<PAGE>
Goldman Sachs Funds
TAX-FREE FUNDS Annual Report October 31, 1998
[GRAPHIC] High current income potential
from portfolios that invest primarily
in municipal securities.
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Market Overview
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Mutual funds, annuities, and other investment products:
o are not FDIC insured;
o are not deposits or obligations of, or guaranteed by, any financial
institution;
o are subject to investment risks, including possible loss of the principal
amount invested.
- --------------------------------------------------------------------------------
Dear Shareholder,
Investors' renewed interest in fixed income securities during the review period
was further fueled by a worldwide flight to quality in the wake of increased
levels of global market turmoil.
o The Economy: The Federal Reserve Remains on Hold -- Early in the period,
subdued inflationary pressures and a slower pace of economic growth kept
the Federal Reserve Board (the "Fed") from raising interest rates. The
onset of Asian market turbulence further motivated the Fed to remain
inactive as officials indicated that they wanted to await stabilization of
world markets before implementing any policy shift.
As the period progressed, it appeared likely that the strength of
the U.S. equity market would diffuse much of the impact of the Asian
crisis on U.S. growth. By period end, however, Asia's financial
instability had spread to other markets. For the first time in months,
monetary ease became an option as the Fed's near-term focus shifted from
the pace of U.S. economic activity to the health of the global financial
system.
o The Bond Market: Bond Markets Fluctuated Along With Investor Confidence --
For most of the period, market sentiment (and interest rates) vacillated
between optimism that the Asian ordeal was well in hand and fear that
global market turmoil would spread.
At period end, this touch-and-go global anxiety culminated in a
powerful Treasury rally. The catalyst for the rally included investors'
wholesale preference for Treasuries--exacerbated by the ruble devaluation
and Russia's de facto default--and technical imbalances (forced
liquidations by heavily leveraged players combined with seasonal supply
pressures). In August alone, the long bond rallied 46 basis points, while
shorter-maturity securities rallied 70 basis points.
o Outlook: Environment for Bonds is Positive -- On the domestic front, the
U.S. economy appears to have retained forward momentum. Although consumer
confidence and spending have recently registered declines, the fundamental
supports for spending growth remain largely intact. Hence, we believe real
GDP growth should remain firm for the rest of 1998 before decelerating in
1999.
A key factor supporting this view is Latin America's increased
vulnerability to Asia's market turmoil. Latin America, in particular,
poses a substantial risk to the U.S. growth outlook. Approximately 20% of
all U.S. exports flow to Latin America, and U.S. trade links within this
region are tighter than those with Asia. Therefore, should growth in Latin
America substantially weaken, the result could be negative for the U.S.
economy.
Another key factor is the U.S. stock market's recent volatility.
Even if the market recovers, as we expect, residual uncertainty is apt to
dampen growth in consumer and capital spending. As of this writing, the
Federal Reserve Board has cut short-term rates by three-quarters of a
point, to 4.75%. By year-end 1999, we expect the Fed Funds target could
fall to 4.00%. The prospect of this much easing could mean that the bond
market rally has not yet run its course.
We encourage you to maintain your long-term investment program and
look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ David B. Ford /s/ John P. McNulty /s/ Sharmin Mossavar-Rahmani
David B. Ford John P. McNulty Sharmin Mossavar-Rahmani
Co-Head, Goldman Sachs Co-Head, Goldman Sachs CIO Fixed Income Investments,
Asset Management Asset Management Goldman Sachs Asset Management
November 30, 1998
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Fixed Income Investment Process
With our fixed income portfolios, we seek consistent, strong performance. We
actively manage our funds within a research-intensive, risk-controlled framework
instead of attempting to anticipate interest rate movements.
-------------------------------
FIXED INCOME SECURITY SELECTION
-------------------------------
-----------------------
1
Sector
Allocation
-----------------------
Our sector specialists work together to assess relative value among sectors and
create investment strategies to meet each fund's objectives.
-----------------------
2
Security
Selection
-----------------------
In selecting securities for each portfolio, our fixed income teams have access
to the vast resources of Goldman Sachs.
-----------------------
3
Yield Curve
Strategies
-----------------------
We adjust the term structure of our portfolios based on our expectations of the
relationship between short- and long-term interest rates, while keeping each
fund's duration close to its benchmark.
