.24 $ 12.08 $ 12.64 $ 10.67 $ 10.00
------- ------- ------- ------- -----------
Income from investment operations:
Net investment income 0.14+ 0.16+ 0.15+ 0.13 0.09
Net realized and unrealized gain
(loss) (2.64) (0.86) (0.57) 1.97 0.65
------- ------- ------- ------- -----------
Total from investment operations (2.50) (0.70) (0.42) 2.10 0.74
------- ------- ------- ------- -----------
Less distributions to shareholders:
From net investment income (0.12) (0.14) (0.14) (0.13) (0.07)
------- ------- ------- ------- -----------
Total distributions (0.12) (0.14) (0.14) (0.13) (0.07)
------- ------- ------- ------- -----------
NET ASSET VALUE, END OF PERIOD $ 8.62 $ 11.24 $ 12.08 $ 12.64 $ 10.67
======= ======= ======= ======= ===========
TOTAL RETURN(a) (22.33)% (5.78)% (3.44)% 19.83% 7.48%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $40,347 $27,495 $11,418 $13,275 $ 8,116
Net expenses to average daily net
assets 0.49% 0.48% 0.48% 0.48% 0.48%**
Net investment income to average
daily net assets 1.41% 1.36% 1.18% 1.11% 1.30%**
Portfolio turnover rate 63% 45% 161% 19% 33%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.16% 0.36% 0.54% 0.44% 1.47%**
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
* Period from July 23, 1998 (commencement of operations) through February
28, 1999.
** Annualized.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
12 See accompanying notes to the financial statements.
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Tax-Managed U.S. Equities Fund (the "Fund"), is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, non-diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high after-tax total return primarily through investment in
U.S. equity securities.
The Fund's benchmark is the S&P 500 (After Tax), which is computed by the
Manager by applying a 38.6% tax (credit) on short-term realized capital
gains (losses), a 38.6% tax on income, and a 20% tax (credit) on long-term
realized capital gains (losses) on the securities comprising the S&P 500
Stock Index, a U.S. large capitalization stock index, independently
maintained and published by Standard & Poor's Corporation.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
13
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
28, 2003, the Fund held no open futures contracts.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a
14
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. As of February 28,
2003, the Fund held no open swap agreements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $1,083,169 collateralized by cash in the amount of
$1,144,500, which was invested in short-term investments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
15
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income were $180,097 and
$478,306, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $103,176 of undistributed ordinary income.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $24,242, $1,030,107 and $3,063,585 expiring in 2008, 2010 and
2011, respectively. The Fund elected to defer to March 1, 2003
post-October losses of $306,815.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost,
when the amount of the return of capital is conclusively determined.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder
16
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on average daily net assets at the annual rate of
.15% for Class III shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $1,537. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$45,335,369 and $22,855,118, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$47,379,112 $922,159 $(6,591,180) $(5,669,021)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 65.3% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
17
<Page>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
---------------------- ----------------------
Shares Amount Shares Amount
Class III: --------- ----------- --------- -----------
Shares sold 2,413,324 $24,569,187 1,498,911 $16,997,564
Shares issued to shareholders
in reinvestment of distributions 2,643 24,973 694 7,798
Shares repurchased (181,198) (1,839,156) -- --
--------- ----------- --------- -----------
Net increase 2,234,769 $22,755,004 1,499,605 $17,005,362
========= =========== ========= ===========
</Table>
18
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO TAX-MANAGED U.S. EQUITIES FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tax-Managed U.S. Equities Fund
(the "Fund") (a series of GMO Trust) at February 28, 2003 and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
19
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
20
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
21
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
22
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Tobacco-Free Core Fund returned -21.7% for the
fiscal year ended February 28, 2003, as compared to -22.7% for the S&P 500.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
For the fiscal year, every sector in the S&P 500 posted losses, providing little
haven for U.S. equity investors. Financial services, healthcare, consumer
staples, integrated oils, and materials and processing all posted returns that
were in excess of the benchmark, but still under water. Trailing the S&P 500
Index returns were technology, utilities, consumer discretionary, autos and
transportation, producer durables, and energy. Autos and transportation and
utilities were the weakest performing sectors, falling 29.9% and 29.1%,
respectively. Value stocks across all market capitalization sectors continued to
outperform growth stocks, while there was virtually no difference between large
cap and small cap returns.
The Fund's outperformance of the benchmark for the period is attributable to
stock selection, as sector selection impact was negative for the period. This
was due in large part to the Fund's near-benchmark weighting in the
weak-performing technology sector and its overweight positions in the even
weaker performing utilities and autos and transportation sectors. Our continued
underweighting of healthcare throughout the year was beneficial, as was the
Fund's underweighting in the energy sector.
Good stock selection contributed significantly to the Fund's outperformance for
the fiscal year. Selection was particularly strong among financial services,
healthcare and technology, while selection among consumer staples, utilities,
and autos and transportation was weak.
The Fund incorporates three investment disciplines in the portfolio: price to
intrinsic value, which has a 40% weight; price to normalized earnings, with a
20% weight; and momentum, with a 40% weight. For the fiscal year, the strongest
contributor to returns was price to normalized earnings, our more traditional
valuation metric. Momentum was also a positive contributor, while price to
intrinsic value detracted from relative returns.
OUTLOOK
The portfolio is conservatively positioned, with a lower price to book, lower
price to earnings, and a higher dividend yield than the S&P 500. We believe that
our process of combining value and momentum disciplines in the GMO Tobacco-Free
Core Fund is well suited to the continued choppy market environment that we
anticipate. The portfolio currently maintains overweight positions in the
telephone utilities and financial services sectors, and underweight positions in
integrated oils, healthcare, and technology.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TOBACCO-FREE CORE FUND CLASS III SHARES AND THE
S&P 500 INDEX
AS OF FEBRUARY 28, 2003
GMO TOBACCO-FREE S&P 500
CORE FUND INDEX
2/28/93 $10,000 $10,000
3/31/93 $10,264 $10,211
6/30/93 $10,522 $10,261
9/30/93 $11,082 $10,526
12/31/93 $11,268 $10,770
3/31/94 $10,958 $10,361
6/30/94 $10,991 $10,405
9/30/94 $11,409 $10,914
12/31/94 $11,538 $10,912
3/31/95 $12,608 $11,974
6/30/95 $13,973 $13,118
9/30/95 $15,462 $14,160
12/31/95 $16,500 $15,012
3/31/96 $17,104 $15,818
6/30/96 $17,690 $16,528
9/30/96 $18,207 $17,039
12/31/96 $19,519 $18,459
3/31/97 $20,017 $18,954
6/30/97 $23,294 $22,263
9/30/97 $26,129 $23,931
12/31/97 $26,468 $24,618
3/31/98 $30,089 $28,052
6/30/98 $30,823 $28,978
9/30/98 $27,739 $26,096
12/31/98 $33,138 $31,654
3/31/99 $34,849 $33,231
6/30/99 $37,313 $35,573
9/30/99 $34,847 $33,351
12/31/99 $40,180 $38,314
3/31/2000 $41,842 $39,192
6/30/2000 $40,193 $38,151
9/30/2000 $42,032 $37,782
12/31/2000 $39,820 $34,826
3/31/2001 $36,468 $30,697
6/30/2001 $38,121 $32,493
9/30/2001 $33,391 $27,724
12/31/2001 $36,308 $30,686
3/31/2002 $36,559 $30,771
6/30/2002 $32,044 $26,648
9/30/2002 $26,509 $22,045
12/31/2002 $28,955 $23,905
2/28/2003 $27,620 $22,929
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
Class III -21.69% -0.79% 10.69% n/a
7/2/2001
Class IV -21.65% n/a n/a -17.90%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Performance for Class IV shares may vary due to
different shareholder servicing fees. Past performance is not indicative of
future performance. Information is unaudited.
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
COMMON STOCKS -- 98.8%
AUTO & TRANSPORTATION -- 3.8%
82,400 AMR Corp* 192,816
89,800 Burlington Northern Santa Fe Railroad Co 2,245,000
23,300 CSX Corp 625,838
61,100 Delta Air Lines Inc 513,240
30,400 Expeditors International Washington Inc 1,039,376
210,593 Ford Motor Co 1,752,134
161,013 General Motors Corp 5,437,409
8,900 Genuine Parts Co 256,320
34,000 Goodyear Tire & Rubber Co 136,000
24,100 Harley Davidson Inc 954,119
9,000 Union Pacific Corp 496,710
77,500 United Parcel Service, Class B 4,459,350
------------
18,108,312
------------
CONSUMER DISCRETIONARY -- 10.3%
111,000 Amazon.com Inc* 2,443,110
46,600 Apollo Group Inc, Class A* 2,159,444
56,600 Autonation Inc* 748,818
23,200 Black and Decker Corp 851,440
27,000 CDW Computer Centers Inc* 1,178,820
600 ChoicePoint Inc* 20,250
66,600 Circuit City Stores Inc 294,372
50,500 Clear Channel Communications Inc* 1,843,755
16,800 Coach Inc* 600,264
37,100 Dollar Tree Stores Inc* 766,115
67,800 Eastman Kodak Co 2,006,880
28,200 eBay Inc* 2,211,444
30,800 Electronic Arts Inc* 1,626,240
18,800 Estee Lauder Cos Inc 527,340
42,000 Federated Department Stores Inc* 1,071,000
29,800 Fox Entertainment Group Inc, Class A* 796,554
16,600 Gannett Co Inc 1,198,022
8,300 Harrahs Entertainment Inc* 272,572
7,900 Hilton Hotels Corp 86,821
36,600 Jones Apparel Group Inc* 1,037,976
43,500 Limited Brands Inc 516,780
3,700 Manpower Inc 112,369
53,300 May Department Stores Co 1,045,746
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
11,900 Maytag Corp 286,790
8,500 MGM Mirage* 217,770
9,200 Mohawk Industries Inc* 454,296
26,200 New York Times Co, Class A 1,217,252
63,300 Newell Rubbermaid Inc 1,785,060
25,600 Penney (JC) Co Inc 508,160
11,400 Pixar Inc* 615,486
14,000 R.R. Donnelley and Sons 255,640
13,500 Ross Stores Inc 461,835
91,700 Sears Roebuck & Co 1,997,226
72,800 Starbucks Corp* 1,707,160
145,700 The Gap Inc 1,899,928
56,900 Toys R Us Inc* 459,752
52,000 Tribune Co 2,332,200
9,200 VF Corp 311,420
33,400 Viacom Inc, Class A* 1,242,814
155,900 Viacom Inc, Class B* 5,788,567
38,000 Wal Mart Stores Inc 1,826,280
100 Washington Post Co, Class B 71,350
18,400 Weight Watchers International Inc* 770,040
12,300 Whirlpool Corp 605,898
11,400 Williams-Sonoma Inc* 265,392
------------
48,496,448
------------
CONSUMER STAPLES -- 7.0%
34,376 Albertsons Inc 647,300
53,300 Anheuser Busch Cos Inc 2,478,450
30,600 Campbell Soup Co 634,644
246,900 Coca Cola Co 9,930,318
116,900 Coca Cola Enterprises Inc 2,359,042
18,300 Colgate-Palmolive Co 920,673
74,100 CVS Corp 1,845,090
14,900 Heinz (HJ) Co 457,430
32,100 Kroger Co* 424,362
80,400 Pepsi Bottling Group Inc 1,869,300
18,400 PepsiCo Inc 705,088
34,900 Procter and Gamble Co 2,856,914
95,900 Rite Aid Corp* 230,160
137,800 Safeway Inc* 2,740,842
53,500 Sara Lee Corp 1,059,300
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
CONSUMER STAPLES -- CONTINUED
21,200 Supervalu Inc 295,104
30,600 Sysco Corp 829,872
95,300 Walgreen Co 2,681,742
------------
32,965,631
------------
FINANCIAL SERVICES -- 25.2%
117,400 AFLAC Corp 3,668,750
123,200 Allstate Corp 3,896,816
167,000 American Express Co 5,607,860
23,200 Amsouth Bancorp 477,920
15,700 Automatic Data Processing Inc 510,250
122,664 Bank of America Corp 8,493,255
51,800 Bank One Corp 1,866,354
24,100 BB&T Corp 791,203
32,221 Bear Stearns Cos Inc 2,018,323
22,900 Capital One Financial Corp 709,213
26,203 Charter One Financial Inc 757,529
26,300 Cigna Corp 1,130,111
93,700 Citigroup Inc 3,123,958
13,700 CNA Financial Corp* 314,963
27,100 Comerica Inc 1,110,558
50,600 Countrywide Financial Corp 2,701,534
10,700 Dun & Bradstreet Corp* 384,130
6,800 Edwards (AG) Inc 181,356
23,900 Equifax Inc 458,402
201,300 Fannie Mae 12,903,330
28,500 Fidelity National Financial Inc 935,655
89,146 FleetBoston Financial Corp 2,189,426
18,200 Franklin Resources Inc 594,594
130,900 Freddie Mac 7,153,685
27,400 Golden West Financial Corp 1,983,760
18,400 Greenpoint Financial Corp 781,632
89,000 Household International Inc 2,485,770
37,800 Hudson City Bancorp Inc 717,822
32,900 Huntington Bancshares Inc 631,680
91,140 J.P. Morgan Chase & Co 2,067,055
56,900 Janus Capital Group Inc 673,127
85,200 KeyCorp 2,021,796
17,200 Lehman Brothers Holdings Inc 952,364
13,400 Lincoln National Corp 379,622
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
25,300 MBIA Inc 964,689
70,800 Merrill Lynch & Co Inc 2,412,864
30,900 Metlife Inc 808,653
45,500 MGIC Investment Corp 1,795,430
23,400 Moody's Corp 1,031,940
133,600 Morgan Stanley 4,923,160
47,400 National City Corp 1,309,188
18,900 Old Republic International Corp 515,970
48,600 PMI Group Inc 1,317,060
24,600 PNC Financial Services Group 1,105,278
44,400 Principal Financial Group 1,224,108
36,800 Radian Group Inc 1,283,216
34,300 Regions Financial Corp 1,110,634
24,100 Sovereign Bancorp Inc 327,278
16,000 Suntrust Banks Inc 900,000
23,700 Torchmark Corp 860,547
19,500 Union Planters Corp 536,640
84,900 Unumprovident Corp 1,103,700
26,300 US Bancorp 550,196
124,700 Wachovia Corp 4,424,356
143,700 Washington Mutual Inc 4,961,961
229,900 Wells Fargo & Co 10,425,965
------------
118,566,636
------------
HEALTH CARE -- 15.2%
23,800 Abbott Laboratories 847,756
52,000 Aetna Inc 2,190,240
9,500 Amgen Inc* 519,080
12,900 Anthem Inc* 768,969
53,400 Boston Scientific Corp* 2,358,678
215,800 Bristol Myers Squibb Co 5,028,140
16,100 Cardinal Health Inc 922,369
50,200 Guidant Corp* 1,795,152
35,400 HCA - The Healthcare Company 1,459,896
500 Health Net Inc* 12,555
53,520 Johnson & Johnson 2,807,124
12,200 Lilly (Eli) & Co 690,032
33,500 Lincare Holdings Inc* 1,001,650
18,300 Medtronic Inc 818,010
417,900 Merck & Co Inc 22,044,225
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
HEALTH CARE -- CONTINUED
12,300 Oxford Health Plans Inc* 344,400
7,800 Patterson Dental Co* 343,278
463,750 Pfizer Inc 13,829,025
55,600 Pharmacia Corp 2,297,392
285,900 Schering Plough Corp 5,151,918
13,400 Stryker Corp 873,680
21,000 UnitedHealth Group Inc 1,740,900
19,300 Varian Medical Systems Inc* 975,615
15,600 Wellpoint Health Network Inc* 1,060,956
34,200 Zimmer Holdings Inc* 1,518,138
------------
71,399,178
------------
INTEGRATED OILS -- 2.3%
12,200 Amerada Hess Corp 543,266
116,933 ConocoPhillips 5,928,503
30,554 Exxon Mobil Corp 1,039,447
107,600 Marathon Oil Corp 2,484,484
32,800 Occidental Petroleum Corp 980,720
------------
10,976,420
------------
MATERIALS & PROCESSING -- 1.8%
20,800 Ashland Inc 578,448
18,800 Avery Dennison Corp 1,079,120
27,400 Du Pont (E.I.) De Nemours 1,004,758
9,300 Eastman Chemical Co 299,367
39,900 Ecolab Inc 1,957,095
13,500 Energizer Holdings Inc* 358,425
17,700 PPG Industries Inc 821,280
42,600 Sealed Air Corp* 1,545,102
35,000 Sherwin Williams Co 934,500
------------
8,578,095
------------
OTHER -- 3.9%
46,200 3 M Co 5,792,094
7,900 Eaton Corp 560,505
18,800 Fortune Brands Inc 824,192
126,700 General Electric Co 3,047,135
180,200 Honeywell International Inc 4,124,778
24,400 ITT Industries Inc 1,372,012
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
OTHER -- CONTINUED
20,400 Johnson Controls Inc 1,590,384
28,900 Textron Inc 1,044,157
------------
18,355,257
------------
OTHER ENERGY -- 3.8%
42,600 Apache Corp 2,780,928
43,200 Burlington Resources Inc 2,002,320
31,400 Cooper Cameron Corp* 1,632,800
48,200 Devon Energy Corp 2,323,240
34,600 Ensco International Inc 968,108
19,600 EOG Resources Inc 809,480
114,100 Halliburton Co 2,311,666
34,500 Nabors Industries Ltd* 1,367,925
5,100 Noble Corp* 185,130
11,200 Pioneer Natural Resources Co* 292,880
22,900 Smith International Inc* 798,294
42,800 Transocean Inc 971,560
12,600 Weatherford International Ltd* 504,504
34,400 XTO Energy Inc 867,224
------------
17,816,059
------------
PRODUCER DURABLES -- 4.9%
27,700 American Power Conversion Corp* 433,228
158,900 Boeing Co 4,379,284
16,700 Caterpillar Inc 784,900
19,800 Centex Corp 1,094,544
20,800 Cooper Industries Ltd 787,280
17,000 Deere & Co 703,460
21,300 DR Horton Inc 390,003
10,800 Emerson Electric Co 508,356
20,200 Lennar Corp 1,090,598
18,100 Lexmark International Group Inc* 1,129,621
27,300 Lockheed Martin Corp 1,248,156
20,456 Northrop Grumman Corp 1,773,535
46,200 Novellus System Inc* 1,346,730
1,100 NVR Inc* 365,145
6,700 Pitney Bowes Inc 207,968
12,400 Pulte Corp 630,292
66,800 Tyco International Ltd 988,640
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
PRODUCER DURABLES -- CONTINUED
59,900 United Technologies Corp 3,508,942
23,300 Waters Corp* 539,861
149,700 Xerox Corp* 1,347,300
------------
23,257,843
------------
TECHNOLOGY -- 10.4%
21,700 Applera Corp-Applied Biosystems Group 398,195
136,900 BMC Software Inc* 2,655,860
76,900 Brocade Communications Systems Inc* 309,907
21,000 Ceridian Corp* 289,800
372,300 Cisco Systems Inc* 5,204,754
210,600 Computer Associates International Inc 2,811,510
95,100 Compuware Corp* 350,919
90,900 Corning Inc* 447,228
168,500 Dell Computer Corp* 4,542,760
172,200 EMC Corp* 1,272,558
140,400 Gateway Inc* 306,072
174,900 Hewlett-Packard Co 2,772,165
25,700 IBM Corp 2,003,315
242,400 Intel Corp 4,183,824
35,900 Intuit Inc* 1,705,968
98,900 Lucent Technologies Inc* 162,196
237,800 Microsoft Corp 5,635,860
719,200 Oracle Corp* 8,601,632
59,800 Qualcomm Inc* 2,067,884
29,300 Raytheon Co 793,444
23,100 Rockwell Automation 531,531
13,600 Symantec Co* 550,392
241,900 Tellabs Inc* 1,473,171
------------
49,070,945
------------
UTILITIES -- 10.2%
14,400 Ameren Corp 561,456
36,300 American Electric Power Inc 790,614
177,106 AT & T Corp 3,283,545
144,700 Bellsouth Corp 3,135,649
24,700 Centerpoint Energy Inc 114,855
16,900 Cinergy Corp 544,687
19,700 Consolidated Edison Inc 768,300
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
UTILITIES -- CONTINUED
20,300 Constellation Energy Group Inc 532,266
17,200 DTE Energy Co 712,768
27,900 Duke Power Co 376,929
75,300 Edison International* 930,708
7,600 Entergy Corp 346,180
50,700 Exelon Corp 2,491,905
8,957 Firstenergy Corp 264,232
26,400 FPL Group Inc 1,478,664
105,100 PG & E Corp* 1,340,025
13,900 Pinnacle West Capital Corp 424,506
18,300 PPL Corp 643,611
27,100 Public Service Enterprise Group Inc 938,473
162,200 Qwest Communications International Inc* 580,676
460,014 SBC Communications Inc 9,568,291
24,100 Sempra Energy 559,120
57,900 Southern Co 1,633,359
188,600 Sprint Corp (Fon Group) 2,395,220
14,900 Teco Energy Inc 165,092
17,700 TXU Corp 282,669
375,684 Verizon Communications Inc 12,991,153
------------
47,854,953
------------
TOTAL COMMON STOCKS (COST $560,767,853) 465,445,777
------------
SHORT-TERM INVESTMENTS -- 5.4%
CASH EQUIVALENTS -- 2.3%
4,853,359 Dreyfus Money Market Fund(a) 4,853,359
$ 3,429,585 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(a) 3,429,585
2,829,408 Merrimac Money Market Fund(a) 2,829,408
------------
11,112,352
------------
U.S. GOVERNMENT -- 0.4%
$ 1,700,000 U.S. Treasury Bill, 1.14%, due 4/24/03 1,696,876
------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.7%
$ 12,727,710 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/3/03, with a maturity value of
$12,728,092 and an effective yield of 0.36%,
collaterized by a U.S. Treasury Note with a rate of
3.625%, maturity date of 3/31/04 and market value,
including accrued interest of $13,694,755. 12,727,710
------------
TOTAL SHORT-TERM INVESTMENTS (COST $25,536,938) 25,536,938
------------
TOTAL INVESTMENTS -- 104.2%
(Cost $586,304,791) 490,982,715
Other Assets and Liabilities (net) -- (4.2%) (19,956,840)
------------
TOTAL NET ASSETS -- 100.0% $471,025,875
============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
(a) Represents investment of security lending collateral (Note 1).
See accompanying notes to the financial statements. 9
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$10,542,002 (cost $586,304,791) (Note 1) $490,982,715
Receivable for investments sold 8,258,490
Dividends and interest receivable 850,850
Receivable for expenses reimbursed by Manager (Note 2) 20,496
------------
Total assets 500,112,551
------------
LIABILITIES:
Payable for investments purchased 17,766,091
Payable upon return of securities loaned (Note 1) 11,112,352
Payable to affiliate for (Note 2):
Management fee 119,865
Shareholder service fee 43,791
Accrued expenses 44,577
------------
Total liabilities 29,086,676
------------
NET ASSETS $471,025,875
============
NET ASSETS CONSIST OF:
Paid-in capital $643,244,967
Accumulated undistributed net investment income 1,329,115
Accumulated net realized loss (78,226,131)
Net unrealized depreciation (95,322,076)
------------
$471,025,875
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $163,025,363
============
Class IV shares $308,000,512
============
SHARES OUTSTANDING:
Class III 18,757,289
============
Class IV 35,447,255
============
NET ASSET VALUE PER SHARE:
Class III $ 8.69
============
Class IV $ 8.69
============
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends $ 8,100,424
Interest (including securities lending income of $21,950) 176,938
-------------
Total income 8,277,362
-------------
EXPENSES:
Management fee (Note 2) 1,539,653
Custodian and transfer agent fees 104,111
Audit fees 35,500
Legal fees 22,708
Trustees fees and related expenses (Note 2) 10,854
Registration fees 9,202
Miscellaneous 9,015
Fees reimbursed by Manager (Note 2) (178,855)
-------------
1,552,188
Shareholder service fee (Note 2) - Class III 263,500
Shareholder service fee (Note 2) - Class IV 305,439
-------------
Net expenses 2,121,127
-------------
Net investment income 6,156,235
-------------
REALIZED AND UNREALIZED LOSS:
Net realized loss on:
Investments (44,513,462)
Closed futures contracts (3,080,259)
-------------
Net realized loss (47,593,721)
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (74,643,435)
Open futures contracts (40,476)
-------------
Net unrealized loss (74,683,911)
-------------
Net realized and unrealized loss (122,277,632)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(116,121,397)
=============
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 6,156,235 $ 4,400,065
Net realized loss (47,593,721) (25,790,130)
Change in net unrealized appreciation (depreciation) (74,683,911) (7,702,275)
------------- -------------
Net decrease in net assets from operations (116,121,397) (29,092,340)
------------- -------------
Distributions to shareholders from:
Net investment income
Class III (2,003,854) (2,265,734)
Class IV (3,699,871) (1,907,569)
------------- -------------
Total distributions from net investment income (5,703,725) (4,173,303)
------------- -------------
(5,703,725) (4,173,303)
------------- -------------
Net share transactions (Note 5):
Class III 80,376,925 (111,901,886)
Class IV 131,175,397 266,034,460
------------- -------------
Increase in net assets resulting from net share
transactions 211,552,322 154,132,574
------------- -------------
Total increase in net assets 89,727,200 120,866,931
NET ASSETS:
Beginning of period 381,298,675 260,431,744
------------- -------------
End of period (including accumulated undistributed
net investment income of $1,329,115 and $876,605,
respectively) $ 471,025,875 $ 381,298,675
============= =============
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23 $ 12.29 $ 14.35 $ 14.26 $ 14.05
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.12+ 0.15+ 0.17+ 0.20 0.18
Net realized and unrealized gain
(loss) (2.55) (1.07) (0.20) 1.94 1.99
-------- -------- -------- -------- --------
Total from investment operations (2.43) (0.92) (0.03)++ 2.14 2.17
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.11) (0.14) (0.19) (0.19) (0.19)
From net realized gains -- -- (1.84) (1.86) (1.77)
-------- -------- -------- -------- --------
Total distributions (0.11) (0.14) (2.03) (2.05) (1.96)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.69 $ 11.23 $ 12.29 $ 14.35 $ 14.26
======== ======== ======== ======== ========
TOTAL RETURN(a) (21.69)% (7.53)% (0.83)% 15.10% 16.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $163,025 $133,203 $260,432 $321,786 $227,158
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 1.26% 1.24% 1.20% 1.34% 1.35%
Portfolio turnover rate 62% 85% 82% 108% 77%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.04% 0.03% 0.05% 0.05% 0.25%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
+ Computed using average shares outstanding throughout the period.
++ The amount shown for a share outstanding does not correspond with the
net increase in net assets from operations due to the timing of
purchases and redemptions of Fund shares in relation to the fluctuating
market values of the Fund.
See accompanying notes to the financial statements. 13
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED
FEBRUARY 28/29,
------------------------
2003 2002(1)
---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23 $ 12.32
-------- --------
Income from investment operations:
Net investment income 0.13+ 0.10+
Net realized and unrealized loss (2.55) (1.08)
-------- --------
Total from investment operations (2.42) (0.98)
-------- --------
Less distributions to shareholders:
From net investment income (0.12) (0.11)
-------- --------
Total distributions (0.12) (0.11)
-------- --------
NET ASSET VALUE, END OF PERIOD $ 8.69 $ 11.23
======== ========
TOTAL RETURN(a) (21.65)% (8.00)%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $308,001 $248,095
Net expenses to average daily net assets 0.44% 0.44%*
Net investment income to average daily net assets 1.35% 1.37%*
Portfolio turnover rate 62% 85%
Fees and expenses reimbursed by the Manager to
average daily net assets: 0.04% 0.04%*
</Table>
(1) Period from July 2, 2001 (commencement of operations) through
February 28, 2002.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
+ Computed using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
14 See accompanying notes to the financial statements.
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in U.S. equity
securities. The Fund's benchmark is the S&P 500 Index.
Throughout the fiscal year ended February 28, 2003, the Fund offered two
classes of shares: Class III and Class IV. The principal economic
difference between the classes of shares is the level of shareholder fees
borne by the classes. Eligibility for and automatic conversion among the
various classes of shares is generally based on the total amount of assets
invested in a particular fund or with GMO, as more fully outlined in the
Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of foreign market that would materially affect that security's
value.
15
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of
February 28, 2003, there were no outstanding future contracts.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a
16
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. As of
February 28, 2003 the Fund held no open swap agreements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $10,542,002 collateralized by cash in the amount of
$11,112,352, which was invested in short-term instruments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
17
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the year ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income were $4,173,303
and $5,703,725, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $1,286,770 of undistributed ordinary income.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $24,719,851 and $28,414,910 expiring in 2010 and 2011,
respectively. The Fund elected to defer to March 1, 2003 post-October
losses of $19,614,026.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost,
when the amount of the return of capital is conclusively determined.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
18
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .105% for Class IV shares.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees, fees and
expenses of the independent Trustees of the Trust (including legal 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, interest
expense and transfer taxes) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $7,593. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$497,082,072 and $277,805,530, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$591,739,793 $42,342 $(100,799,420) $(100,757,078)
</Table>
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 56.0% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
19
<Page>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ----------- -------------
Shares sold 19,145,833 $ 202,448,347 9,762,326 $ 118,497,001
Shares issued to shareholders in reinvestment
of distributions 139,964 1,343,482 146,377 1,687,074
Shares repurchased (12,384,896) (123,414,904) (19,237,964) (232,085,961)
----------- ------------- ----------- -------------
Net increase (decrease) 6,900,901 $ 80,376,925 (9,329,261) $(111,901,886)
=========== ============= =========== =============
</Table>
<Table>
<Caption>
Period from July 2, 2001
(commencement of
Year Ended operations) through
February 28, 2003 February 28, 2002
------------------------ --------------------------
Shares Amount Shares Amount
Class IV: ---------- ------------ ----------- -------------
Shares sold 12,955,575 $127,475,526 22,613,569 $272,126,891
Shares issued to shareholders in reinvestment
of distributions 398,388 3,699,871 169,378 1,907,569
Shares repurchased -- -- (689,655) (8,000,000)
---------- ------------ ---------- ------------
Net increase 13,353,963 $131,175,397 22,093,292 $266,034,460
========== ============ ========== ============
</Table>
The Fund's Class IV was started with an initial transfer of paid in
capital of $100,653,595 from Class III. This transfer is included in the
transaction amounts above.
20
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO TOBACCO-FREE CORE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tobacco-Free Core Fund (the
"Fund") (a series of GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
21
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
22
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
23
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer (1997
c/o GMO Trust Officer of the Trust Officer since October 2002; - present), Chief Operating
40 Rowes Wharf Vice President from August Officer (2000 - present) and
Boston, MA 02110 1998 - October 2002. Member, Grantham, Mayo, Van
Age: 47 Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
24
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO U.S. Core Fund returned -21.6% for the fiscal
year ended February 28, 2003, as compared to -22.7% for the S&P 500 Index.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
For the fiscal year, every sector in the S&P 500 posted losses, providing
nowhere for U.S. equity investors to hide. Financial services, healthcare,
consumer staples, integrated oils, and materials and processing all posted
returns that were in excess of the benchmark, but still underwater. Trailing the
S&P 500 Index returns were technology, utilities, consumer discretionary, autos
and transportation, producer durables, energy, and other. Autos and
transportation and utilities were the weakest performing sectors, falling 29.9%
and 29.1%, respectively. Value stocks across all market capitalization sectors
continued to outperform growth stocks, while there was virtually no difference
between large cap and small cap returns.
The Fund's outperformance of the benchmark for the period is attributable to
stock selection, as sector selection impact was negative for the period. This
was due in large part to the Fund's near-benchmark weighting in the
weak-performing technology sector and its overweight position in the even weaker
performing utilities sector. Our continued underweighting of healthcare
throughout the year was beneficial, as was the Fund's underweighting in the
energy sector.
Good stock selection contributed significantly to the Fund's outperformance for
the fiscal year. Selection was particularly strong among financial services,
healthcare and technology, while selection among consumer staples, utilities and
autos and transportation was weak.
The Fund incorporates three investment disciplines in the portfolio: price to
intrinsic value, which has a 40% weight; price to normalized earnings, with a
20% weight; and momentum, with a 40% weight. For the fiscal year, the strongest
contributor to returns was price to normalized earnings, our more traditional
valuation metric. Momentum was also a positive contributor, while price to
intrinsic value had a negative impact on performance.
OUTLOOK
The portfolio is conservatively positioned, with a lower price to book, lower
price to earnings, and a higher dividend yield than the S&P 500. We believe that
our process of combining value and momentum disciplines in the GMO U.S. Core
Fund is well suited to the continued choppy market environment that we
anticipate. The portfolio currently maintains overweight positions in the
telephone utilities and financial services sectors and an underweight position
in both healthcare and technology.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO U.S. CORE FUND CLASS III SHARES AND THE S&P 500 INDEX
AS OF FEBRUARY 28, 2003 GMO U.S. CORE FUND S&P 500 INDEX
2/28/93 $10,000 $10,000
3/31/93 $10,267 $10,211
6/30/93 $10,497 $10,261
9/30/93 $11,021 $10,526
12/31/93 $11,214 $10,770
3/31/94 $10,869 $10,361
6/30/94 $10,892 $10,405
9/30/94 $11,359 $10,914
12/31/94 $11,479 $10,912
3/31/95 $12,528 $11,974
6/30/95 $13,899 $13,118
9/30/95 $15,408 $14,160
12/31/95 $16,444 $15,012
3/31/96 $17,036 $15,818
6/30/96 $17,608 $16,528
9/30/96 $18,098 $17,039
12/31/96 $19,341 $18,459
3/31/97 $19,813 $18,954
6/30/97 $23,032 $22,263
9/30/97 $25,735 $23,931
12/31/97 $26,128 $24,618
3/31/98 $29,550 $28,052
6/30/98 $30,158 $28,978
9/30/98 $27,265 $26,096
12/31/98 $32,579 $31,654
3/31/99 $33,768 $33,231
6/30/99 $36,290 $35,573
9/30/99 $33,811 $33,351
12/31/99 $38,637 $38,314
3/31/2000 $40,170 $39,192
6/30/2000 $38,733 $38,151
9/30/2000 $40,574 $37,782
12/31/2000 $38,752 $34,826
3/31/2001 $35,681 $30,697
6/30/2001 $37,387 $32,493
9/30/2001 $32,977 $27,724
12/31/2001 $35,774 $30,686
3/31/2002 $36,180 $30,771
6/30/2002 $31,722 $26,648
9/30/2002 $26,285 $22,045
12/31/2002 $28,738 $23,905
2/28/2003 $27,393 $22,929
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 10 YEAR 6/7/96
Class II* -21.63% -0.67% n/a 6.73%
Class III -21.59% -0.62% 10.60% n/a
1/9/98
Class IV -21.55% -0.57% n/a 1.89%
7/2/2001
Class V -21.55% n/a n/a -17.28%
4/15/2002
Class M n/a n/a n/a -22.03%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Performance for Classes II, IV, V and M may vary
due to different fees. Past performance is not indicative of future performance.
Information is unaudited.
* Class II performance includes Class III performance for the period November
17,1997 to January 9, 1998, during which no Class II shares were outstanding.
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
COMMON STOCKS -- 98.3%
AUTO & TRANSPORTATION -- 3.8%
331,100 AMR Corp* 774,774
456,300 Burlington Northern Santa Fe Railroad Co 11,407,500
126,400 CSX Corp 3,395,104
265,200 Delta Air Lines Inc 2,227,680
150,600 Expeditors International Washington Inc 5,149,014
3,000 FedEx Corp 154,200
974,311 Ford Motor Co 8,106,268
773,716 General Motors Corp 26,128,389
59,200 Genuine Parts Co 1,704,960
195,500 Goodyear Tire & Rubber Co 782,000
128,700 Harley Davidson Inc 5,095,233
41,800 Union Pacific Corp 2,306,942
383,500 United Parcel Service, Class B 22,066,590
--------------
89,298,654
--------------
CONSUMER DISCRETIONARY -- 10.6%
38,800 Abercrombie & Fitch Co, Class A* 1,067,000
546,900 Amazon.com Inc* 12,037,269
268,700 Apollo Group Inc, Class A* 12,451,558
241,200 Autonation Inc* 3,191,076
132,300 Black and Decker Corp 4,855,410
165,500 CDW Computer Centers Inc* 7,225,730
396,100 Circuit City Stores Inc 1,750,762
257,200 Clear Channel Communications Inc* 9,390,372
82,100 Coach Inc* 2,933,433
255,200 Dollar Tree Stores Inc* 5,269,880
375,400 Eastman Kodak Co 11,111,840
131,400 eBay Inc* 10,304,388
107,400 Electronic Arts Inc* 5,670,720
61,800 Estee Lauder Cos Inc 1,733,490
158,500 Federated Department Stores Inc* 4,041,750
73,700 Gannett Co Inc 5,318,929
57,800 Harrahs Entertainment Inc* 1,898,152
125,700 Hilton Hotels Corp 1,381,443
211,600 Jones Apparel Group Inc* 6,000,976
181,600 Limited Brands Inc 2,157,408
32,800 Manpower Inc 996,136
259,200 May Department Stores Co 5,085,504
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- CONTINUED
54,200 MGM Mirage* 1,388,604
51,800 Mohawk Industries Inc* 2,557,884
160,600 New York Times Co, Class A 7,461,476
322,800 Newell Rubbermaid Inc 9,102,960
160,300 Penney (JC) Co Inc 3,181,955
40,700 Pixar Inc* 2,197,393
63,400 R.R. Donnelley and Sons 1,157,684
71,300 Ross Stores Inc 2,439,173
485,400 Sears Roebuck & Co 10,572,012
447,200 Starbucks Corp* 10,486,840
824,000 The Gap Inc 10,744,960
129,500 Toys R Us Inc* 1,046,360
269,800 Tribune Co 12,100,530
58,200 VF Corp 1,970,070
231,300 Viacom Inc, Class A* 8,606,673
778,000 Viacom Inc, Class B* 28,887,140
196,800 Wal Mart Stores Inc 9,458,208
100 Washington Post Co, Class B 71,350
116,300 Weight Watchers International Inc* 4,867,155
39,400 Whirlpool Corp 1,940,844
62,800 Williams-Sonoma Inc* 1,461,984
--------------
247,574,481
--------------
CONSUMER STAPLES -- 8.8%
124,752 Albertsons Inc 2,349,080
1,438,200 Altria Group Inc 55,586,430
249,800 Anheuser Busch Cos Inc 11,615,700
133,100 Campbell Soup Co 2,760,494
1,044,600 Coca Cola Co 42,013,812
602,800 Coca Cola Enterprises Inc 12,164,504
116,300 Colgate-Palmolive Co 5,851,053
406,900 CVS Corp 10,131,810
25,545 Del Monte Foods Co* 208,958
57,900 Heinz (HJ) Co 1,777,530
140,500 Kroger Co* 1,857,410
319,400 Pepsi Bottling Group Inc 7,426,050
94,900 Procter and Gamble Co 7,768,514
378,100 Rite Aid Corp* 907,440
85,200 RJ Reynolds Tobacco Holdings 3,400,332
722,100 Safeway Inc* 14,362,569
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
CONSUMER STAPLES -- CONTINUED
236,700 Sara Lee Corp 4,686,660
183,900 Sysco Corp 4,987,368
128,600 UST Inc 3,707,538
446,300 Walgreen Co 12,558,882
--------------
206,122,134
--------------
FINANCIAL SERVICES -- 24.0%
508,800 AFLAC Corp 15,900,000
500,400 Allstate Corp 15,827,652
809,300 American Express Co 27,176,294
112,700 Amsouth Bancorp 2,321,620
508,209 Bank of America Corp 35,188,391
237,500 Bank One Corp 8,557,125
100,600 BB&T Corp 3,302,698
148,379 Bear Stearns Cos Inc 9,294,461
198,800 Capital One Financial Corp 6,156,836
38,303 Charter One Financial Inc 1,107,340
190,500 Cigna Corp 8,185,785
439,200 Citigroup Inc 14,642,928
87,500 CNA Financial Corp* 2,011,625
98,100 Comerica Inc 4,020,138
695,300 Conseco Inc* 28,507
196,800 Countrywide Financial Corp 10,507,152
28,800 Dun & Bradstreet Corp* 1,033,920
92,200 Equifax Inc 1,768,396
927,600 Fannie Mae 59,459,160
114,600 Fidelity National Financial Inc 3,762,318
418,388 FleetBoston Financial Corp 10,275,609
134,400 Franklin Resources Inc 4,390,848
637,100 Freddie Mac 34,817,515
120,900 Golden West Financial Corp 8,753,160
91,700 Greenpoint Financial Corp 3,895,416
306,500 Household International Inc 8,560,545
186,000 Hudson City Bancorp Inc 3,532,140
139,000 Huntington Bancshares Inc 2,668,800
618,580 J.P. Morgan Chase & Co 14,029,394
267,700 Janus Capital Group Inc 3,166,891
342,100 KeyCorp 8,118,033
77,700 Lehman Brothers Holdings Inc 4,302,249
66,800 Lincoln National Corp 1,892,444
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
240,700 Loews Corp 10,520,997
123,750 MBIA Inc 4,718,587
358,500 Merrill Lynch & Co Inc 12,217,680
212,300 Metlife Inc 5,555,891
225,400 MGIC Investment Corp 8,894,284
112,000 Moody's Corp 4,939,200
572,000 Morgan Stanley 21,078,200
265,100 National City Corp 7,322,062
241,400 PMI Group Inc 6,541,940
126,100 PNC Financial Services Group 5,665,673
217,200 Principal Financial Group 5,988,204
151,400 Radian Group Inc 5,279,318
136,300 Regions Financial Corp 4,413,394
23,500 Sovereign Bancorp Inc 319,130
84,500 Suntrust Banks Inc 4,753,125
119,700 Torchmark Corp 4,346,307
93,300 Union Planters Corp 2,567,616
343,400 Unumprovident Corp 4,464,200
133,700 US Bancorp 2,797,004
687,200 Wachovia Corp 24,381,856
606,950 Washington Mutual Inc 20,957,984
1,177,800 Wells Fargo & Co 53,413,230
--------------
559,791,272
--------------
HEALTH CARE -- 15.0%
93,500 Abbott Laboratories 3,330,470
287,000 Aetna Inc 12,088,440
95,000 Anthem Inc* 5,662,950
251,100 Boston Scientific Corp* 11,091,087
1,179,900 Bristol Myers Squibb Co 27,491,670
76,300 Cardinal Health Inc 4,371,227
14,200 Forest Laboratories Inc* 707,160
318,000 Guidant Corp* 11,371,680
206,400 HCA - The Healthcare Company 8,511,936
64,500 Health Net Inc* 1,619,595
193,000 Lincare Holdings Inc* 5,770,700
52,300 Medtronic Inc 2,337,810
2,051,700 Merck & Co Inc 108,227,175
52,400 Oxford Health Plans Inc* 1,467,200
42,800 Patterson Dental Co* 1,883,628
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
HEALTH CARE -- CONTINUED
2,228,900 Pfizer Inc 66,465,798
305,200 Pharmacia Corp 12,610,864
1,536,500 Schering Plough Corp 27,687,730
68,700 Stryker Corp 4,479,240
118,400 UnitedHealth Group Inc 9,815,360
58,400 Universal Health Services, Class B* 2,268,256
117,700 Varian Medical Systems Inc* 5,949,735
103,400 Wellpoint Health Network Inc* 7,032,234
167,300 Zimmer Holdings Inc* 7,426,447
--------------
349,668,392
--------------
INTEGRATED OILS -- 2.5%
59,500 Amerada Hess Corp 2,649,535
556,115 ConocoPhillips 28,195,031
223,510 Exxon Mobil Corp 7,603,810
536,500 Marathon Oil Corp 12,387,785
207,600 Occidental Petroleum Corp 6,207,240
--------------
57,043,401
--------------
MATERIALS & PROCESSING -- 1.8%
102,700 Ashland Inc 2,856,087
107,700 Avery Dennison Corp 6,181,980
126,000 Du Pont (E.I.) De Nemours 4,620,420
167,200 Ecolab Inc 8,201,160
66,100 Energizer Holdings Inc* 1,754,955
77,600 PPG Industries Inc 3,600,640
244,000 Sealed Air Corp* 8,849,880
221,300 Sherwin Williams Co 5,908,710
3,600 Sigma Aldrich Corp 157,752
--------------
42,131,584
--------------
OTHER -- 3.3%
216,800 3 M Co 27,180,216
38,500 Eaton Corp 2,731,575
123,700 Fortune Brands Inc 5,423,008
953,600 Honeywell International Inc 21,827,904
92,000 ITT Industries Inc 5,173,160
102,100 Johnson Controls Inc 7,959,716
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
OTHER -- CONTINUED
148,000 Textron Inc 5,347,240
--------------
75,642,819
--------------
OTHER ENERGY -- 3.7%
233,600 Apache Corp 15,249,408
67,100 BJ Services Co* 2,306,227
212,500 Burlington Resources Inc 9,849,375
83,700 Cooper Cameron Corp* 4,352,400
187,800 Devon Energy Corp 9,051,960
189,800 Ensco International Inc 5,310,604
100,200 EOG Resources Inc 4,138,260
560,300 Halliburton Co 11,351,678
153,900 Nabors Industries Ltd* 6,102,135
37,400 Noble Corp* 1,357,620
54,700 Pioneer Natural Resources Co* 1,430,405
123,865 Reliant Resources Inc.* 501,653
123,100 Smith International Inc* 4,291,266
189,200 Transocean Inc 4,294,840
63,600 Weatherford International Ltd* 2,546,544
157,000 XTO Energy Inc 3,957,970
--------------
86,092,345
--------------
PRODUCER DURABLES -- 4.5%
176,800 American Power Conversion Corp* 2,765,152
750,100 Boeing Co 20,672,756
63,900 Caterpillar Inc 3,003,300
96,500 Centex Corp 5,334,520
65,700 Cooper Industries Ltd 2,486,745
9,700 Danaher Corp 630,694
84,100 Deere & Co 3,480,058
98,800 DR Horton Inc 1,809,028
109,700 Emerson Electric Co 5,163,579
73,700 Lennar Corp 3,979,063
59,500 Lexmark International Group Inc* 3,713,395
136,500 Lockheed Martin Corp 6,240,780
93,546 Northrop Grumman Corp 8,110,438
131,800 Novellus System Inc* 3,841,970
11,000 NVR Inc* 3,651,450
59,000 Pulte Corp 2,998,970
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
PRODUCER DURABLES -- CONTINUED
279,500 Tyco International Ltd 4,136,600
252,300 United Technologies Corp 14,779,734
126,900 Waters Corp* 2,940,273
642,100 Xerox Corp* 5,778,900
--------------
105,517,405
--------------
TECHNOLOGY -- 10.2%
156,200 Applera Corp-Applied Biosystems Group 2,866,270
660,000 BMC Software Inc* 12,804,000
175,200 Brocade Communications Systems Inc* 706,056
132,300 Ceridian Corp* 1,825,740
1,580,700 Cisco Systems Inc* 22,098,186
1,019,700 Computer Associates International Inc 13,612,995
608,200 Compuware Corp* 2,244,258
655,900 Corning Inc* 3,227,028
803,500 Dell Computer Corp* 21,662,360
1,488,900 EMC Corp* 11,002,971
944,400 Gateway Inc* 2,058,792
1,012,700 Hewlett-Packard Co 16,051,295
106,500 IBM Corp 8,301,675
1,144,900 Intel Corp 19,760,974
186,300 Intuit Inc* 8,852,976
853,200 Lucent Technologies Inc* 1,399,248
922,800 Microsoft Corp 21,870,360
3,380,700 Oracle Corp* 40,433,172
307,200 Qualcomm Inc* 10,622,976
111,700 Rockwell Automation 2,570,217
150,700 Symantec Co* 6,098,829
1,371,700 Tellabs Inc* 8,353,653
--------------
238,424,031
--------------
UTILITIES -- 10.1%
70,400 Ameren Corp 2,744,896
165,800 American Electric Power Inc 3,611,124
902,071 AT & T Corp 16,724,396
851,200 Bellsouth Corp 18,445,504
158,900 Centerpoint Energy Inc 738,885
83,100 Cinergy Corp 2,678,313
126,100 Consolidated Edison Inc 4,917,900
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
UTILITIES -- CONTINUED
67,900 Constellation Energy Group Inc 1,780,338
85,000 DTE Energy Co 3,522,400
372,100 Edison International* 4,599,156
267,700 Exelon Corp 13,157,455
35,931 Firstenergy Corp 1,059,965
77,700 FPL Group Inc 4,351,977
77,100 Keyspan Corp 2,464,887
528,400 PG & E Corp* 6,737,100
63,300 Pinnacle West Capital Corp 1,933,182
149,100 PPL Corp 5,243,847
129,300 Public Service Enterprise Group Inc 4,477,659
768,700 Qwest Communications International Inc* 2,751,946
2,231,382 SBC Communications Inc 46,412,746
152,400 Sempra Energy 3,535,680
272,900 Southern Co 7,698,509
1,053,900 Sprint Corp (Fon Group) 13,384,530
32,400 Teco Energy Inc 358,992
111,900 TXU Corp 1,787,043
1,773,522 Verizon Communications Inc 61,328,391
--------------
236,446,821
--------------
TOTAL COMMON STOCKS (COST $2,720,323,950) 2,293,753,339
--------------
SHORT-TERM INVESTMENTS -- 8.1%
CASH EQUIVALENTS -- 3.7%
37,307,868 Dreyfus Money Market Fund(a) 37,307,868
$ 26,363,286 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(a) 26,363,286
21,749,711 Merrimac Money Market Fund(a) 21,749,711
--------------
85,420,865
--------------
U.S. GOVERNMENT -- 0.4%
$ 10,335,000 U.S. Treasury Bill, 1.14%, due 4/24/03(b) 10,316,010
--------------
</Table>
See accompanying notes to the financial statements.
8
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 4.0%
$ 92,078,552 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of
$92,081,314, and an effective yield of 0.36%,
collateralized by U.S. Treasury Note with a rate of
3.625%, maturity date of 3/31/04, and market value,
including accrued interest of $99,074,642. 92,078,552
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $187,815,427) 187,815,427
--------------
TOTAL INVESTMENTS -- 106.4%
(Cost $2,908,139,377) 2,481,568,766
Other Assets and Liabilities (net) -- (6.4%) (148,214,690)
--------------
TOTAL NET ASSETS -- 100.0% $2,333,354,076
==============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
(a) Represents investment of security lending collateral (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
See accompanying notes to the financial statements. 9
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$81,620,895 (cost $2,908,139,377) (Note 1) $2,481,568,766
Receivable for investments sold 40,314,367
Receivable for Fund shares sold 3,051,662
Dividends and interest receivable 3,843,617
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 127,575
Receivable for expenses reimbursed by Manager (Note 2) 64,736
--------------
Total assets 2,528,970,723
--------------
LIABILITIES:
Payable for investments purchased 98,451,808
Payable upon return of securities loaned (Note 1) 85,420,865
Payable for Fund shares repurchased 10,775,376
Payable to affiliate for (Note 2):
Management fee 594,807
Shareholder service fee 239,303
12b-1 fee - Class M 24,800
Administration fee - Class M 9,326
Accrued expenses 100,362
--------------
Total liabilities 195,616,647
--------------
NET ASSETS $2,333,354,076
==============
NET ASSETS CONSIST OF:
Paid-in capital $3,242,281,504
Accumulated undistributed net investment income 11,451,349
Accumulated net realized loss (493,878,942)
Net unrealized depreciation (426,499,835)
--------------
$2,333,354,076
==============
NET ASSETS ATTRIBUTABLE TO:
Class II shares $ 241,430,806
==============
Class III shares $1,141,724,817
==============
Class IV shares $ 463,253,730
==============
Class V shares $ 426,703,118
==============
Class M shares $ 60,241,605
==============
SHARES OUTSTANDING:
Class II 24,222,943
==============
Class III 114,365,861
==============
Class IV 46,463,874
==============
Class V 42,826,818
==============
Class M 6,049,202
==============
NET ASSET VALUE PER SHARE:
Class II $ 9.97
==============
Class III $ 9.98
==============
Class IV $ 9.97
==============
Class V $ 9.96
==============
Class M $ 9.96
==============
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends $ 46,286,252
Interest (including securities lending income of
$118,957) 974,270
-------------
Total income 47,260,522
-------------
EXPENSES:
Management fee (Note 2) 8,520,974
Custodian and transfer agent fees 398,398
Legal fees 142,635
Registration fees 56,510
Trustees fees and related expenses (Note 2) 55,165
Audit fees 49,504
Miscellaneous 49,362
Fees reimbursed by Manager (Note 2) (684,970)
-------------
8,587,578
Shareholder service fee (Note 2) - Class II 447,524
Shareholder service fee (Note 2) - Class III 1,876,518
Shareholder service fee (Note 2) - Class IV 705,267
Shareholder service fee (Note 2) - Class V 352,503
-------------
12b-1 fee (Note 2) - Class M 103,221
-------------
Administration fee (Note 2) - Class M 82,577
-------------
Net expenses 12,155,188
-------------
Net investment income 35,105,334
-------------
REALIZED AND UNREALIZED LOSS:
Net realized loss on:
Investments (295,003,418)
Closed futures contracts (7,564,879)
-------------
Net realized loss (302,568,297)
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (338,074,313)
Open futures contracts (508,208)
-------------
Net unrealized loss (338,582,521)
-------------
Net realized and unrealized loss (641,150,818)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(606,045,484)
=============
</Table>
See accompanying notes to the financial statements. 11
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 35,105,334 $ 37,068,955
Net realized loss (302,568,297) (164,915,777)
Change in net unrealized appreciation (depreciation) (338,582,521) (28,658,516)
-------------- --------------
Net decrease in net assets from operations (606,045,484) (156,505,338)
-------------- --------------
Distributions to shareholders from:
Net investment income
Class II (2,561,727) (1,721,073)
Class III (16,337,118) (17,730,889)
Class IV (9,588,920) (12,297,927)
Class V (5,745,428) (4,546,353)
Class M (370,335) --
-------------- --------------
Total distributions from net investment income (34,603,528) (36,296,242)
-------------- --------------
Net realized gains
Class II -- (109,969)
Class III -- (1,128,842)
Class IV -- (648,375)
Class V -- (350,905)
-------------- --------------
Total distributions from net realized gains -- (2,238,091)
-------------- --------------
(34,603,528) (38,534,333)
-------------- --------------
Net share transactions (Note 5):
Class II 115,982,471 71,357,721
Class III 143,190,844 (104,317,667)
Class IV (126,130,617) (495,915,214)
Class V 84,738,772 478,135,957
Class M 67,581,135 --
-------------- --------------
Increase (decrease) in net assets resulting from net
share transactions 285,362,605 (50,739,203)
-------------- --------------
Total decrease in net assets (355,286,407) (245,778,874)
NET ASSETS:
Beginning of period 2,688,640,483 2,934,419,357
-------------- --------------
End of period (including accumulated undistributed
net investment income of $11,451,349 and
$11,088,227, respectively) $2,333,354,076 $2,688,640,483
============== ==============
</Table>
12 See accompanying notes to the financial statements.
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89 $ 13.94 $ 16.62 $ 18.57 $ 19.98
-------- -------- -------- ------- -------
Income from investment operations:
Net investment income 0.14+ 0.17+ 0.20+ 0.23+ 0.25+
Net realized and unrealized gain
(loss) (2.91) (1.04) 0.03* 2.29 2.55
-------- -------- -------- ------- -------
Total from investment operations (2.77) (0.87) 0.23 2.52 2.80
-------- -------- -------- ------- -------
Less distributions to shareholders:
From net investment income (0.15) (0.17) (0.18) (0.24) (0.29)
From net realized gains -- (0.01) (2.73) (4.23) (3.92)
-------- -------- -------- ------- -------
Total distributions (0.15) (0.18) (2.91) (4.47) (4.21)
-------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.97 $ 12.89 $ 13.94 $ 16.62 $ 18.57
======== ======== ======== ======= =======
TOTAL RETURN(a) (21.63)% (6.29)% 0.75% 13.61% 14.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $241,431 $176,456 $114,454 $95,041 $41,684
Net expenses to average daily net
assets 0.55% 0.55% 0.55% 0.55% 0.55%
Net investment income to average
daily net assets 1.30% 1.27% 1.21% 1.21% 1.29%
Portfolio turnover rate 74% 69% 81% 90% 71%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.03% 0.02% 0.02% 0.02% 0.22%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
* The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain/ loss for the period due to
the timing of purchases and redemptions of Fund shares in relation to
the fluctuating market values of the Fund.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 13
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.90 $ 13.95 $ 16.63 $ 18.59 $ 19.99
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income 0.15+ 0.18+ 0.20+ 0.24+ 0.26+
Net realized and unrealized gain
(loss) (2.92) (1.05) 0.04* 2.28 2.55
---------- ---------- ---------- ---------- ----------
Total from investment operations (2.77) (0.87) 0.24 2.52 2.81
---------- ---------- ---------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.15) (0.17) (0.19) (0.25) (0.29)
From net realized gains -- (0.01) (2.73) (4.23) (3.92)
---------- ---------- ---------- ---------- ----------
Total distributions (0.15) (0.18) (2.92) (4.48) (4.21)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 9.98 $ 12.90 $ 13.95 $ 16.63 $ 18.59
========== ========== ========== ========== ==========
TOTAL RETURN(a) (21.59)% (6.23)% 0.83% 13.66% 15.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $1,141,725 $1,321,634 $1,532,124 $1,623,734 $1,780,011
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 1.34% 1.33% 1.27% 1.27% 1.36%
Portfolio turnover rate 74% 69% 81% 90% 71%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.03% 0.02% 0.02% 0.02% 0.22%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
* The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain/ loss for the period due to
the timing of purchases and redemptions of Fund shares in relation to
the fluctuating market values of the Fund.
+ Computed using average shares outstanding throughout the period.
14 See accompanying notes to the financial statements.
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ------------- ------------- -------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89 $ 13.94 $ 16.62 $ 18.58 $ 19.99
-------- -------- ---------- ---------- ----------
Income from investment operations:
Net investment income 0.16+ 0.18+ 0.21+ 0.25+ 0.27+
Net realized and unrealized gain
(loss) (2.92) (1.04) 0.04* 2.28 2.55
-------- -------- ---------- ---------- ----------
Total from investment operations (2.76) (0.86) 0.25 2.53 2.82
-------- -------- ---------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.16) (0.18) (0.20) (0.26) (0.31)
From net realized gains -- (0.01) (2.73) (4.23) (3.92)
-------- -------- ---------- ---------- ----------
Total distributions (0.16) (0.19) (2.93) (4.49) (4.23)
-------- -------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 9.97 $ 12.89 $ 13.94 $ 16.62 $ 18.58
======== ======== ========== ========== ==========
TOTAL RETURN(a) (21.55)% (6.20)% 0.92% 13.74% 15.07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $463,254 $744,813 $1,287,842 $1,343,460 $1,543,655
Net expenses to average daily net
assets 0.44% 0.44% 0.44% 0.44% 0.44%
Net investment income to average
daily net assets 1.39% 1.36% 1.31% 1.32% 1.41%
Portfolio turnover rate 74% 69% 81% 90% 71%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.03% 0.02% 0.02% 0.02% 0.22%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
* The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain/ loss for the period due to
the timing of purchases and redemptions of Fund shares in relation to
the fluctuating market values of the Fund.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 15
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS V SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED
FEBRUARY 28/29,
-------------------------
2003 2002(1)
----------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.88 $ 14.00
-------- --------
Income from investment operations:
Net investment income 0.16+ 0.13+
Net realized and unrealized loss (2.92) (1.10)
-------- --------
Total from investment operations (2.76) (0.97)
-------- --------
Less distributions to shareholders:
From net investment income (0.16) (0.14)
From net realized gains -- (0.01)
-------- --------
Total distributions (0.16) (0.15)
-------- --------
NET ASSET VALUE, END OF PERIOD $ 9.96 $ 12.88
======== ========
TOTAL RETURN(a) (21.55)% (6.96)%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $426,703 $445,738
Net expenses to average daily net assets 0.42% 0.42%*
Net investment income to average daily net assets 1.41% 1.46%*
Portfolio turnover rate 74% 69%
Fees and expenses reimbursed by the Manager to
average daily net assets: 0.03% 0.02%*
</Table>
(1) Period from July 2, 2001(commencement of operations) through February
28, 2002.
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
* Annualized.
+ Computed using average shares outstanding throughout the period.
++ Not Annualized.
16 See accompanying notes to the financial statements.
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS M SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM
APRIL 15, 2002
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 28, 2003
----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89
-------
Income from investment operations:
Net investment income 0.11+
Net realized and unrealized loss (2.94)
-------
Total from investment operations (2.83)
-------
Less distributions to shareholders:
From net investment income (0.10)
-------
Total distributions (0.10)
-------
NET ASSET VALUE, END OF PERIOD $ 9.96
=======
TOTAL RETURN(a) (22.03)%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $60,242
Net expenses to average daily net assets 0.78%*
Net investment income to average daily net assets 1.18%*
Portfolio turnover rate 74%
Fees and expenses reimbursed by the Manager to average
daily net assets: 0.03%*
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
* Annualized.
+ Computed using average shares outstanding throughout the period.
++ Not Annualized.
See accompanying notes to the financial statements. 17
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO U.S. Core Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in U.S. equity
securities. The Fund's benchmark is the S&P 500 Index.
Throughout the year ended February 28, 2003, the Fund had four classes of
shares outstanding: Class II, Class III, Class IV, and Class V. Effective
April 15, 2002, the Fund began to offer Class M shares. Class M shares
bear an administrative fee and a 12b-1 fee. (See Note 2) The principal
economic difference among the classes of shares is the level of fees borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested in a particular fund or with GMO, as more fully outlined in the
Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
18
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 2003.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a
19
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. As of February 28,
2003 the Fund held no open swap agreements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $81,620,895, collateralized by cash in the amount of
$85,420,865, which was invested in short-term instruments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
20
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income were $38,534,333
and $34,603,528, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consists of $11,312,029 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to losses on wash sales.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $170,940,887 expiring in 2010 and $190,371,968 expiring in 2011.
The Fund elected to defer to March 1, 2003 post-October losses of
$104,178,933.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investent income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to differing treatments
for the sale of partnership holdings and redemptions in kind transactions.
Net losses resulting from redemption in kind transactions were $46,047.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
$(138,684) $324,862 $(186,178)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on
21
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
securities sold, the cost of securities is determined on the identified
cost basis. Dividends representing a return of capital are reflected as a
reduction of cost, when the amount of the return of capital is
conclusively determined.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service, 12b-1, and
administration fees, which are directly attributable to a class of shares,
are charged to that class' operations.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .22%
for Class II shares, .15% for Class III shares, .105% for Class IV shares
and .085% for Class V shares.
The Fund pays GMO an administrative fee monthly at the annual rate of .20%
of the average daily Class M net assets for support services provided to
Class M shareholders.
Fund Distributors, Inc. (the "Distributor") serves as the Fund's
distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the
Fund, Class M shares of the Fund pay a fee, at the annual rate of .25% of
average daily Class M net assets for any activities or expenses primarily
intended to result in the sale of Class M shares of the Fund. This fee may
be spent by the Distributor on personal services rendered to Class M
shareholders of the Fund and/or maintenance of Class M shareholder
accounts.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees (Class II,
Class III, Class IV and Class V only), administrative fee (Class M only),
12b-1 fee (Class M only), fees and expenses of the independent Trustees of
the Trust (including legal 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, interest expense and transfer taxes)
exceed the management fee.
22
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
As of February 28, 2003, greater than 10% of the Fund's shares were held
by accounts for which the Manager has investment discretion.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $37,314. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$2,268,582,982 and $1,821,217,648 respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$2,936,316,435 $53,823,431 $(508,571,100) $(454,747,669)
</Table>
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 14.0% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder may
have a material effect on the Fund.
23
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class II: ----------- ------------- ----------- -------------
Shares sold 13,418,875 $ 146,502,245 5,999,733 $ 78,192,785
Shares issued to shareholders
in reinvestment of distributions 158,481 1,717,067 84,554 1,110,236
Shares repurchased (3,048,932) (32,236,841) (600,687) (7,945,300)
----------- ------------- ----------- -------------
Net increase 10,528,424 $ 115,982,471 5,483,600 $ 71,357,721
=========== ============= =========== =============
</Table>
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ----------- -------------
Shares sold 38,472,240 $ 437,495,310 14,080,984 $ 183,397,230
Shares issued to shareholders
in reinvestment of distributions 1,078,206 11,858,975 1,022,084 13,448,177
Shares repurchased (27,621,256) (306,163,441) (22,459,839) (301,163,074)
----------- ------------- ----------- -------------
Net increase (decrease) 11,929,190 $ 143,190,844 (7,356,771) $(104,317,667)
=========== ============= =========== =============
</Table>
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class IV: ----------- ------------- ----------- -------------
Shares sold 30,894,720 $ 334,668,818 12,510,519 $ 150,062,926
Shares issued to shareholders
in reinvestment of distributions 634,377 7,001,006 951,389 12,473,256
Shares repurchased (42,856,570) (467,800,441) (48,070,262) (658,451,396)
----------- ------------- ----------- -------------
Net decrease (11,327,473) $(126,130,617) (34,608,354) $(495,915,214)
=========== ============= =========== =============
</Table>
24
<Page>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Period from July 2, 2001
(commencement of
Year Ended operations)
February 28, 2003 through February 28, 2002
------------------------ -------------------------
Shares Amount Shares Amount
Class V: ----------- ----------- ----------- ------------
Shares sold 8,112,537 $84,103,316 34,374,438 $475,050,242
Shares issued to shareholders
in reinvestment of distributions 519,722 5,681,255 371,986 4,873,176
Shares repurchased (416,143) (5,045,799) (135,722) (1,787,461)
----------- ----------- ----------- ------------
Net increase 8,216,116 $84,738,772 34,610,702 $478,135,957
=========== =========== =========== ============
</Table>
<Table>
<Caption>
Period from April 15, 2002
(commencement of
operations)
through February 28, 2003
----------------------------
Shares Amount
Class M: ------------ -------------
Shares sold 14,124,184 $150,489,047
Shares issued to shareholders
in reinvestment of distributions 35,653 370,335
Shares repurchased (8,110,635) (83,278,247)
----------- ------------
Net increase 6,049,202 $ 67,581,135
=========== ============
</Table>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows.
FUTURES CONTRACTS
<Table>
<Caption>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Appreciation
--------- ------------------------------------- --------------- ------------ --------------
Buys
61 S&P 500 March 2003 $12,823,725 $70,776
=======
</Table>
At February 28, 2003 the Fund had sufficient cash and/or securities to
cover any commitments or margin requirements of the relevant broker or
exchange.
25
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO U.S. CORE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Core Fund (the "Fund") (a
series of GMO Trust) at February 28, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
26
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
27
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
28
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Principal Occupation(s)
Name, Address, Position(s) Term of Office(4) and Length During Past
and Age Held with Fund of Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
29
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Asset
Allocation team at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO U.S. Sector Fund returned -16.8% for the fiscal
year ended February 28, 2003, as compared to -22.7% for its S&P 500 benchmark,
and -22.2% as compared to the Russell 3000 Index. The GMO U.S. Sector Fund
currently invests in the GMO U.S. Core Fund, the GMO Small Cap Value Fund and
the GMO Real Estate Fund.
The Fund's outperformance relative to the S&P 500 for the fiscal year was due to
allocation in favor of small cap value stocks and Real Estate Investment Trusts
(REITs). In another down year, both small cap value stocks and REITs again
dominated all other market segments. The benchmark for the Small Cap Value Fund,
the Russell 2500 Value Index, outperformed the S&P 500 by 6.1%. The positive
impact of the decision to overweight Small Cap Value was augmented by the
overweight in REITs, whose Morgan Stanley REIT Index benchmark had a positive
return of 0.8% for the fiscal year, outperforming the S&P 500 by 23.5%.
Implementation within the Fund also added to performance as the U.S. Core Fund
outperformed its benchmark by 1.1%. This outperformance was partly offset by the
Real Estate Fund underperforming its benchmark by 3.0%.
OUTLOOK
Small cap value stocks remain attractively valued relative to the still
over-priced S&P 500 and Russell 3000 Indexes. In the face of increased risk and
somewhat less attractive valuations we have reduced the Fund's overweight to
REITs. We expect the Fund to benefit from an ongoing recovery in the Small cap
value and REIT sectors. Our style, which combines value and momentum
disciplines, is well suited to the continued choppy, but value-driven market
environment we anticipate.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO U.S. SECTOR FUND CLASS III SHARES AND THE S&P 500 INDEX
AS OF FEBRUARY 28, 2003 GMO U.S. SECTOR FUND S&P 500 INDEX
2/28/93 $10,000 $10,000
3/31/93 $10,260 $10,211
6/30/93 $10,503 $10,261
9/30/93 $11,051 $10,526
12/31/93 $11,261 $10,770
3/31/94 $11,037 $10,361
6/30/94 $11,017 $10,405
9/30/94 $11,506 $10,914
12/31/94 $11,629 $10,912
3/31/95 $12,688 $11,974
6/30/95 $14,084 $13,118
9/30/95 $15,611 $14,160
12/31/95 $16,650 $15,012
3/31/96 $17,228 $15,818
6/30/96 $17,816 $16,528
9/30/96 $18,311 $17,039
12/31/96 $19,686 $18,459
3/31/97 $20,131 $18,954
6/30/97 $22,588 $22,263
9/30/97 $25,238 $23,931
12/31/97 $25,324 $24,618
3/31/98 $27,966 $28,052
6/30/98 $27,841 $28,978
9/30/98 $24,354 $26,096
12/31/98 $28,272 $31,654
3/31/99 $28,332 $33,231
6/30/99 $31,022 $35,573
9/30/99 $28,750 $33,351
12/31/99 $32,318 $38,314
3/31/2000 $33,768 $39,192
6/30/2000 $33,120 $38,151
9/30/2000 $35,160 $37,782
12/31/2000 $35,498 $34,826
3/31/2001 $34,213 $30,697
6/30/2001 $37,459 $32,493
9/30/2001 $34,110 $27,724
12/31/2001 $38,078 $30,686
3/31/2002 $39,748 $30,771
6/30/2002 $37,242 $26,648
9/30/2002 $31,084 $22,045
12/31/2002 $33,036 $23,905
2/28/2003 $31,572 $22,929
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS 10 YEARS
Class III -16.79% 3.31% 12.18%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
MUTUAL FUNDS -- 100.0%
128,973 GMO Real Estate Fund, Class III 1,352,922
358,038 GMO Small Cap Value Fund, Class III 3,512,349
829,874 GMO U.S. Core Fund, Class III 8,282,138
-------------
TOTAL MUTUAL FUNDS (COST $15,428,803) 13,147,409
-------------
SHORT-TERM INVESTMENTS -- 0.1%
REPURCHASE AGREEMENT -- 0.1%
$ 7,840 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of $7,840
and an effective yield of 0.36%, collateralized by a
U.S. Treasury Obligation with a rate of 3.625%,
maturity date of 3/31/04 and market value, including
accrued interest of $8,434. 7,840
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $7,840) 7,840
-------------
TOTAL INVESTMENTS -- 100.1%
(Cost $15,436,643) 13,155,249
Other Assets and Liabilities (net) -- (0.1%) (10,917)
-------------
TOTAL NET ASSETS -- 100.0% $ 13,144,332
=============
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $15,436,643) (Note 1) $13,155,249
Receivable for expenses reimbursed by Manager (Note 2) 8,739
-----------
Total assets 13,163,988
-----------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 3,332
Shareholder service fee 1,515
Accrued expenses 14,809
-----------
Total liabilities 19,656
-----------
NET ASSETS $13,144,332
===========
NET ASSETS CONSIST OF:
Paid-in capital $14,937,408
Accumulated undistributed net investment income 133,406
Accumulated net realized gain 354,912
Net unrealized depreciation (2,281,394)
-----------
$13,144,332
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $13,144,332
===========
SHARES OUTSTANDING:
Class III 2,903,487
===========
NET ASSET VALUE PER SHARE:
Class III $ 4.53
===========
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends from investment company shares $ 127,119
Interest 1,228
-----------
Total income 128,347
-----------
EXPENSES:
Management fee (Note 2) 21,756
Audit fees 19,031
Registration fees 4,466
Custodian and transfer agent fees 2,107
Trustees fees and related expenses (Note 2) 1,106
Legal fees 22
Miscellaneous 824
Fees reimbursed by Manager (Note 2) (26,428)
-----------
22,884
Indirectly incurred fees waived or borne by Manager (Note
2) (21,754)
-----------
1,130
-----------
Shareholder service fee (Note 2) -- Class III 9,889
Shareholder service fee waived (Note 2) -- Class III (9,882)
-----------
7
-----------
Net expenses 1,137
-----------
Net investment income 127,210
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (67,992)
Realized gains distributions from investment company
shares 599,610
-----------
Net realized gain on investments 531,618
-----------
Change in net unrealized appreciation (depreciation) on
investments (2,256,923)
-----------
Net realized and unrealized loss (1,725,305)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(1,598,095)
===========
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 127,210 $ 5,225
Net realized gain 531,618 18,064
Change in net unrealized appreciation (depreciation) (2,256,923) 1,196
----------- --------
Net increase (decrease) in net assets from
operations (1,598,095) 24,485
----------- --------
Distributions to shareholders from:
Net investment income
Class III (6,056) (7,677)
----------- --------
Total distributions from net investment income (6,056) (7,677)
----------- --------
Net share transactions (Note 5):
Class III 14,478,433 --
----------- --------
Increase in net assets resulting from net share
transactions 14,478,433 --
----------- --------
Total increase in net assets 12,874,282 16,808
NET ASSETS:
Beginning of period 270,050 253,242
----------- --------
End of period (including accumulated undistributed
net investment income of $133,406 and $5,527,
respectively) $13,144,332 $270,050
=========== ========
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ---------- -------- -------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.45 $ 5.11 $ 4.84 $ 4.63 $ 8.53
------- ------ ------ ------ -------
Income from investment operations:
Net investment income(a)+ 0.09 0.11 0.14 0.09 0.10
Net realized and unrealized gain
(loss) (1.00) 0.39 0.35 0.54 0.27
------- ------ ------ ------ -------
Total from investment operations (0.91) 0.50 0.49 0.63 0.37
------- ------ ------ ------ -------
Less distributions to shareholders:
From net investment income (0.01) (0.16) (0.17) (0.23) (0.25)
From net realized gains -- -- (0.05) (0.19) (4.02)
------- ------ ------ ------ -------
Total distributions (0.01) (0.16) (0.22) (0.42) (4.27)
------- ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $ 4.53 $ 5.45 $ 5.11 $ 4.84 $ 4.63
======= ====== ====== ====== =======
TOTAL RETURN(b) (16.79)% 9.80% 10.14% 13.35% 3.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $13,144 $ 270 $ 253 $1,602 $16,830
Net expenses to average daily net
assets 0.02%(d) 0.00%(c) 0.00% 0.00% 0.00%
Net investment income to average
daily net assets(a) 1.93% 1.99% 2.71% 1.85% 1.51%
Portfolio turnover rate 24% 2% 35% 22% 16%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.88% 8.97% 3.05% 0.52% 0.57%
</Table>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the Fund
invests.
(b) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(c) Net expenses were less than 0.01%.
(d) Net expenses exclude expenses incurred indirectly through investments in
underlying funds. (See Note 1)
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 5
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO U.S. Sector Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks total return greater than that of the
S&P 500 Index through investment in common stocks, either directly or
through investment in Class III shares of other Funds of the Trust. The
financial statements of the underlying funds should be read in conjunction
with the Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Portfolio securities listed on a securities exchange
for which market quotations are readily available are valued at the last
quoted sale price or official closing price on each business day, or if
there is no such reported sale or official closing price, at the most
recent quoted bid price. Unlisted securities for which market quotations
are readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates fair value. Securities for
which quotations are not readily available or whose values the Manager has
determined to be unreliable are valued at fair value as determined in good
faith by the Trustees or other persons acting at their direction. A
security's value may be deemed unreliable if, for example, the Manager
becomes aware of information or events occurring after the close of a
foreign market that would materially affect that security's value.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
6
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. For the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income were $7,677 and
$6,056, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $133,406 and $553,465 of undistributed ordinary income
and undistributed long-term capital gains, respectively. The temporary
differences between book and tax basis distributable earnings are
primarily due to losses on wash sale transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code, of $55,779 and $97,318 expiring in 2009 and 2011, respectively.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of
7
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under U.S. federal
tax rules versus U.S. GAAP. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain
----------------- -----------------
$6,725 $(6,725)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Dividend income is recorded on the ex-dividend date. Non
cash dividends, if any, are recorded at the fair market value of the
securities received. Interest income is recorded on the accrual basis. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur certain fees and expenses indirectly as
a shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary. (See Note 2.)
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares. The Fund will invest in Class III shares of each underlying fund
being offered. Like the management fee (as described below), the
shareholder service fee will be waived (but not below zero) to the extent
of the indirect shareholder service fees
8
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
paid in connection with the Fund's investment in shares of underlying
Funds. For the year ended February 28, 2003, the shareholder service fees
incurred indirectly by the Fund were .15% of the Fund's average daily net
assets.
GMO has entered into a binding agreement effective until June 30, 2003 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding shareholder service fees, and the following expenses:
fees and expenses of the independent trustees of the Trust (including
legal 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,
interest expenses and transfer taxes ("fund expenses")) plus the amount of
fees and expenses, excluding shareholder service fees, and fund expenses
(as defined above), incurred indirectly by the Fund through investment in
underlying Funds exceed the management fee. Because GMO will not reimburse
expenses incurred indirectly to the extent they exceed .33%, and because
the amount of fees and expenses incurred indirectly by the Fund will vary,
the operating expenses (excluding shareholder service fees and fund
expenses) and investment-related expenses incurred indirectly by the Fund
through investment in underlying Funds may exceed .33% of the Fund's
average daily net assets. For the year ended February 28, 2003, operating
expenses (excluding shareholder service fees) incurred indirectly by the
Fund were .37% of the Fund's average daily net assets, and indirect
investment-related expenses (including, but not limited to, interest
expense, foreign audit expense, and investment-related legal expense)
incurred by the fund were less than .001% of the Fund's average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 2003 was $1,106. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$16,817,761 and $1,577,341, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$15,482,099 $-- $(2,326,850) $(2,326,850)
</Table>
9
<Page>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 98.3% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders may have a
material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
----------------------- -------------------
Shares Amount Shares Amount
Class III: ---------- ----------- ----------- ------
Shares sold 2,852,744 $14,472,377 -- $--
Shares issued to shareholders
in reinvestment of distributions 1,214 6,056 -- --
Shares repurchased -- -- -- --
---------- ----------- ----------- ---
Net increase 2,853,958 $14,478,433 -- $--
========== =========== =========== ===
</Table>
6. SUBSEQUENT EVENT
Effective the close of business on February 28, 2003, the Fund's benchmark
changed from the S&P 500 Index to the Russell 3000 Index.
10
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO U.S. SECTOR FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Sector Fund (the "Fund")
(a series of GMO Trust) at February 28, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
11
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
12
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
13
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer (1997
c/o GMO Trust Officer of the Trust Officer since October 2002; - present), Chief Operating
40 Rowes Wharf Vice President from August Officer (2000 - present) and
Boston, MA 02110 1998 - October 2002. Member, Grantham, Mayo, Van
Age: 47 Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
14
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the U.S.
Active Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Value Fund returned -22.3% for the fiscal year
ending February 28, 2003, trailing the Russell 1000 Value Index return of
- -19.3%. The Value Fund outperformed the S&P 500 return of -22.7% during the
period.
The Fund utilizes fundamental investment principals and quantitative models to
identify an attractively valued universe of investable companies. For the
period, the Fund's models produced an investment universe with
uncharacteristically poor returns, lagging the Russell 1000 Value Index return
by 8.7%. While our fundamental decisions significantly added to the models' base
return, we were unable to compensate for the negative alpha generated by the
models.
Sector selection added 2.2% to returns. Our underweight positions in the auto
and transportation, consumer discretionary, and utilities sectors all added
value, as did our overweight positions in consumer staples, financial services,
and healthcare. The only sector weighting to detract from returns was our slight
overweight in technology shares.
Stock selection subtracted 5.2% from total returns. In particular, our stock
selection within the utility sector negatively impacted returns by 4.6%. Our
three worst relative contributors -- TXU Corp., Qwest Communications, and Xcel
Energy -- came from the sector. Rapidly deteriorating fundamentals, liquidity
concerns, and corporate governance issues afflicted all three companies during
the year. On the positive side, Occidental Petroleum benefited from rising
commodity prices and growing recognition of its transformation into a pure
exploration and production energy company. Sealed Air inked a deal to limit its
asbestos exposure, causing the stock to more than double in the second half of
the year. Our third best performing stock was Fox Entertainment, which delivered
strong results in both filmed entertainment and network operations.
OUTLOOK
The U.S. market faces an intimidating gauntlet of hazards, both real and
perceived. Excessive valuations do not present the same headwind for the market
as in the recent past, but despite three years of contraction, the market's
overall valuation can only be charitably described as "fair" when placed in
historical context. Anemic economic growth with continuing disinflation has
spawned ominous comparisons to the economic fate of Japan; neither of these two
factors engenders much confidence in the outlook for corporate profits. New
revelations in the corporate crime wave seem to have abated somewhat, but the
damage to investor confidence remains unrepaired. Add to the mix a geopolitical
landscape riddled with uncertainty, and the market's proverbial wall of worry
seems convincingly insurmountable.
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
Perhaps therein lies the opportunity; in our minds, the more likely outcome is
not at the extremes but somewhere in the middle. The market is obsessed with
negative outcomes, and while we certainly do not discount the potential impact
of any one of these threats, we do discount the probability that all of them
occur. After three grinding years of negative returns, the market is far more
pessimistic than it was when the decline began, and the contrarian in us finds
this reversal intriguing and potentially investable.
The tug-of-war regarding the overall market's prospects is interesting, but more
importantly, we are increasingly confident about our portfolio. The high
volatility we have witnessed over the past few years, not just in broader
averages but also individual issues, has enabled us to assemble a portfolio of
high-quality, franchise names selling at significant discounts to fair value. As
we survey the investable universe and the broader market as a whole, we are
increasingly confident we have an "all-weather" portfolio that can prosper in
any environment, rain or shine.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO VALUE FUND CLASS III SHARES AND THE
RUSSELL 1000 VALUE INDEX
AS OF FEBRUARY 28, 2003 GMO VALUE FUND RUSSELL 1000 VALUE INDEX
2/28/93 $10,000 $10,000
3/31/93 $10,170 $10,295
6/30/93 $10,506 $10,597
9/30/93 $10,869 $11,120
12/31/93 $11,235 $11,087
3/31/94 $10,799 $10,698
6/30/94 $10,749 $10,765
9/30/94 $11,275 $11,041
12/31/94 $11,304 $10,868
3/31/95 $12,436 $11,902
6/30/95 $13,607 $12,968
9/30/95 $14,754 $14,101
12/31/95 $15,620 $15,037
3/31/96 $16,562 $15,888
6/30/96 $17,027 $16,162
9/30/96 $17,126 $16,632
12/31/96 $18,858 $18,291
3/31/97 $18,978 $18,760
6/30/97 $21,773 $21,525
9/30/97 $24,193 $23,669
12/31/97 $24,594 $24,727
3/31/98 $27,345 $27,609
6/30/98 $27,330 $27,733
9/30/98 $24,353 $24,520
12/31/98 $27,461 $28,591
3/31/99 $27,333 $29,001
6/30/99 $30,644 $32,271
9/30/99 $27,493 $29,110
12/31/99 $28,201 $30,692
3/31/2000 $27,436 $30,838
6/30/2000 $27,390 $29,393
9/30/2000 $29,135 $31,705
12/31/2000 $31,209 $32,845
3/31/2001 $31,616 $30,921
6/30/2001 $33,027 $32,430
9/30/2001 $30,651 $28,880
12/31/2001 $32,099 $31,009
3/31/2002 $31,992 $32,277
6/30/2002 $29,179 $29,528
9/30/2002 $23,523 $23,985
12/31/2002 $25,473 $26,195
2/28/2003 $24,282 $24,880
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
1 YEAR 5 YEAR 10 YEAR INCEPTION
Class III -22.29% -1.44% 9.28% n/a
1/10/2002
Class M -22.56% n/a n/a -22.05%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Performance for Class M shares may vary due to
different fees. Past performance is not indicative of future performance.
Information is unaudited.
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
COMMON STOCKS -- 97.3%
AUTO & TRANSPORTATION -- 1.7%
36,900 General Motors Corp 1,246,113
29,300 Union Pacific Corp 1,617,067
-------------
2,863,180
-------------
CONSUMER DISCRETIONARY -- 5.3%
38,800 Carnival Corp 891,236
40,500 Cendant Corp* 498,555
99,600 Federated Department Stores Inc* 2,539,800
64,600 Fox Entertainment Group Inc, Class A* 1,726,758
20,200 Home Depot Inc 473,690
27,100 Jones Apparel Group Inc* 768,556
14,500 Omnicom Group 768,210
38,600 Viacom Inc, Class B* 1,433,218
-------------
9,100,023
-------------
CONSUMER STAPLES -- 8.5%
139,100 Altria Group Inc 5,376,215
20,300 Constellation Brands Inc, Class A* 499,989
123,000 CVS Corp 3,062,700
13,700 Dean Foods Co* 577,729
85,700 Kraft Foods Inc 2,537,577
33,300 Kroger Co* 440,226
63,600 PepsiAmericas Inc 777,192
43,100 Safeway Inc* 857,259
41,900 Tyson Foods Inc, Class A 385,480
-------------
14,514,367
-------------
FINANCIAL SERVICES -- 33.6%
90,200 ACE Ltd 2,499,442
117,800 Allstate Corp 3,726,014
57,400 Bank of America Corp 3,974,376
23,100 Bear Stearns Cos Inc 1,446,984
105,800 Citigroup Inc 3,527,372
25,200 Compass Bankshares Inc 801,864
54,900 Equity Office Properties Trust 1,346,697
53,600 Equity Residential Properties Trust 1,301,408
87,500 Fannie Mae 5,608,750
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
FINANCIAL SERVICES -- CONTINUED
103,900 FleetBoston Financial Corp 2,551,784
45,300 Freddie Mac 2,475,645
20,000 Greenpoint Financial Corp 849,600
136,900 J.P. Morgan Chase & Co 3,104,892
57,900 Merrill Lynch & Co Inc 1,973,232
54,200 Morgan Stanley 1,997,270
39,500 Simon Property Group Inc, REIT 1,368,280
230,400 Sovereign Bancorp Inc 3,128,832
245,652 Travelers Property Casualty Corp, Class A 3,844,454
70,200 US Bancorp 1,468,584
89,200 Wachovia Corp 3,164,816
74,650 Washington Mutual Inc 2,577,664
136,500 Willis Group Holdings Ltd* 3,419,325
31,200 Wilmington Trust Corp 886,080
-------------
57,043,365
-------------
HEALTH CARE -- 11.0%
34,497 Aetna Inc 1,453,014
31,200 Anthem Inc* 1,859,832
146,600 Bristol Myers Squibb Co 3,415,780
51,700 Merck & Co Inc 2,727,175
237,100 Pfizer Inc 7,070,322
118,100 Schering Plough Corp 2,128,162
-------------
18,654,285
-------------
INTEGRATED OILS -- 8.3%
127,615 ConocoPhillips 6,470,081
12,500 Exxon Mobil Corp 425,250
238,800 Occidental Petroleum Corp 7,140,120
-------------
14,035,451
-------------
MATERIALS & PROCESSING -- 4.5%
72,000 Cabot Corp 1,576,800
64,900 Engelhard Corp 1,346,675
99,900 Hercules Inc* 802,197
135,600 Olin Corp 2,237,400
48,600 Sealed Air Corp* 1,762,722
-------------
7,725,794
-------------
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
OTHER -- 1.5%
110,300 Honeywell International Inc 2,524,767
-------------
OTHER ENERGY -- 3.1%
50,600 Anadarko Petroleum Corp 2,331,648
73,400 Valero Energy Corp 2,863,334
-------------
5,194,982
-------------
PRODUCER DURABLES -- 3.2%
58,100 Centex Corp 3,211,768
44,450 DR Horton Inc 813,879
15,400 Lennar Corp 831,446
16,900 Pitney Bowes Inc 524,576
-------------
5,381,669
-------------
TECHNOLOGY -- 5.8%
122,800 Hewlett-Packard Co 1,946,380
53,400 Intel Corp 921,684
302,200 Oracle Corp* 3,614,312
127,400 Raytheon Co 3,449,992
-------------
9,932,368
-------------
UTILITIES -- 10.8%
225,200 Bellsouth Corp 4,880,084
91,200 NiSource Inc 1,544,928
47,900 Questar Corp 1,335,452
251,100 Qwest Communications International Inc* 898,938
131,500 SBC Communications Inc 2,735,200
199,100 Verizon Communications Inc 6,884,878
-------------
18,279,480
-------------
TOTAL COMMON STOCKS (COST $176,795,923) 165,249,731
-------------
SHORT-TERM INVESTMENTS -- 2.5%
CASH EQUIVALENTS -- 0.0%
16,597 Dreyfus Money Market Fund(a) 16,597
$ 11,728 Harris Trust & Savings Bank Eurodollar Time Deposit,
1.26%, due 3/24/03(a) 11,728
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
CASH EQUIVALENTS -- CONTINUED
9,675 Merrimac Money Market Fund(a) 9,675
-------------
38,000
-------------
REPURCHASE AGREEMENT -- 2.5%
$ 4,273,247 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of
$4,273,375, and an effective yield of 0.36%,
collateralized by a U.S. Treasury Bond with a rate of
3.625%, maturity date of 3/31/04, and a market value,
including accrued interest of $4,597,925. 4,273,247
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $4,311,247) 4,311,247
-------------
TOTAL INVESTMENTS -- 99.8%
(Cost $181,107,170) 169,560,978
Other Assets and Liabilities (net) -- 0.2% 346,242
-------------
TOTAL NET ASSETS -- 100.0% $ 169,907,220
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</Table>
<Table>
REIT - Real Estate Investment Trust
</Table>
* Non-income producing security.
(a) Represents investment of security lending collateral (Note 1).
4 See accompanying notes to the financial statements.
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value, including securities on loan of
$36,300 (cost $181,107,170) (Note 1) $169,560,978
Receivable for investments sold 2,724,033
Receivable for Fund shares sold 2,311
Dividends and interest receivable 255,815
Receivable for expenses reimbursed by Manager (Note 2) 17,192
------------
Total assets 172,560,329
------------
LIABILITIES:
Payable for investments purchased 1,240,623
Payable upon return of securities loaned (Note 1) 38,000
Payable for Fund shares repurchased 1,253,322
Payable to affiliate for (Note 2):
Management fee 61,198
Shareholder service fee 19,217
12b-1 Distribution fee - Class M 2,840
Administration fee - Class M 985
Accrued expenses 36,924
------------
Total liabilities 2,653,109
------------
NET ASSETS $169,907,220
============
NET ASSETS CONSIST OF:
Paid-in capital $230,634,275
Accumulated undistributed net investment income 49,492
Accumulated net realized loss (49,230,355)
Net unrealized depreciation (11,546,192)
------------
$169,907,220
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $163,462,983
============
Class M shares $ 6,444,237
============
SHARES OUTSTANDING:
Class III 24,284,175
============
Class M 958,941
============
NET ASSET VALUE PER SHARE:
Class III $ 6.73
============
Class M $ 6.72
============
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $1,644) $ 4,667,968
Interest (including securities lending income of $11,918) 66,840
------------
Total income 4,734,808
------------
EXPENSES:
Management fee (Note 2) 908,459
Custodian and transfer agent fees 61,653
Audit fees 40,144
Legal fees 16,093
Registration fees 13,757
Trustees fees and related expenses (Note 2) 5,014
Miscellaneous 8,161
Fees reimbursed by Manager (Note 2) (138,784)
------------
914,497
Shareholder service fee (Note 2) - Class III 288,995
12B-1 Distribution fee (Note 2) - Class M 12,070
Administration fee (Note 2) - Class M 9,656
------------
Net expenses 1,225,218
------------
Net investment income 3,509,590
------------
REALIZED AND UNREALIZED LOSS:
Net realized loss on investments (37,323,839)
------------
Change in net unrealized appreciation (depreciation) on
investments (15,408,843)
------------
Net realized and unrealized loss (52,732,682)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(49,223,092)
============
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,509,590 $ 4,628,541
Net realized loss (37,323,839) (5,947,538)
Change in net unrealized appreciation (depreciation) (15,408,843) (7,858,916)
------------ ------------
Net decrease in net assets from operations (49,223,092) (9,177,913)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (3,347,011) (4,387,005)
Class M (69,858) --
------------ ------------
Total distributions from net investment income (3,416,869) (4,387,005)
------------ ------------
Net realized gains
Class III -- (6,580,353)
------------ ------------
Total distributions from net realized gains -- (6,580,353)
------------ ------------
(3,416,869) (10,967,358)
------------ ------------
Net share transactions (Note 5):
Class III (17,609,557) 4,470,782
Class M 7,381,915 478,524
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (10,227,642) 4,949,306
------------ ------------
Total decrease in net assets (62,867,603) (15,195,965)
NET ASSETS:
Beginning of period 232,774,823 247,970,788
------------ ------------
End of period (including accumulated undistributed
net investment income of $49,492 and $81,674,
respectively) $169,907,220 $232,774,823
============ ============
</Table>
See accompanying notes to the financial statements. 7
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.82 $ 9.57 $ 7.98 $ 10.40 $ 14.33
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.14 0.18 0.18 0.21 0.26
Net realized and unrealized gain
(loss) (2.10) (0.51) 2.32 (0.83) 0.13
-------- -------- -------- -------- --------
Total from investment operations (1.96) (0.33) 2.50 (0.62) 0.39
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.13) (0.17) (0.18) (0.23) (0.27)
From net realized gains -- (0.25) (0.73) (1.57) (4.05)
-------- -------- -------- -------- --------
Total distributions (0.13) (0.42) (0.91) (1.80) (4.32)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 6.73 $ 8.82 $ 9.57 $ 7.98 $ 10.40
======== ======== ======== ======== ========
TOTAL RETURN(a) (22.29)% (3.64)% 32.72% (8.45)% 2.24%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $163,463 $232,289 $247,971 $178,329 $202,842
Net expenses to average daily net
assets 0.61% 0.61% 0.61% 0.61% 0.61%
Net investment income to average
daily net assets 1.79% 1.89% 1.99% 2.06% 1.82%
Portfolio turnover rate 100% 95% 102% 104% 37%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.07% 0.06% 0.05% 0.05% 0.30%
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
8 See accompanying notes to the financial statements.
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM
JANUARY 10, 2002
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) THROUGH
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- ----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.82 $ 9.06
------- ------
Income from investment operations:
Net investment income 0.12 0.01
Net realized and unrealized loss (2.10) (0.25)
------- ------
Total from investment operations (1.98) (0.24)
------- ------
Less distributions to shareholders:
From net investment income (0.12) --
------- ------
Total distributions (0.12) --
------- ------
NET ASSET VALUE, END OF PERIOD $ 6.72 $ 8.82
======= ======
TOTAL RETURN(a) (22.56)% (2.65)%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 6,444 $ 486
Net expenses to average daily net assets 0.92% 0.91%*
Net investment income to average daily net assets 1.46% 1.52%*
Portfolio turnover rate 100% 95%
Fees and expenses reimbursed by the Manager to
average daily net assets: 0.07% 0.06%*
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the period shown.
* Annualized.
+ Not annualized.
See accompanying notes to the financial statements. 9
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks long-term capital growth primarily through investment in
equity securities. The Fund's benchmark is the Russell 1000 Value Index.
Throughout the year ended February 28, 2003, the Fund had two classes of
shares outstanding: Class III and Class M. Class M shares bear an
administrative fee and a 12b-1 fee, while Class III shares bear a
shareholder service fee. (See Note 2) The principal economic difference
between the classes of shares is the level of fees borne by the classes.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of foreign market that would materially affect that security's
value.
10
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
28, 2003, the Fund held no open futures contracts.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a
11
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. As of February 28,
2003, the Fund held no open swap agreements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, the Fund loaned securities having a
market value of $36,300 collateralized by cash in the amount of $38,000,
which was invested in short-term instruments.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
12
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income were $10,895,734
and $3,416,869, respectively. For the years ended February 28, 2002 and
February 28, 2003, the distributions paid from long-term capital gains
were $71,624 and $0, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $49,492, of undistributed ordinary income.
At February 28, 2003, the Fund had a capital loss carryforward available
to offset future capital gains, if any, to the extent permitted by the
Code of $394,435 and $27,296,081 expiring in 2010 and 2011, respectively.
The Fund elected to defer to March 1, 2003 post-October losses of
$14,250,861.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus U.S. GAAP. The financial highlights exclude these
adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain
----------------- -----------------
$(124,903) $124,903
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the amortization of premiums and of discounts. Non-cash
dividends, if any, are recorded at the fair market value of the securities
received. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost.
13
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service, 12b-1, and
administration fees, which are directly attributable to a class of shares,
are charged to that class' operations.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .46% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
The Fund pays GMO an administrative fee monthly at the annual rate of .20%
of the average daily Class M net assets for support services provided to
Class M shareholders.
Fund Distributors, Inc. (the "Distributor") serves as the Fund's
distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the
Fund, Class M shares of the Fund pay a fee, at the annual rate of .25% of
average daily Class M net assets for any activities or expenses primarily
intended to result in the sale of Class M shares of the Fund. This fee may
be spent by the Distributor on personal services rendered to Class M
shareholders of the Fund and/or maintenance of Class M shareholder
accounts.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund to the extent that the Fund's total
annual operating expenses (excluding shareholder service fees (Class III
only), administrative fees (Class M only), 12b-1 fees (Class M only), fees
and expenses of the independent Trustees of the Trust (including legal
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, interest
expense and transfer taxes) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $3,651. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
14
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$189,149,114 and $188,592,549, respectively.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$188,396,149 $5,613,952 $(24,449,123) $(18,835,171)
</Table>
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 71.5% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder may
have a material effect on the Fund.
15
<Page>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ---------- ------------
Shares sold 4,918,036 $ 36,956,368 1,292,173 $ 12,230,667
Shares issued to shareholders
in reinvestment of
distributions 96,123 700,606 820,723 7,601,535
Shares repurchased (7,055,458) (55,266,531) (1,699,329) (15,361,420)
---------- ------------ ---------- ------------
Net increase (decrease) (2,041,299) $(17,609,557) 413,567 $ 4,470,782
========== ============ ========== ============
</Table>
<Table>
<Caption>
Period from
January 10, 2002
(commencement of
Year Ended operations) through
February 28, 2003 February 28, 2002
-------------------------- --------------------------
Shares Amount Shares Amount
Class M: ---------- ------------ ---------- ------------
Shares sold 999,258 $ 8,085,093 55,099 $ 478,524
Shares issued to shareholders
in reinvestment of
distributions 10,104 69,858 -- --
Shares repurchased (105,520) (773,036) -- --
---------- ------------ ---------- ------------
Net increase 903,842 $ 7,381,915 55,099 $ 478,524
========== ============ ========== ============
</Table>
6. SUBSEQUENT EVENT
Subsequent to February 28, 2003, the shareholder as disclosed in Note 4,
redeemed out of the Fund at a value of $115,101,119, or 71.6% of the Fund.
16
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO VALUE FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Value Fund (the "Fund") (a
series of GMO Trust) at February 28, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
17
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
18
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
19
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
20
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(FORMERLY GMO WORLD EQUITY ALLOCATION FUND)
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Asset
Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
On June 30, 2002, the Fund changed its benchmark from the MSCI ACWI Free Index
to the GMO World Balanced Index to reflect its current practice of providing
broad exposure to both global equity and fixed income securities.
PERFORMANCE FROM FEBRUARY 28, 2002 THROUGH JUNE 30, 2002
During this period, Class III shares returned 4.4% and the benchmark, the MSCI
ACWI Free Index returned -5.0%. Both asset allocation and portfolio
implementation added to performance. Relative to the benchmark, the Fund was
underweight in U.S. stocks by 22% and developed international stocks by 9%.
Balancing this, the Fund was overweight emerging equities by 22% and fixed
income by 9%. Within U.S. stocks, the portfolio was tilted towards the most
attractively valued sectors including small cap value stocks and REITs, where we
had 8% overweight positions in both sectors. Within international stocks the
portfolio was successfully tilted towards the small cap sector.
The value bias of the GMO International Intrinsic Value Fund and the GMO U.S.
Core Fund again ensured their outperformance in a down market. The GMO
International Intrinsic Value Fund outperformed its SSB PMI EPAC Value benchmark
by 5.7%, while the GMO U.S. Core Fund outperformed its S&P 500 benchmark by 0.9%
over the period.
Relative to the benchmark, the Fund's 9% overweight to fixed income was
allocated to inflation indexed bonds, international fixed income, and emerging
bonds. The last two funds added value relative to their benchmarks.
PERFORMANCE FROM JUNE 30, 2002 THROUGH FEBRUARY 28, 2003
During this period, Class III shares returned -5.3% and the benchmark, the GMO
World Balanced Index returned -7.3%. Asset allocation added substantially to
performance while portfolio implementation detracted marginal value. Relative to
the benchmark, the Fund was underweight in U.S. stocks by 18%. It was overweight
developed international stocks by 2.9%, emerging markets by 9.2%, and fixed
income (including global hedged equity) by 5.7%. Within U.S. stocks, the
portfolio was tilted towards the most attractively valued sectors including
small cap value stocks and REITs, where we were overweight 4.7% and 6.8%,
respectively. The allocation to REITs added value, as they outperformed the S&P
500 by 4.3%.
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
The GMO U.S. Core Fund outperformed its S&P 500 benchmark during a difficult
period by 0.4%, while the GMO International Intrinsic Value Fund strongly
outperformed its SSB PMI EPAC Value benchmark by 6.1%. Both the GMO Real Estate
Fund and the GMO Small Cap Value Fund underperformed their benchmarks by 2.0%
and 1.3%, respectively.
Most of the fixed income funds underperformed their benchmarks due largely to
exposure to certain asset-backed securities that defaulted during the period.
Implementation was strong within the GMO Emerging Country Debt Fund, which
outperformed its J.P. Morgan EMBI Global benchmark over the period by 2.4%.
OUTLOOK
With U.S. equities remaining stubbornly overpriced relative to economic
fundamentals we continue to maintain a sizeable underweight to the S&P 500.
However, many of the Fund's bets now differ substantially from those of a year
ago. We have decreased our position in REITs in the face of increased risk and
somewhat less attractive valuations. A modest allocation to large developed
international equities, both value and growth, reflects our view that the asset
class is fairly valued. With help from a depreciating dollar, this and
overweights to the still cheap sectors of international small and emerging
markets are expected to add value. With yields at near record lows, the Fund now
has a relatively neutral weight in fixed income. Within fixed income we favor
the short end of the curve and the still attractively priced emerging country
debt asset class.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO WORLD BALANCED ALLOCATION FUND CLASS III SHARES AND THE
GMO WORLD BALANCED INDEX*
AS OF FEBRUARY 28, 2003
GMO WORLD BALANCED 50% S&P 500 / 50% GMO WORLD
ALLOCATION FUND LEHMAN AGGREGATE BALANCED INDEX*
6/28/96 $10,000 $10,000 $10,000
9/30/96 $9,950 $10,252 $10,213
12/31/96 $10,476 $10,834 $10,763
3/31/97 $10,631 $10,953 $10,885
6/30/97 $11,691 $12,095 $12,170
9/30/97 $12,365 $12,757 $12,743
12/31/97 $11,548 $13,135 $12,874
3/31/98 $12,921 $14,142 $14,096
6/30/98 $12,223 $14,544 $14,406
9/30/98 $10,379 $14,145 $13,576
12/31/98 $11,864 $15,630 $15,414
3/31/99 $11,945 $15,980 $15,822
6/30/99 $13,628 $16,470 $16,437
9/30/99 $13,218 $16,006 $16,059
12/31/99 $14,645 $17,162 $17,666
3/31/2000 $14,771 $17,569 $18,043
6/30/2000 $14,551 $17,487 $17,800
9/30/2000 $14,440 $17,676 $17,670
12/31/2000 $14,554 $17,346 $17,123
3/31/2001 $13,902 $16,564 $15,930
6/30/2001 $14,673 $17,105 $16,417
9/30/2001 $13,224 $16,192 $15,069
12/31/2001 $14,332 $17,056 $16,070
3/31/2002 $15,525 $17,096 $16,148
6/30/2002 $15,378 $16,229 $15,199
9/30/2002 $14,275 $15,144 $13,635
12/31/2002 $14,784 $15,929 $14,442
2/28/2003 $14,569 $15,718 $14,097
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO WORLD BALANCED ALLOCATION FUND CLASS III SHARES AND THE
GMO WORLD BALANCED INDEX*
AS OF FEBRUARY 28, 2003
GMO WORLD
BALANCED INDEX +**
6/28/96 $10,000
9/30/96 $10,105
12/31/96 $10,533
3/31/97 $10,639
6/30/97 $12,231
9/30/97 $12,521
12/31/97 $12,113
3/31/98 $13,790
6/30/98 $13,902
9/30/98 $12,196
12/31/98 $14,773
3/31/99 $15,357
6/30/99 $16,224
9/30/99 $15,964
12/31/99 $18,735
3/31/2000 $18,953
6/30/2000 $18,231
9/30/2000 $17,244
12/31/2000 $16,124
3/31/2001 $14,112
6/30/2001 $14,493
9/30/2001 $12,356
12/31/2001 $13,511
3/31/2002 $13,622
6/30/2002 $12,385
9/30/2002 $11,110
12/31/2002 $11,768
2/28/2003 $11,487
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
1 YEAR 5 YEAR 6/28/96
Class III -1.06% 3.45% 5.80%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
* GMO World Balanced Index: 48.75% S&P 500, 16.25% MSCI ACWI Free ex-U.S. and
35% Lehman Brothers U.S. Aggregate Bond Index.
** GMO World Balanced Index +: MSCI ACWI (All Country World Index) Free Index
prior to 7/02 and GMO World Balanced Index thereafter.
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
MUTUAL FUNDS -- 100.0%
1,915,066 GMO Core Plus Bond Fund, Class III 19,054,904
1,860,527 GMO Currency Hedged International Bond Fund, Class III 16,465,664
2,550,630 GMO Currency Hedged International Equity Fund, Class
III 14,130,488
2,959,051 GMO Domestic Bond Fund, Class III 29,827,229
589,381 GMO Emerging Countries Fund, Class III 5,033,310
1,145,952 GMO Emerging Country Debt Fund, Class IV 10,920,921
2,602,902 GMO Emerging Markets Fund, Class IV 22,931,562
1,376,071 GMO Inflation Indexed Bond Fund, Class III 16,127,548
606,430 GMO International Bond Fund, Class III 6,027,916
6,797,748 GMO U.S. Core Fund, Class V 67,705,567
198,453 GMO Value Fund, Class III 1,335,590
1,251,770 GMO Global Hedged Equity Fund, Class III 12,054,545
350,285 GMO Short-Term Income Fund, Class III 3,040,470
892,185 GMO International Growth Fund, Class III 15,015,474
2,397,041 GMO International Small Companies Fund, Class III 22,771,889
1,013,946 GMO Real Estate Fund, Class III 10,636,290
1,096,141 GMO Small Cap Value Fund, Class III 10,753,146
1,258,448 GMO International Intrinsic Value Fund, Class IV 20,286,189
-------------
TOTAL MUTUAL FUNDS (COST $323,042,597) 304,118,702
-------------
SHORT-TERM INVESTMENTS -- 0.0%
REPURCHASE AGREEMENT -- 0.0%
$ 29,884 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/28/03, due 3/03/03, with a maturity value of $29,885
and an effective yield of 0.36%, collateralized by U.S.
Treasury Bond with a rate of 3.625%, maturity date
3/31/04 and a market value of $32,164. 29,884
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $29,884) 29,884
-------------
TOTAL INVESTMENTS -- 100.0%
(Cost $323,072,481) 304,148,586
Other Assets and Liabilities (net) -- (0.0%) (3,947)
-------------
TOTAL NET ASSETS -- 100.0% $ 304,144,639
=============
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $323,072,481) (Note 1) $304,148,586
Receivable for expenses reimbursed by Manager (Note 2) 18,452
------------
Total assets 304,167,038
------------
LIABILITIES:
Accrued expenses 22,399
------------
Total liabilities 22,399
------------
NET ASSETS $304,144,639
============
NET ASSETS CONSIST OF:
Paid-in capital $324,492,699
Accumulated undistributed net investment income 1,569,088
Accumulated net realized loss (2,993,253)
Net unrealized depreciation (18,923,895)
------------
$304,144,639
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $304,144,639
============
SHARES OUTSTANDING:
Class III 37,422,584
============
NET ASSET VALUE PER SHARE:
Class III $ 8.13
============
</Table>
2 See accompanying notes to the financial statements.
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends from investment company shares $ 4,006,025
Interest 8,103
-----------
Total income 4,014,128
-----------
EXPENSES:
Audit fees 21,301
Custodian and transfer agent fees 18,814
Registration fees 11,553
Trustees fees and related expenses (Note 2) 3,087
Legal fees 2,281
Miscellaneous 823
Fees reimbursed by Manager (Note 2) (54,685)
-----------
3,174
-----------
Net expenses 3,174
-----------
Net investment income 4,010,954
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (265,873)
Realized gains distributions from investment company
shares 2,847,343
-----------
Net realized gain on investments 2,581,470
-----------
Change in net unrealized appreciation (depreciation) on
investments (13,162,505)
-----------
Net realized and unrealized loss (10,581,035)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,570,081)
===========
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 2003 FEBRUARY 28, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 4,010,954 $ 199,434
Net realized gain (loss) 2,581,470 (514,358)
Change in net unrealized appreciation (depreciation) (13,162,505) 249,596
------------ -----------
Net decrease in net assets from operations (6,570,081) (65,328)
------------ -----------
Distributions to shareholders from:
Net investment income
Class III (4,040,341) (463,488)
------------ -----------
Total distributions from net investment income (4,040,341) (463,488)
------------ -----------
Net share transactions (Note 5):
Class III 307,437,159 (3,173,880)
------------ -----------
Increase (decrease) in net assets resulting from net
share transactions 307,437,159 (3,173,880)
------------ -----------
Total increase (decrease) in net assets 296,826,737 (3,702,696)
NET ASSETS:
Beginning of period 7,317,902 11,020,598
------------ -----------
End of period (including accumulated undistributed
net investment income of $1,569,088 and $198,476,
respectively) $304,144,639 $ 7,317,902
============ ===========
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- --------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.64 $ 8.99 $ 8.96 $ 8.52 $ 10.39
--------- -------- -------- -------- --------
Income from investment operations:
Net investment income(a) 0.20 0.23 0.21 0.20+ 0.18+
Net realized and unrealized gain
(loss) (0.28) (0.20) 0.18 1.69 (0.82)
--------- -------- -------- -------- --------
Total from investment operations (0.08) 0.03 0.39 1.89 (0.64)
--------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.43) (0.38) (0.36) -- (0.51)
From net realized gains -- -- -- (1.45) (0.72)
--------- -------- -------- -------- --------
Total distributions (0.43) (0.38) (0.36) (1.45) (1.23)
--------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.13 $ 8.64 $ 8.99 $ 8.96 $ 8.52
========= ======== ======== ======== ========
TOTAL RETURN(b) (1.06)% 0.49% 4.29% 22.45% (6.67)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 304,145 $ 7,318 $ 11,021 $ 10,834 $ 29,582
Net expenses to average daily net
assets(d) 0.00% 0.00% 0.00% 0.00% 0.00%
Net investment income to average
daily net assets(a) 4.01% 2.66% 2.31% 2.24% 1.91%
Portfolio turnover rate 61% 25% 12% 12% 17%
Fees and expenses reimbursed by the
Manager to average daily net
assets: 0.05% 0.31% 0.20% 0.19% 0.06%
</Table>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
(b) The total returns would have been lower had certain expenses not been
reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 2.
(d) Net expenses to average daily net assets was less than 0.01%.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 5
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO World Balanced Allocation Fund (the "Fund") (formerly GMO World Equity
Allocation Fund) is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
In August 2002, substantially all of the shareholders of GMO Global
Balanced Allocation Fund (GBAL) exchanged their shares for a total of
17,040,209 shares of the Fund valued at $146,529,743, and these amounts
are included in "shares sold" in Note 5. The exchange transaction included
an in-kind redemption from GBAL followed by a purchase in-kind of Fund
shares. For U.S. federal income tax purposes, this transaction is
considered a tax-free reorganization of the Fund.
On June 30, 2002, the Fund changed its benchmark from the MSCI ACWI (All
Country World Index) Free Index to the GMO World Balanced Index to reflect
its current practice of providing broad exposure to both global equity and
fixed income securities. The GMO World Balanced Index is a composite
benchmark computed by GMO consisting of (i) the S&P 500 Index (a U.S.
large capitalization stock index, independently maintained and published
by Standard & Poor's Corporation); (ii) the MSCI ACWI Free ex-U.S. Index
(an international (excluding U.S. and including emerging) equity index,
independently maintained and published by Morgan Stanley Capital
International): (iii) the Lehman Brothers U.S. Aggregate Bond Index (an
independently maintained and published index comprised of U.S. fixed rate
debt issues, having a maturity of at least one year, rated investment
grade or higher by Moody's Investors Service, Standard & Poor's or Fitch
IBCA, Inc.) in the following proportions: 48.75% (S&P 500), 16.25% (MSCI
ACWI), and 35% (Lehman Brothers). The GMO World Balanced Index reflects
investment of all applicable dividends, capital gains, and interest.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks total return greater than the return
of the GMO World Balanced Index through investment to varying extents in
the underlying funds. The Fund will pursue its objective by investing in
the least expensive actively invested class of underlying domestic equity,
international equity, and fixed income funds of the Trust. The financial
statements of the underlying funds should be read in conjunction with the
Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and
6
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
which are consistently followed by the Fund in the preparation of its
financial statements. The preparation of financial statements in
accordance with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates fair
value. Securities for which quotations are not readily available, or whose
values the Manager has determined to be unreliable, are valued at fair
value as determined in good faith by the Trustees or other persons acting
at their direction. A security's value may be deemed unreliable if, for
example, the Manager becomes aware of information or events occurring
after the close of a foreign market that would materially affect that
security's value.
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain investments in securities held by the underlying funds were valued
on the basis of a price provided by a principal market maker. The prices
provided by the principal market makers may differ from the value that
would be realized if the securities were sold and the differences could be
material to the financial statements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
7
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from income were $463,488 and
$4,040,341, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $1,569,088 and $809,087 of undistributed ordinary
income and undistributed long-term capital gains, respectively. The
temporary differences between book and tax distributable earnings are
primarily due to losses on wash sale transactions.
At February 28, 2003, the Fund had a capital loss carryforward available
of $5,001,056. However, restrictions on annual utilization of this
carryforward under the Code resulting from significant shareholder
activity are expected to limit maximum utilization to offset future
capital gains prior to expiration to approximately $4,466 of which $3,190
expires in 2008 and $1,276 expires in 2010.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to wash sale transactions
from Global Balanced Allocation Fund, limitations of capital loss
carryovers, and differing treatment for redemption in kind transactions.
The net loss resulting from redemption in kind transactions was $93,101.
The financial highlights exclude these adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Net
Investment Income Realized Loss Paid-in Capital
----------------- ----------------- ---------------
$1,399,999 $31,270 $(1,431,269)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
8
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis.
Non-cash dividends, if any, are recorded at fair market value of the
securities received. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur certain fees and expenses indirectly as
a shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in the underlying funds, some of which may invest in foreign securities.
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
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 securities markets of the U.S. and developed foreign
markets. Additionally, the investment risk associated with an investment
in the underlying funds may be more pronounced to the extent that the
underlying funds engage in derivative transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not directly charge an
advisory fee or shareholder service fee, but receives advisory and
shareholder service fees from the underlying funds in which the Fund
invests.
GMO has entered into a binding agreement effective until at least
June 30, 2003 to reimburse the Fund for its total annual operating
expenses (excluding fees and expenses of the independent
9
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Trustees of the Trust (including legal 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, interest expense and transfer
taxes).
The Fund incurs fees and expenses indirectly as a shareholder in the
underlying funds. For the year ended February 28, 2003, shareholder
service fees incurred indirectly by the Fund were 0.13% of the Fund's
average daily net assets, indirect operating expenses (excluding
shareholder service fees and investment-related expenses) were 0.436% of
the Fund's average daily net assets, and indirect investment-related
expenses (including, but not limited to, interest expense, foreign audit
expense, and investment-related legal expense) were 0.017% of the Fund's
average daily net assets.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $2,445. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 2003, aggregated
$228,739,286 and $64,716,842, respectively.
For the year ended February 28, 2003, the cost of purchases exclude the
transfer of GMO Global Balanced Allocation Fund's investments in
underlying funds of $146,529,743.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$326,870,355 $2,991,380 $(25,713,149) $(22,721,769)
</Table>
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 45.7% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder may
have a material effect on the Fund.
10
<Page>
GMO WORLD BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Year Ended Year Ended
February 28, 2003 February 28, 2002
------------------------- ----------------------
Shares Amount Shares Amount
Class III: ----------- ------------ --------- -----------
Shares sold 37,840,597 $318,274,774* 90,177 $ 763,787
Shares issued to shareholders
in reinvestment of distributions 443,693 3,651,607 19,848 164,333
Shares repurchased (1,708,667) (14,489,222) (489,222) (4,102,000)
----------- ------------ --------- -----------
Net increase (decrease) 36,575,623 $307,437,159 (379,197) $(3,173,880)
=========== ============ ========= ===========
</Table>
* Includes a tax-free contribution of securities in-kind, which had a
market value of $146,529,743, including unrealized loss of $5,545,507,
on the date of contribution.
11
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO WORLD BALANCED ALLOCATION FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO World Balanced Allocation Fund
(the "Fund") (formerly World Equity Allocation Fund, a series of GMO Trust) at
February 28, 2003, and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
12
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- --------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of 39 *(2)
c/o GMO Trust Trust Business
40 Rowes Wharf Administration
Boston, MA 02110 and Senior
Age: 61 Associate Dean,
Harvard
University.
Donald W. Glazer, Esq. Trustee of the Since December Advisory 39 None
c/o GMO Trust Trust 2000 Counsel,
40 Rowes Wharf Goodwin Procter
Boston, MA 02110 LLP; Secretary
Age: 58 and Consultant,
Provant, Inc.
(provider of
performance
improvement
training
services and
products)
(1998 -
present);
Consultant --
Business and
Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
13
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- --------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, 39 None
c/o GMO Trust Board of 1985. President Grantham, Mayo,
40 Rowes Wharf Trustees of the from February Van Otterloo &
Boston, MA 02110 Trust 2002 - October Co. LLC.
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
14
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
------------------------- ------------------------------ ------------------------------ ------------------------------
Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer
c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief
40 Rowes Wharf Vice President from August Operating Officer (2000 -
Boston, MA 02110 1998 - October 2002. present) and Member, Grantham,
Age: 47 Mayo, Van Otterloo & Co. LLC.
Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van
c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC.
40 Rowes Wharf February 1998.
Boston, MA 02110
Age: 45
Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator,
c/o GMO Trust Trust Grantham, Mayo, Van
40 Rowes Wharf Otterloo & Co. LLC.
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money
c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer
40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003)
Boston, MA 02110 and Member, Grantham, Mayo,
Age: 37 Van Otterloo & Co. LLC.
Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel,
c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van
40 Rowes Wharf 2001. Otterloo & Co. LLC (June
Boston, MA 02110 1999 - present); Associate/
Age: 58 Junior Partner, Hale and Dorr
LLP (1991 - 1999).
Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering
c/o GMO Trust Laundering Compliance Officer Reporting Officer (February
40 Rowes Wharf 2003 - present) and Compliance
Boston, MA 02110 Officer, Grantham, Mayo, Van
Age: 32 Otterloo & Co. LLC.
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
15
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the
Emerging Markets Quantitative Division at Grantham, Mayo, Van Otterloo & Co.
LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Taiwan Fund was launched in October 2002 to give emerging market equity
separate account clients exposure to the market without having to register
individually locally in Taiwan.
During the period from October 4, 2002 (commencement of operations) through
February 28, 2003, Class III shares of the GMO Taiwan Fund returned 1.4%. The
Fund's benchmark, MSCI Taiwan Index, returned 9.2% during the same period.
The underperformance is so pronounced due to the fact that the Taiwan market
rose 15% during the period from October 4, 2002 through October 31, 2002 (as
measured by MSCI) and the GMO Taiwan Fund was largely invested in cash as we
slowly built our positions in the market.
From October 31, 2002 until February 28, 2002 the GMO Taiwan Fund fell 5.2%
while the MSCI Taiwan declined 5.4%.
OUTLOOK
While we have moved to an underweight position of Taiwan in our global emerging
market equity portfolios, it remains a significant part of the benchmark and
therefore an important part of all global portfolios. We will continue to use
this fund as a way to give clients access to this market.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TAIWAN FUND CLASS III SHARES AND THE MSCI TAIWAN INDEX
AS OF FEBRUARY 28, 2003 GMO TAIWAN FUND MSCI TAIWAN INDEX
10/4/2002 $9,985 $10,000
12/31/2002 $10,000 $11,075
2/28/2003 $10,079 $10,924
</Table>
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURN
SINCE
INCEPTION
10/4/2002
Class III 0.79%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase and 45 bp on the redemption.
Transaction fees are retained by the Fund to cover trading costs. Past
performance is not indicative of future performance. Information is unaudited.
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
COMMON STOCKS -- 100.3%
TAIWAN -- 100.3%
365,000 Ambit Microsystems Corp 1,123,885
3,008,000 Asustek Computer Inc 5,107,108
2,553,000 Cheng Loong Corp* 767,737
3,940,000 China Bills Finance Corp* 1,009,093
18,208,000 China Development Financial Holding Corp* 6,864,023
1,232,000 China Manmade Fibers* 528,253
6,037,000 China Petrochemical Development Corp* 764,397
4,999,000 China Steel Corp 3,107,292
858,000 Chung Shing Textile Co Ltd* 66,171
1,486,000 Compal Electronics Inc 1,432,547
1,215,000 Compeq Manufacturing Co Ltd* 587,396
489,600 Delta Electronics Inc 512,847
274,000 Far Eastern Department Stores Ltd 64,656
1,880,000 First Financial Holding Co Ltd* 1,173,986
193,000 Formosa Plastics Corp 242,708
691,000 Fubon Financial Holding Co Ltd 542,858
440,000 GigaByte Technology Co Ltd 595,108
756,000 Goldsun Development & Construction Co Ltd* 88,762
53,000 Hon Hai Precision Industry Co Ltd 170,820
2,746,000 Hsinchu International Bank* 1,110,253
5,644,000 Inventec Co Ltd 3,248,345
2,000 Mitac International Corp 708
222,600 Nan Ya Plastic Corp 220,358
3,970,571 Orient Semiconductor Electronics Ltd* 611,297
13,875,000 Pacific Electric Wire & Cable Co Ltd* 1,297,662
1,834,000 Picvue Electronics Ltd* 635,963
728,000 Quanta Computer Inc 1,256,978
3,129,000 Ritek Corp 1,476,708
849,000 Synnex Technology International Corp 1,187,378
5,528,000 Taiwan Cement Corp* 1,948,719
630,000 Taiwan Tea Corp* 76,144
641,000 United Microelectronics* 363,387
6,596,000 Walsin Lihwa Corp* 1,945,583
1,394,000 Winbond Electronics Corp* 561,611
484,000 Yang Ming Marine Transport* 254,883
241,000 Yieh Loong Co Ltd* 98,134
</Table>
See accompanying notes to the financial statements. 1
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
TAIWAN -- CONTINUED
205,600 Yulon Motor Co 243,170
----------
41,286,928
----------
TOTAL COMMON STOCKS (COST $41,306,566) 41,286,928
----------
TOTAL INVESTMENTS -- 100.3%
(Cost $41,306,566) 41,286,928
Other Assets and Liabilities (net) -- (0.3%) (119,571)
----------
TOTAL NET ASSETS -- 100.0% $41,167,357
==========
</Table>
<Table>
NOTES TO SCHEDULE OF INVESTMENTS:
</Table>
* Non-income producing security.
2 See accompanying notes to the financial statements.
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY
(SHOWING PERCENTAGE OF EQUITY INVESTMENTS)
FEBRUARY 28, 2003 (UNAUDITED)
At February 28, 2003, industry sector diversification of the Fund's equity
investments was as follows:
<Table>
<Caption>
INDUSTRY SECTOR
- --------------------------------------------------------------------
Information Technology 45.7%
Financials 25.9
Materials 18.8
Industrials 8.5
Consumer Discretionary 0.9
Consumer Staples 0.2
-----
100.0%
=====
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $41,306,566) (Note 1) $41,286,928
Cash 10,607
Foreign currency, at value (cost $1,571) (Note 1) 1,574
-----------
Total assets 41,299,109
-----------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 27,768
Shareholder service fee 5,142
Accrued expenses 98,842
-----------
Total liabilities 131,752
-----------
NET ASSETS $41,167,357
===========
NET ASSETS CONSIST OF:
Paid-in capital $40,165,284
Accumulated net realized gain 1,021,708
Net unrealized depreciation (19,635)
-----------
$41,167,357
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $41,167,357
===========
SHARES OUTSTANDING:
Class III 2,030,383
===========
NET ASSET VALUE PER SHARE:
Class III $ 20.28
===========
</Table>
4 See accompanying notes to the financial statements.
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- PERIOD FROM OCTOBER 4, 2002 (COMMENCEMENT OF
OPERATIONS) THROUGH FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $7,713) $ 31,159
Interest 30,677
----------
Total income 61,836
----------
EXPENSES:
Management fee (Note 2) 154,861
Custodian fees 89,350
Audit fees 42,528
Transfer agent fees 11,754
Legal fees 5,120
Trustees fees and related expenses (Note 2) 454
Miscellaneous 3,104
----------
307,171
Shareholder service fee (Note 2) - Class III 28,678
Net expenses 335,849
----------
Net investment loss (274,013)
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 1,413,866
Foreign currency, forward contracts and foreign
currency related transactions (118,145)
----------
Net realized gain 1,295,721
----------
Change in net unrealized appreciation (depreciation) on:
Investments (19,638)
Foreign currency, forward contracts and foreign
currency related transactions 3
----------
Net unrealized loss (19,635)
----------
Net realized and unrealized gain 1,276,086
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,002,073
==========
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM OCTOBER 4, 2002
(COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 2003
----------------------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss $ (274,013)
Net realized gain 1,295,721
Change in net unrealized appreciation (depreciation) (19,635)
-----------
Net increase in net assets from operations 1,002,073
-----------
Net share transactions (Note 5):
Class III 40,165,284
-----------
Increase in net assets resulting from net share
transactions 40,165,284
-----------
Total increase in net assets 41,167,357
NET ASSETS:
Beginning of period --
-----------
End of period $41,167,357
===========
</Table>
6 See accompanying notes to the financial statements.
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM
OCTOBER 4, 2002
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 28, 2003
----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.00
-------
Income from investment operations:
Net investment loss (0.12)(a)
Net realized and unrealized gain 0.40
-------
Total from investment operations 0.28
-------
NET ASSET VALUE, END OF PERIOD $ 20.28
=======
TOTAL RETURN 1.40%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $41,167
Net expenses to average daily net assets 1.76%*
Net investment income to average daily net assets (1.43)%*
Portfolio turnover rate 50%
Purchase and redemption fees consisted of the following
per share amounts: $ 0.01
</Table>
* Annualized.
** Not annualized.
(a) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 7
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Taiwan Fund (the "Fund"), which commenced operations on October 4,
2002, is a series of GMO Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940, as amended, as an open-end,
non-diversified management investment company. The Fund is advised and
managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities
traded in the Taiwan securities markets. The Fund's benchmark is the MSCI
Taiwan Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates fair value.
Shares of mutual funds are valued at their net asset value as reported on
each business day. Securities for which quotations are not readily
available or whose values the Manager has determined to be unreliable are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction. A security's value may be deemed
unreliable if, for example, the Manager becomes aware of information or
events occurring after the close of a foreign market that would materially
affect that security's value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on
8
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
the current exchange rates each business day. Income and expenses
denominated in foreign currencies are translated at current exchange rates
when accrued or incurred. The Fund does not isolate realized and
unrealized gains and losses attributable to changes in exchange rates from
gains and losses that arise from changes in the market value of
investments. Such fluctuations are included with net realized and
unrealized gain or loss on investments. Net realized gains and losses on
foreign currency transactions represent gains and losses on disposition of
foreign currencies and forward foreign currency contracts, currency gains
and losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if there are movements in
foreign currency values that are unfavorable to the Fund. There were no
forward foreign currency contracts outstanding as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are
9
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
28, 2003, there were no outstanding futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 28, 2003, there
were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed
10
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
securities to increase or decrease its exposure to different underlying
instruments and to gain exposure to markets that may be difficult to
invest in through conventional securities. Indexed securities may be more
volatile than their underlying instruments, but any loss is limited to the
amount of the original investment.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into total return swap agreements, which involve a commitment by
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty, respectively. The Fund may
also enter into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral. Swaps are marked to
market daily based upon quotations from market makers and the change in
value, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 28,
2003, there were no outstanding swap contracts.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the
11
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
investment of the collateral, the risk of delay in recovery or loss of
rights in the collateral should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities. At
February 28, 2003, the Fund did not have any securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income are withheld in accordance with the applicable country's tax treaty
with the United States.
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
The Fund is currently subject to Taiwan security transaction tax of 0.3%
on equities and 0.1% on corporate bonds and mutual fund shares of the
transaction amount.
Income dividends and capital gain distrbutions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $1,038,055 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to losses on wash sale transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This
12
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
reclassification has no impact on net investment income, realized
gain/loss or the net asset value of the Fund and is primarily attributable
to foreign currency transactions and the net operating loss. The financial
highlights exclude these adjustments.
<Table>
<Caption>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain
----------------- -----------------
$274,013 $(274,013)
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable withholding taxes, is recorded on the ex-dividend date,
or when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the
amortization of premiums and discounts. Non cash dividends, if any, are
recorded at the fair market value of the securities received. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
Taiwanese companies typically declare dividends in the Fund's first fiscal
quarter of each year. As a result, the Fund receives substantially less
dividend income in the second half of its year. Interest income, which
includes accretion of original discount, is accrued as earned.
Dividend and interest income generated in Taiwan is subject to a 20%
withholding tax. Stock dividends received (except those which have
resulted from capitalization of capital surplus) are taxable at 20% of the
par value of the stock dividends received.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .15% of the amount
invested. In the case of cash redemptions, the fee is .45% of the amount
redeemed. If the Manager determines that any portion of a cash purchase or
redemption fee is offset by a corresponding cash redemption or purchase
occurring on the same day, the purchase premium or redemption fee charged
by the Fund will be reduced by 100% with respect to that portion. In
addition, the purchase premium or redemption fee
13
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
charged by the Fund may be waived if the Manager determines the Fund is
either substantially overweighted or underweighted in cash so that a
redemption or purchase will not require a securities transaction. All
purchase premiums and redemption fees are paid to and recorded by the Fund
as paid-in capital. For the period ended February 28, 2003, the Fund
received $74,686 in purchase premiums and $43,358 in redemption fees.
There was no premium for reinvested distributions.
INVESTMENT RISK
Investments in emerging countries present certain risks that are not
inherent in many other securities. Many emerging countries present
elements of political and/or economic instability. The securities markets
of emerging countries are generally smaller and less developed than the
securities markets of the U.S. and developed foreign markets. Further,
countries may impose various types of foreign currency regulations or
controls which may impede the Fund's ability to repatriate amounts it
receives. The Fund may acquire interests in securities in anticipation of
improving conditions in the related countries. These factors may result in
significant volatility in the values of its holdings. The markets for
emerging countries are relatively illiquid. Accordingly, the Fund may not
be able to realize in an actual sale amounts approximating those used to
value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .81% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the period ended February 28, 2003, was $274. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchase and proceeds from sales of securities, excluding
short-term investments, for the period ended February 28, 2003, aggregated
$59,600,002 and $19,707,301, respectively.
14
<Page>
GMO TAIWAN FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
At February 28, 2003, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$41,322,913 $3,282,500 $(3,318,485) $(35,985)
</Table>
4. PRINCIPAL SHAREHOLDER
At February 28, 2003, 90.6% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder may
have a material effect on the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Period from October 4, 2002
(commencement of
operations)
through February 28, 2003
---------------------------
Shares Amount
Class III: ------------ -------------
Shares sold 2,471,225 $49,791,166
Shares issued to shareholders
in reinvestment of distributions -- --
Shares repurchased (440,842) (9,625,882)
---------- -----------
Net increase 2,030,383 $40,165,284
========== ===========
</Table>
15
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO TAIWAN FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Taiwan Fund (the "Fund") (a
series of the GMO Trust) at February 28, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for the
period from October 4, 2002 (commencement of operations) to February 28, 2003,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at February 28, 2003 by
correspondence with the custodian, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
16
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA 02110 University.
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA 02110 Provant, Inc. (provider
Age: 58 of performance
improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
17
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------ --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA 02110 Trust 2002 - October
Age: 64 2002.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
18
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of Office(4) Principal Occupation(s)
Name, Address, Position(s) and Length of During Past
and Age Held with Fund Time Served Five Years
--------------------------------- -------------- ----------------- --------------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present), Chief
c/o GMO Trust Chief Chief Executive Operating Officer (2000 - present) and Member,
40 Rowes Wharf Executive Officer since Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Officer of the October 2002;
Age: 47 Trust Vice President
from August
1998 - October
2002.
Susan Randall Harbert Chief Chief Financial Member, Grantham, Mayo, Van Otterloo & Co. LLC.
c/o GMO Trust Financial Officer Since
40 Rowes Wharf Officer and February 2000;
Boston, MA 02110 Treasurer of Treasurer since
Age: 45 the Trust February 1998.
Brent Arvidson Assistant Since September Senior Fund Administrator, Grantham, Mayo, Van
c/o GMO Trust Treasurer of 1998. Otterloo & Co. LLC.
40 Rowes Wharf the Trust
Boston, MA 02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti- Money Laundering Reporting
c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member,
40 Rowes Wharf the Trust 1997; Clerk since Grantham, Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 March 2001; May
Age: 37 1999 - August
1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van
c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present);
40 Rowes Wharf of the Trust 1999; Secretary Associate/ Junior Partner, Hale and Dorr LLP
Boston, MA 02110 since March 2001. (1991 - 1999).
Age: 58
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February
c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham,
40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC.
Boston, MA 02110 Laundering
Age: 32 Compliance
Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
19
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 28, 2003
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund's portfolio is the responsibility of the Fixed
Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
From its November 26, 2002 inception, shares of the GMO Short-Duration
Collateral Fund (SDCF) returned +0.2% for the fiscal year ended February 28,
2003, as compared with the 0.4% return of the J.P. Morgan US 3-Month Cash Index.
The Fund underperformed the benchmark during the period by 14 basis points.
Gains from narrower swap spreads were more than offset by losses due to
deterioration in credit quality. At fiscal year-end, approximately 87% of the
portfolio was AAA-rated, 3% AA-rated and the remaining 10% A-rated.
Approximately 56% of the Fund was invested in highly-rated, asset-backed
securities. These included issues backed by auto, truck, credit card, and
healthcare receivables. Approximately 18% of the Fund was invested in US
government agency issues that offer higher yields than similar maturity US
Treasury securities. The remainder of the Fund was split between collateralized
bond obligations (14%) and corporate bonds (3%).
OUTLOOK
The Fund focuses on high credit quality and low-volatility, but less-liquid
sectors of the US bond market that offer attractive returns relative to the
index.
THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO
CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<Page>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO SHORT-DURATION COLLATERAL FUND AND THE
J.P. MORGAN U.S. 3 MONTH CASH INDEX AS OF FEBRUARY 28, 2003 GMO SHORT-DURATION COLLATERAL FUND J.P. MORGAN U.S. 3 MONTH CASH INDEX
11/26/2002 $10,000 $10,000
12/31/2002 $9,992 $10,015
2/28/2003 $10,024 $10,038
</Table>
<Table>
<Caption>
TOTAL RETURN
SINCE INCEPTION
11/26/2002
Class III 0.24%
</Table>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
distributions and redemptions. Past performance is not indicative of future
performance. Information is unaudited.
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
DEBT OBLIGATIONS -- 91.9%
ASSET-BACKED SECURITIES -- 70.1%
AIRLINES -- 2.6%
37,600,000 Aircraft Finance Trust Series 99-1A Class A1,
Variable Rate, 1 mo. LIBOR + .48%, 1.82%, due
05/15/24 29,328,000
--------------
AUTOMOTIVE -- 5.6%
15,000,000 Americredit Automobile Receivables Trust Series
00-B Class A4,
Variable Rate, 1 mo. LIBOR + .20%, 1.54%, due
04/05/07 14,990,625
15,000,000 Capital Auto Receivables Asset Trust (GMAC) Series
03-1
Class A3A, 2.75%, due 04/16/07 15,168,750
14,500,000 Ford Credit Auto Owner Trust Series 03-A Class
A4A, 2.70%,
due 06/15/07 14,536,250
20,000,000 Volkswagen Credit Auto Master Trust Series 00-1
Class A,
Variable Rate, 1 mo. LIBOR +.16%, 1.50%, due
08/20/07 20,022,000
--------------
64,717,625
--------------
BANKING -- 2.2%
25,000,000 Aesop Funding II LLC Series 03-2A Class A1, 2.74%,
due 06/20/07 24,999,727
--------------
COMMERCIAL MORTGAGE BACKED SECURITY -- 1.5%
16,448,000 Morgan Stanley Dean Witter Capital I Series
03-TOP9 Class A1, 3.98%, due 11/13/36 16,728,130
--------------
EMERGING MARKETS COLLATERALIZED DEBT OBLIGATIONS -- 4.7%
22,531,292 Anfield Road I Ltd Series 1 Class A,
Variable Rate, 6 mo. LIBOR + .25%, 1.60%, due
11/06/06 21,844,088
9,539,822 Augusta Funding Ltd Series 96-AX,
Variable Rate, 1 mo. LIBOR + .25%, 1.43%, due
10/21/08 9,432,499
4,906,989 Augusta Funding Ltd Series 97-B Class A, MBIA,
Variable Rate, 6 mo. LIBOR + .19%, 1.90%, due
04/10/10 4,821,116
18,514,784 Starvest Emerging Markets CBO-I Series 1A, Class
A,
Variable Rate, 6 mo. LIBOR + .19%, 1.53%, due
07/30/11 17,993,223
--------------
54,090,926
--------------
</Table>
See accompanying notes to the financial statements.
1
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
EQUIPMENT LEASES -- 0.2%
2,522,403 Xerox Equipment Lease Owner Trust Series 01-1
Class A, 144A, Variable Rate, 1 mo. LIBOR +
2.00%, 3.34%, due 02/15/08 2,523,979
--------------
HEALTH CARE EQUIPMENT RECEIVABLES -- 0.4%
5,571,895 DVI Business Credit Receivables Corp III Series
98-1A Class A, Variable Rate, 1 mo. LIBOR +
.35%, 1.69%, due 01/15/04(a) 5,014,705
--------------
HIGH YIELD COLLATERALIZED DEBT OBLIGATIONS -- 6.2%
3,180,886 Cigna CBO Ltd Series 96-1 Class A2, 144A, Step Up,
6.46%,
due 11/15/08 3,261,457
22,338,462 Great Point CBO Ltd Series 98-1A Class A1, 144A,
Variable Rate, 6 mo. LIBOR + .30%, 2.02%, due
10/15/10 21,498,759
8,000,000 Nomura CBO Ltd Series 97-2 Class A2, 144A, Step
Up, 6.26%,
due 10/30/09 7,902,480
22,555,435 Northstar CBO Ltd. Series 97-2 Class A2, 144A,
Variable Rate, Step Up, 6.62%, due 07/15/09 18,946,565
4,267,647 Pacific Life CBO Series 98-1A Class A2A, 144A,
Step Up, 6.56%,
due 02/15/10 4,263,934
14,800,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2,
144A, Step Up, 6.33%, due 09/15/09 15,250,512
--------------
71,123,707
--------------
INSURANCE -- 8.9%
8,021,762 Clydesdale CBO 1 Ltd Series 1A Class A2 144A,
6.83%,
due 03/25/11 8,122,034
7,050,737 DLJ CBO Ltd Series 1A Class A2 144A, 6.68%, due
04/15/11 7,050,737
29,200,000 Meridian Funding Co LLC, MBIA, 144A,
Variable Rate, 1 mo. LIBOR + .38%, 1.71%, due
06/22/11 28,944,500
10,765,094 Northstar CBO Ltd. Series 97-2I Class A2, 144A,
Variable Rate, Step Up, 4.12%, due 07/15/09 10,716,866
28,650,000 Pemex Finance Ltd Series 1A1, AMBAC 144A, 6.30%,
due 05/15/10 31,845,621
12,000,000 PFS Financing Corp Series 01-FA Class A, MBIA,
144A,
Variable Rate, 1 mo. LIBOR + .33%, 1.67%, due
06/15/08 11,955,000
3,066,664 Polaris Funding Company, Series EMTN,
Variable Rate, 1 mo. LIBOR + .45%, 1.79%, due
01/07/05 3,062,831
--------------
101,697,589
--------------
</Table>
See accompanying notes to the financial statements.
2
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
OTHER CREDIT CARDS -- 23.6%
15,000,000 American Express Credit Account Master Trust
Series 01-6
Class A, Variable Rate, 1 mo. LIBOR + .12%,
1.46%,
due 12/15/08 15,009,375
15,000,000 American Express Credit Account Master Trust
Series 02-6
Class A, Variable Rate, 1 mo. LIBOR + .14%,
1.48%,
due 03/15/10 15,009,961
16,000,000 Bank One Issuance Trust Series 02-A5 Class A5,
1.46%,
due 06/15/10 16,010,000
20,000,000 Capital One Master Trust Series 00-4 Class A,
Variable Rate, 1 mo. LIBOR + .14%, 1.48%, due
08/15/08 19,890,000
20,000,000 Chase Credit Card Master Trust Series 01-6 Class
A,
Variable Rate, 1 mo. LIBOR + .13%, 1.47%, due
03/16/09 20,022,000
15,650,000 Chase Credit Card Master Trust Series 02-1 Class
A,
Variable Rate, 1 mo. LIBOR + .10%, 1.44%, due
06/15/09 15,637,773
15,200,000 Citibank Credit Card Issuance Trust Series 00-B2
Class B2,
Variable Rate, 3 mo. LIBOR + .25%, 1.63%, due
10/15/07 15,149,840
18,400,000 Discover Card Master Trust I Series 00-5 Class A,
Variable Rate, 1 mo. LIBOR + .18%, 1.52%, due
11/15/07 18,444,562
10,000,000 Discover Card Master Trust I Series 02-3 Class A,
Variable Rate, 1 mo. LIBOR + .11%, 1.45%, due
11/17/09 9,989,844
GBP 20,000,000 Earls Five Ltd Series EMTN, 3 mo. GBP LIBOR +
.14%, 3.82%,
due 02/27/08 31,243,684
20,000,000 Gracechurch Card Funding Plc Series 2 Class A,
1.46%,
due 10/15/09 19,995,312
30,000,000 MBNA Credit Card Master Trust Series 02-A4
Class A4,
Variable Rate, 1 mo. LIBOR + .11%, 1.45%, due
08/17/09 29,982,422
20,000,000 MBNA Credit Card Master Trust Series 02-B4 Class
B4, 1.84%,
due 03/15/09 19,955,469
8,000,000 Neiman Marcus Group Credit Card Master Trust
Series 00-1 Class A, 144A, Variable Rate, 1 mo.
LIBOR + .27%, 1.61%, due 04/15/08 8,001,875
16,000,000 Providian Gateway Master Trust Series 00-C Class
A, 144A,
Variable Rate, 1 mo. LIBOR + .22%, 1.56%, due
03/15/07 15,953,600
--------------
270,295,717
--------------
PERPETUAL LOANS COLLATERALIZED DEBT OBLIGATIONS -- 2.6%
2,906,540 Augusta Funding Ltd Series 10A Class A-1 144A,
6.65%,
due 06/30/04 2,979,204
</Table>
See accompanying notes to the financial statements. 3
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
PERPETUAL LOANS COLLATERALIZED DEBT OBLIGATIONS -- CONTINUED
28,000,000 Augusta Funding Ltd Series 10A Class F-1 144A,
Variable Rate, 3 mo. LIBOR + .25%, 1.65%, due
06/30/17 27,020,000
--------------
29,999,204
--------------
RATE REDUCTION BONDS -- 3.8%
26,913,600 California Infrastructure PG&E Series 97-1 Class
A7, 6.42%,
due 09/25/08 29,274,848
13,735,403 California Infrastructure SCE Series 97-1 Class
A5, 6.28%,
due 09/25/05 13,933,923
--------------
43,208,771
--------------
SMALL BUSINESS LOANS -- 0.9%
10,995,690 The Money Store Business Loan Backed Trust
Series 99-1 Class AN,
Variable Rate, 1 mo. LIBOR +.50%, 1.84%, due
09/15/17 10,930,403
--------------
STUDENT LOANS -- 4.9%
2,502,868 Banc One Student Loan Trust Series 94-A Class A2,
Variable Rate, 1 mo. LIBOR + .30%, 1.64%, due
10/25/16 2,506,966
9,600,000 Keycorp Student Loan Trust Series 94-B
Certificates,
Variable Rate, 1 mo. LIBOR + .73%, 2.07%, due
11/25/21 9,595,875
8,000,000 Keycorp Student Loan Trust Series 95-A Class B,
Variable Rate, 1 mo. LIBOR + .75%, 2.09%, due
10/27/21 7,998,750
4,772,800 SMS Student Loan Trust Series 94-A Certificates,
Variable Rate, 1 mo. LIBOR + .70%, 2.05%, due
07/26/21 4,777,573
4,205,600 SMS Student Loan Trust Series 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .75%, 2.09%, due
10/25/23 4,214,432
1,475,631 SMS Student Loan Trust Series 94-B Class A2,
Variable Rate, 1 mo. LIBOR + .30%, 1.64%, due
04/25/16 1,479,320
3,945,600 SMS Student Loan Trust Series 95-A Certificates,
Variable Rate, 1 mo. LIBOR + .65%, 1.99%, due
04/25/25 3,950,729
14,191,602 SMS Student Loan Trust Series 97-A Class A,
Variable Rate, 3 mo. U.S. Treasury Bill + .60%,
1.87%,
due 10/27/25 14,170,314
4,006,400 Society Student Loan Trust Series 93-A Class B,
Variable Rate, 1 mo. LIBOR + .75%, 2.10%, due
07/25/03 4,010,567
3,350,767 Student Loan Marketing Association Series 96-4
Class A2,
Variable Rate, 3 mo. U.S. Treasury Bill + .64%,
1.82%,
due 07/25/09 3,334,014
--------------
56,038,540
--------------
</Table>
See accompanying notes to the financial statements.
4
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
TRANSPORTATION -- 2.0%
20,500,000 Westralia Airports Corp, MBIA, 144A, 6.48%, due
04/01/10 23,454,050
--------------
TOTAL ASSET BACKED SECURITIES 804,151,073
--------------
CORPORATE DEBT -- 3.4%
11,750,000 Banco Santander Series MBIA, 6.50%, due 11/01/05 12,838,144
10,452,610 Continental Airlines Series 99-1A, 6.55%, due
02/02/19 8,780,192
16,000,000 General Motors Acceptance Corp, 7.50%, due
07/15/05 17,129,600
--------------
38,747,936
--------------
U.S. GOVERNMENT -- 9.0%
2,239,660 U.S. Treasury Inflation Indexed Note, 3.63%, due
01/15/08 2,530,116
100,000,000 U.S. Treasury Note, 2.00%, due 11/30/04 100,984,380
--------------
103,514,496
--------------
U.S. GOVERNMENT AGENCY -- 9.4%
1,100,000 Agency for International Development Floater
(Support of Belize), Variable Rate, 6 mo. U.S.
Treasury Bill + .50%, 1.70%,
due 01/01/14 1,084,875
4,168,750 Agency for International Development Floater
(Support of C.A.B.E.I.), Variable Rate, 6 mo.
U.S. Treasury Bill + .40%, 1.60%, due 10/01/12 4,101,008
1,802,424 Agency for International Development Floater
(Support of Honduras), Variable Rate, 3 mo. U.S.
Treasury Bill x 1.17%, 1.41%,
due 10/01/11 1,795,664
15,000,000 Agency for International Development Floater
(Support of India), Variable Rate, 3 mo. LIBOR +
.10%, 1.48%, due 02/01/27 14,820,000
5,188,152 Agency for International Development Floater
(Support of Jamaica), Variable Rate, 6 mo. U.S.
Treasury Bill + .75%, 1.95%,
due 03/30/19 5,158,943
20,000,000 Agency for International Development Floater
(Support of Morocco), Variable Rate, 6 mo. LIBOR
- .015%, 1.33%, due 02/01/25 19,535,000
15,000,000 Agency for International Development Floater
(Support of Morocco), Variable Rate, 6 mo. LIBOR
+ .15%, 1.49%, due 10/29/26 14,962,500
1,344,960 Agency for International Development Floater
(Support of Morocco), Variable Rate, 6 mo. U.S.
Treasury Bill + .45%, 1.65%,
due 11/15/14 1,318,061
2,511,836 Agency for International Development Floater
(Support of Peru), Series A, Variable Rate, 6
mo. U.S. Treasury Bill +.35%, 1.55%, due
05/01/14 2,496,137
</Table>
See accompanying notes to the financial statements. 5
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
<Caption>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY -- CONTINUED
22,500,000 Agency for International Development Floater
(Support of Portugal), Variable Rate, 6 mo.
LIBOR, 1.34%, due 01/01/21 22,455,000
14,100,000 Agency for International Development Floater
(Support of Tunisia), Variable Rate, 6 mo.
LIBOR, 1.34%, due 07/01/23 13,853,250
1,500,001 Agency for International Development Floater
(Support of Zimbabwe), Variable Rate, 3 mo. U.S.
Treasury Bill x 115%, 2.60%, due 01/01/12 1,481,251
2,700,000 Federal Home Loan Bank, Variable Rate, 3 mo. LIBOR
+ .25%, 1.60%, due 11/05/03 2,696,760
1,490,551 Small Business Administration Series 95-10C, Class
1, 6.88%,
due 09/01/05 1,595,489
--------------
107,353,938
--------------
TOTAL DEBT OBLIGATIONS (COST $1,053,660,704) 1,053,767,443
--------------
SHORT-TERM INVESTMENTS -- 10.9%
CASH EQUIVALENTS -- 5.0%
56,815,625 Merrimac Cash Fund 56,815,625
--------------
COMMERCIAL PAPER -- 5.9%
$ 34,000,000 Koch Industries, 1.33%, due 03/03/03 33,997,488
$ 34,000,000 UBS Finance (Delaware) Inc, 1.34%, due 03/03/03 33,997,469
--------------
67,994,957
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $124,810,582) 124,810,582
--------------
TOTAL INVESTMENTS -- 102.8%
(Cost $1,178,471,286) 1,178,578,025
Other Assets and Liabilities (net) -- (2.8%) (31,624,336)
--------------
TOTAL NET ASSETS -- 100.0% $1,146,953,689
==============
</Table>
See accompanying notes to the financial statements.
6
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 28, 2003
<Table>
NOTES TO THE SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of
the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional investors.
AMBAC - Insured as to the payment of principal and interest by
AMBAC Assurance Corporation
CBO - Collateralized Bond Obligation
EMTN - Euromarket Medium Term Note
GBP - British Pound
MBIA - Insured as to the payment of principal and interest by
MBIA Insurance Corp
USD - United States Dollar
Variable and step up rates - The rates shown on variable and
step up rate notes are the current interest rates at February
28, 2003, which are subject to change based on the terms of
the security, including varying reset dates.
</Table>
(a) Security valued at fair value using methods determined in good faith by
or at the direction of the Trustees (Note 1).
See accompanying notes to the financial statements. 7
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $1,178,471,286) (Note 1) $1,178,578,025
Cash 14,041,353
Foreign currency, at value (cost $329,697) (Note 1) 328,924
Receivable for Fund shares sold 20,000,000
Interest receivable 3,606,529
Receivable for open forward foreign currency contracts
(Notes 1 and 6) 763,484
Receivable for expenses reimbursed by Manager (Note 2) 78,918
--------------
Total assets 1,217,397,233
--------------
LIABILITIES:
Payable for investments purchased 47,523,742
Payable for Fund shares repurchased 8,100,000
Net payable for open swap contracts (Notes 1 and 6) 14,696,082
Accrued expenses 123,720
--------------
Total liabilities 70,443,544
--------------
NET ASSETS $1,146,953,689
==============
NET ASSETS CONSIST OF:
Paid-in capital $1,146,247,867
Accumulated undistributed net investment income 3,103,842
Accumulated net realized loss (3,903)
Net unrealized depreciation (2,394,117)
--------------
$1,146,953,689
==============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $1,146,953,689
==============
SHARES OUTSTANDING:
Class III 45,851,656
==============
NET ASSET VALUE PER SHARE:
Class III $ 25.01
==============
</Table>
8 See accompanying notes to the financial statements.
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- PERIOD FROM NOVEMBER 26, 2002 (COMMENCEMENT OF
OPERATIONS) THROUGH FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME:
Interest $6,543,509
----------
Total income 6,543,509
----------
EXPENSES:
Audit fees 67,346
Custodian and transfer agent fees 36,004
Tax expense 20,258
Legal fees 17,841
Trustees fees and related expenses (Note 2) 6,582
Miscellaneous 6,863
Fees reimbursed by Manager (Note 2) (141,750)
----------
13,144
----------
Net expenses 13,144
----------
Net investment income 6,530,365
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 88,853
Closed swap contracts 211,751
Foreign currency, forward contracts and foreign
currency related transactions (1,521,283)
----------
Net realized loss (1,220,679)
----------
Change in net unrealized appreciation (depreciation) on:
Investments 106,739
Open swap contracts (3,256,731)
Foreign currency, forward contracts and foreign
currency related transactions 755,875
----------
Net unrealized loss (2,394,117)
----------
Net realized and unrealized loss (3,614,796)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,915,569
==========
</Table>
See accompanying notes to the financial statements. 9
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM NOVEMBER 26, 2002
(COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 2003
-----------------------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 6,530,365
Net realized loss (1,220,679)
Change in net unrealized appreciation (depreciation) (2,394,117)
--------------
Net increase in net assets from operations 2,915,569
--------------
Distributions to shareholders from:
Net investment income
Class III (2,209,747)
--------------
Total distributions from net investment income (2,209,747)
--------------
Net share transactions: (Note 5)
Class III 1,146,247,867
--------------
Increase in net assets resulting from net share
transactions 1,146,247,867
--------------
Total increase in net assets 1,146,953,689
NET ASSETS:
Beginning of period --
--------------
End of period (including accumulated undistributed net
investment income of $3,103,842) $1,146,953,689
==============
</Table>
10 See accompanying notes to the financial statements.
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
PERIOD FROM
NOVEMBER 26, 2002
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 28, 2003
----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 25.00
----------
Income from investment operations:
Net investment income 0.15
Net realized and unrealized loss (0.09)
----------
Total from investment operations 0.06
----------
Less distributions to shareholders:
From net investment income (0.05)
----------
Total distributions (0.05)
----------
NET ASSET VALUE, END OF PERIOD $ 25.01
==========
TOTAL RETURN(a) 0.24%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $1,146,954
Net expenses to average daily net assets 0.00%*
Net investment income to average daily net assets 2.34%*
Portfolio turnover rate 15%
Fees and expenses reimbursed by the Manager to average
daily net assets: 0.05%*
</Table>
(a) The total returns would have been lower had certain expenses not been
reimbursed during the period shown.
* Annualized.
+ Not Annualized.
See accompanying notes to the financial statements. 11
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Short-Duration Collateral Fund (the "Fund"), which commenced
operations on November 26, 2002, is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return comparable to the 3-month London
Inter-Bank Offer Rate ("LIBOR"). The Fund seeks to achieve its objective
by investing primarily in relatively high quality, low volatility fixed
income instruments. The Fund's benchmark index is the J.P. Morgan U.S.
3-Month Cash Index.
Shares of the Fund are only offered to other Funds of the Trust and other
GMO separately managed accounts.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and which are consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from
those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are readily available are valued at the last sale price or
official closing price on each business day, or if there is no such
reported sale or official closing price, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Short-term
investments with a remaining maturity of sixty days or less are valued at
amortized cost which approximates fair value. Shares of mutual funds are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available or whose values
the Manager has determined to be unreliable are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction. A security's value may be deemed unreliable if, for example,
the Manager becomes aware of information or events occurring after the
close of a foreign market that would materially affect that security's
value.
12
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
Some fixed income securities are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager.
The Manager evaluates such primary pricing sources on an ongoing basis,
and may change a pricing source should it deem it appropriate. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and at its discretion may override a
price supplied by a source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics. At February 28, 2003, the total value of these securities
represented 33% of net assets.
Certain securities held by the Fund, or an underlying fund in which it
invests, were valued on the basis of a price provided by a principal
market maker. The prices provided by the principal market makers may
differ from the value that would be realized if the securities were sold
and the differences could be material to the financial statements.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded
13
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
upon delivery or receipt of the currency or, if a forward currency
contract is offset by entering into another forward currency contract with
the same broker, upon settlement of the net gain or loss. These contracts
may involve market risk in excess of the unrealized gain or loss reflected
in the Fund's Statement of Assets and Liabilities. In addition, the Fund
could be exposed to risk if the counterparties are unable to meet the
terms of the contracts or if there are movements in foreign currency
values that are unfavorable to the Fund. The value of the currencies the
Fund has committed to buy or sell is shown under Note 6 and represents the
currency exposure the Fund has acquired or hedged through forward currency
contracts as of February 28, 2003.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts to manage its exposure to
the financial markets. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government and agency
obligations in accordance with the initial margin requirements of the
broker or exchange. In addition, the Fund maintains cash or securities in
an amount that at least equals the net amount payable in the event the
Fund must deliver the full amount of the contracts. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. At February
28, 2003, the Fund held no open futures contracts.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an
14
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
unfavorable change in the price of the future, security or currency
underlying the written option. There is the risk the Fund may not be able
to enter into a closing transaction because of an illiquid market. At
February 28, 2003, there were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid. At February 28, 2003, there were
no open purchased option contracts.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued
using prices supplied by a primary pricing source chosen by the Manager.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the "lender") that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
15
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
financial markets. A swap is an agreement to exchange the return generated
by one instrument for the return generated by another instrument. The Fund
may enter into interest rate, total return, forward swap spread lock and
credit default swap agreements to manage its exposure to interest rates
and credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return, both based on notional amounts. To the extent the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty,
respectively. Forward swap spread lock swap agreements involve commitments
to pay or receive a settlement amount calculated as the difference between
the swap spread and a fixed spread, multiplied by the notional amount
times the duration of the swap rate. The swap spread is the difference
between the benchmark swap rate (market rate) and the specific treasury
rate. In a credit default swap, one party makes a stream of payments to
another party in exchange for the right to receive a specified return in
the event of a default by a third party on its obligation. The Fund may
use credit default swaps to provide a measure of protection against
defaults of sovereign or corporate issuers (i.e., to reduce risk where the
Fund owns or has exposure to the issuer) or to take an active long or
short position with respect to the likelihood of a particular issuer's
default. In connection with these agreements, cash or securities may be
set aside as collateral by the Fund's custodian in accordance with the
terms of the swap agreement. The Fund earns interest on cash set aside as
collateral. Swaps are marked to market daily based upon quotations from
market makers and the change in value, if any, is recorded as unrealized
gain or loss in the Statement of Operations. Payments received or made at
the end of the measurement period are recorded as realized gain or loss in
the Statement of Operations. Net payments of interest on interest rate
swap agreements are included as part of interest income. These financial
instruments are not actively traded on financial markets. The values
assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values
may differ significantly from the values that would have been realized had
a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees,
elements of credit, legal, market, and documentation risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or disagree as to the meaning of contractual terms
in the agreements, or that there may be unfavorable changes in interest
rates. See Note 6 for a summary of open swap agreements as of February 28,
2003.
16
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, recovery of cash by the Fund may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund sold may decline
below the price at which it is obligated to repurchase them under the
agreement. At February 28, 2003, the Fund held no open reverse repurchase
agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of loss with
respect to the investment of the collateral, the risk of delay in recovery
or loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 2003, there were no securities on loan.
TAXES AND DISTRIBUTIONS
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Generally, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign dividend and interest
income are withheld in accordance with the applicable country's tax treaty
with the United States.
17
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003,
the tax basis of distributions paid from ordinary income was $0 and
$2,209,747, respectively.
As of February 28, 2003, the components of distributable earnings on a tax
basis consisted of $4,618,852 of undistributed ordinary income. The
temporary differences between book and tax basis distributable earnings
are primarily due to differing treatments for amortization of payments for
certain swap agreements and foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 2003. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to foreign currency
transactions. The financial highlights exclude these adjustments.
<Table>
<Caption>
Accumulated
Undistributed Net Accumulated Net
Investment Income Realized Loss
----------------- ---------------
$(1,216,776) $1,216,776
</Table>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the amortization of
premiums and discounts. Dividend income is recognized on the ex-dividend
date. Non cash dividends, if any, are recorded at the fair market value of
the securities received. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
Interest income on U.S. Treasury inflation indexed securities is accrued
daily based upon the inflation adjusted principal. Additionally, any
increase in the principal or face amount of the securities adjusted for
inflation is recorded as interest income.
18
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO does not charge the Fund any management or service fees for its
services. In addition, GMO has contractually agreed to reimburse all of
the Fund's expenses (excluding brokerage commissions and other
investment-related costs, hedging transaction fees, fees and expenses of
the independent Trustees of the Trust (including legal fees),
extraordinary, non-recurring and certain other unusual expenses (including
taxes), securities lending fees and expenses, interest expense and
transfer taxes).
The Fund's portion of the fee paid by the Trust to the independent
Trustees during the year ended February 28, 2003 was $4,514. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 28, 2003, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<Table>
<Caption>
Purchases Sales
-------------- ------------
U.S. Government securities $ 102,688,650 $ --
Investments (non-U.S. Government securities) 1,095,287,151 147,376,660
</Table>
For the year ended February 28, 2003, the cost of purchases includes the
initial transfer of GMO Alpha LIBOR Fund's investments in the Fund of
$1,024,462,382.
At February 28, 2003, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<Table>
<Caption>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
$1,178,475,189 $6,889,508 $(6,786,672) $102,836
</Table>
19
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDERS
At February 28, 2003, 77.6% of the outstanding shares of the Fund were
held by five shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Two of the shareholders are other funds of GMO Trust.
Investment activities of these shareholders may have a material effect on
the Fund.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<Table>
<Caption>
Period from November 26, 2002
(commencement of operations)
through February 28, 2003
------------------------------
Shares Amount
------------ ----------------
Shares sold 52,023,171 $1,300,562,382
Shares issued to shareholders
in reinvestment of distributions 88,709 2,209,747
Shares repurchased (6,260,224) (156,524,262)
---------- --------------
Net increase 45,851,656 $1,146,247,867
========== ==============
</Table>
The Fund was formed with an initial taxable contribution of securities
(including derivative instruments) in-kind, which had a market value of
$1,024,462,382 on the date of contribution.
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 28, 2003 is as
follows:
FORWARD CURRENCY CONTRACTS
<Table>
<Caption>
Settlement Net Unrealized
Date Deliver Units of Currency Value Appreciation
---------- -------- ----------------- ------------- --------------
Sales
4/15/03 GBP 20,000,000 $31,416,516 $763,484
</Table>
20
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<Table>
<Caption>
Net Unrealized
Expiration Appreciation
Notional Amount Date Description (Depreciation)*
--------------- ---------- -------------------------------------------------- ---------------
FORWARD SWAP SPREAD LOCK SWAPS
250,000,000 USD 3/10/03 Agreement with Bear Stearns Bank Plc dated 3/06/01 $ 696,791
to pay (receive) the notional amount multiplied by
the difference between the 2 year swap spread and
a fixed spread times the duration of the 2 year
swap rate.
INTEREST RATE SWAPS
100,000,000 USD 1/18/06 Agreement with Goldman Sachs International dated (1,485,337)
1/16/01 to pay the notional amount multiplied by
5.82% and to receive the notional amount
multiplied by the 3 month Floating Rate LIBOR
adjusted by a specified spread.
50,000,000 USD 1/09/08 Agreement with JP Morgan Chase Bank dated 1/07/03 (975,692)
to pay the notional amount multiplied by 3.43375%
and to receive the notional amount multiplied by
the 3 month Floating Rate LIBOR adjusted by a
specified spread.
35,000,000 USD 3/04/08 Agreement with JP Morgan Chase Bank dated 2/28/03 --
to pay the notional amount multiplied by 3.096%
and to receive the notional amount multiplied by
the 3 month Floating Rate LIBOR adjusted by a
specified spread.
40,000,000 USD 1/24/11 Agreement with Goldman Sachs International dated (1,502,440)
1/19/01 to pay the notional amount multiplied by
6.0675% and to receive the notional amount
multiplied by the 3 month Floating Rate LIBOR
adjusted by a specified spread.
</Table>
21
<Page>
GMO SHORT-DURATION COLLATERAL FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 2003
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<Table>
<Caption>
Net Unrealized
Expiration Appreciation
Notional Amount Date Description (Depreciation)*
--------------- ---------- -------------------------------------------------- ---------------
26,700,000 USD 2/25/13 Agreement with Bank of America dated 2/20/03 to $ (320,472)
pay the notional amount multiplied by 4.25% and to
receive the notional amount multiplied by the 3
month Floating Rate LIBOR adjusted by a specified
spread.
TOTAL RETURN SWAPS
35,000,000 USD 4/22/03 Agreement with Bank of America dated 2/20/03 to 330,419
receive (pay) the notional amount multiplied by
the return on the Bank of America AAA 10 year CMBS
Index and to pay the notional amount multiplied by
0.92%.
35,000,000 USD 9/1/03 Agreement with Lehman Brothers Special Financing --
Inc. dated 2/25/03 to receive (pay) the notional
amount multiplied by the return on the Lehman
Brothers AAA CMBS Index and to pay the notional
amount multiplied by 1 month Floating Rate LIBOR
adjusted by a specified spread.
-----------
$(3,256,731)
===========
</Table>
* Includes unrealized gain (loss) of $11,439,351 incurred by GMO Alpha
LIBOR Fund prior conversion to the Fund on November 27, 2002.
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
22
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO SHORT-DURATION COLLATERAL FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Short-Duration Collateral
Fund (the "Fund") (a series of the GMO Trust) at February 28, 2003, and the
results of its operations, the changes in its net assets and the financial
highlights for the period from November 26, 2002 (commencement of operations) to
February 28, 2003, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit, which included confirmation of securities at February
28, 2003 by correspondence with the custodian and brokers, provides a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 2003
23
<Page>
TRUSTEES AND OFFICERS (UNAUDITED)
The following tables list the Trust's Trustees and officers; their address and
age; their position with the Trust; the length of time holding that position
with the Trust; their principal occupation(s) during the past five years; the
number of portfolios in the fund complex they oversee; and other directorships
they hold in companies subject to registration or reporting requirements of the
Securities Exchange Act of 1934 (generally called "public companies") or in
registered investment companies. The Trust's Statement of Additional Information
includes additional information about the Trust's trustees and is available,
without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf,
Boston, MA 02110.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------- --------------- --------------- ------------------------- --------------- ---------------
Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2)
c/o GMO Trust Trust Administration and Senior
40 Rowes Wharf Associate Dean, Harvard
Boston, MA University.
02110
Age: 61
Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None
c/o GMO Trust Trust 2000 Procter LLP; Secretary
40 Rowes Wharf and Consultant,
Boston, MA Provant, Inc. (provider
02110 of performance
Age: 58 improvement training
services and products)
(1998 - present);
Consultant -- Business
and Law.
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
2 Mr. Light is a director of Harvard Management Company, Inc. and Security
Capital European Realty. Neither of these companies has a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act or subject to the requirements of Section 15(d) of the Act and
neither of these companies is a registered investment company.
24
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
Number of
Portfolios in
Term of Principal Fund
Office(1) and Occupation(s) Complex Other
Name, Address, Position(s) Length of During Past Overseen Directorships
and Age Held with Fund Time Served Five Years by Trustee Held by Trustee
------------------------- --------------- --------------- ------------------------- --------------- ---------------
R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None
c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC.
40 Rowes Wharf Trustees of the from February
Boston, MA Trust 2002 - October
02110 2002.
Age: 64
</Table>
1 Each Trustee is elected to serve until the next meeting held for the
purpose of electing Trustees and until his successor is elected and
qualified.
3 Trustee is deemed to be an "interested person" of the Trust and
Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act.
25
<Page>
PRINCIPAL OFFICERS:
<Table>
<Caption>
Term of
Office(4) and Principal Occupation(s)
Name, Address, Position(s) Length of During Past
and Age Held with Fund Time Served Five Years
-------------------------- -------------- -------------- ---------------------------------------------
Scott Eston President and President and Chief Financial Officer (1997 - present),
c/o GMO Trust Chief Chief Chief Operating Officer (2000 - present) and
40 Rowes Wharf Executive Executive Member, Grantham, Mayo, Van Otterloo & Co.
Boston, MA Officer of the Officer since LLC.
02110 Trust October 2002;
Age: 47 Vice President
from August
1998 -
October 2002.
Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co.
c/o GMO Trust Financial Financial LLC.
40 Rowes Wharf Officer and Officer Since
Boston, MA Treasurer of February 2000;
02110 the Trust Treasurer
Age: 45 since February
1998.
Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo,
c/o GMO Trust Treasurer of September Van Otterloo & Co. LLC.
40 Rowes Wharf the Trust 1998.
Boston, MA
02110
Age: 33
William R. Royer, Esq. Vice President Vice President General Counsel, Anti- Money Laundering
c/o GMO Trust and Clerk of since February Reporting Officer (July 2002 - February 2003)
40 Rowes Wharf the Trust 1997; Clerk and Member, Grantham, Mayo, Van Otterloo &
Boston, MA since March Co. LLC.
02110 2001; May
Age: 37 1999 - August
1999.
Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo,
c/o GMO Trust and Secretary since August Van Otterloo & Co. LLC (June 1999 -
40 Rowes Wharf of the Trust 1999; present); Associate/ Junior Partner, Hale and
Boston, MA Secretary Dorr LLP (1991 - 1999).
02110 since March
Age: 58 2001.
Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer
c/o GMO Trust and Anti- 2003. (February 2003 - present) and Compliance
40 Rowes Wharf Money Officer, Grantham, Mayo, Van Otterloo & Co.
Boston, MA Laundering LLC.
02110 Compliance
Age: 32 Officer
</Table>
4 Officers are elected to hold such office until their successor is
elected and qualified to carry out the duties and responsibilities of
their office, or until he or she resigns or is removed from office.
26