1
<PAGE>
FUND BASICS
Short Duration Tax-Free Fund
as of October 31, 1998
Assets Under Management
-----------------------
$83.8 Million
-----------------------
NASDAQ SYMBOLS
Class A Shares
-----------------------
GSDTX
-----------------------
Class B Shares
-----------------------
GSDBX
-----------------------
Class C Shares
-----------------------
GSTCX
-----------------------
Institutional Shares
-----------------------
GSDUX
-----------------------
Service Shares
-----------------------
GSTAX
-----------------------
Administration Shares
-----------------------
GSTAX
-----------------------
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PERFORMANCE REVIEW
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<TABLE>
<CAPTION>
October 31, 1997- Fund Total Return 30-Day Taxable 30-Day SEC Lehman 3-Year
October 31, 1998 (based on NAV)/1/ Equivalent Yield/2/ Yield/3/ Muni Index/4/
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 4.97% 5.71% 3.38% 5.72%
Class B 4.25% 4.86% 2.88% 5.72%
Class C 4.19% N/A N/A 5.72%
Institutional 5.25% 6.52% 3.86% 5.72%
Administration 4.99% 6.05% 3.58% 5.72%
Service 4.73% 5.64% 3.34% 5.72%
- ------------------------------------------------------------------------------------
</TABLE>
/1/The net asset value represents the net assets of the Fund (ex-dividend)
divided by the total number of shares.
/2/The Taxable Equivalent Yield of the Fund is calculated by dividing the
current 30-day SEC yield by 1 minus the highest 1997 federal income tax rate
of 40.8% (adjusted for the 3% phaseout of itemized deductions for individuals
at high income levels).
/3/The 30-Day SEC Yield of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a 30-day period (ending on the stated month-end date)
by the maximum public offering price per share of the Fund on the last day of
the period. This number is compounded semiannually and then annualized. This
yield does not necessarily reflect income actually earned and distributed by
the Fund and, therefore, may not be correlated with the dividends or other
distributions paid to shareholders.
/4/The Lehman 3-Year Municipal Bond Index does not reflect any fees or expenses.
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SEC RETURNS
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<TABLE>
<CAPTION>
For the period ending 9/30/98 Class A Class B Class C Institutional Administration Service
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
One Year/5/ 2.74% 2.30% 3.17% 5.25% 5.09% 4.63%
Five Years/5/ N/A N/A N/A 4.19% 3.93% N/A
Since Inception/5/ 4.17% 4.28% 4.36% 4.58% 4.08% 4.54%
(5/1/97) (5/1/97) (8/15/97) (10/1/92) (5/20/93) (9/20/94)
- ---------------------------------------------------------------------------------------------------
</TABLE>
/5/The SEC Average Annualized Return is determined by computing the annual
percentage change in the value of $1,000 invested at the maximum public
offering price for specified periods, assuming reinvestment of all
distributions at NAV. The total return calculation reflects a maximum initial
sales charge of 2% for Class A shares, the assumed deferred sales charge for
Class B shares (2% maximum declining to 0% after three years) and the assumed
deferred sales charge for Class C shares (1% if redeemed within 12 months of
purchase). The public offering price of the Class A shares on 9/30/98 was
$10.39 and represents the NAV plus the maximum sales charge of 2%.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION AS OF 10/31/986
- --------------------------------------------------------------------------------
Sector Allocation Credit Allocation
- --------------------------------------------------------------------------------
Insured Revenue Bonds 39.6% AAA 57.9%
Revenue Bonds 32.9% AA 17.6%
Insured General Obligations 15.3% A 23.4%
Pre-refunded 8.4% BBB 1.1%
Variable Rate Demand Notes 2.3%
General Obligations 1.5%
- --------------------------------------------------------------------------------
/6/The Fund is actively managed and, as such, its composition may differ over
time. Figures represent a percentage of total portfolio investments that have
settled and include an offset to cash equivalents relating to all unsettled
trades and may not sum to 100%.
Total return figures represent past performance and do not indicate future
results, which will vary. The investment return and principal value of an
investment will fluctuate and, therefore, an investor's shares, when
redeemed, may be worth more or less than their original cost. Performance
reflects fee waivers and expense limitations in effect. In their absence,
performance would be reduced.
2
<PAGE>
PERFORMANCE OVERVIEW
Short Duration Tax-Free Fund
Dear Shareholder,
We are pleased to report on the performance of the Goldman Sachs Short Duration
Tax-Free Fund for the 12-month period ended October 31, 1998.
Performance Review
Over the 12-month period ended October 31, 1998, the Fund slightly
underperformed the 5.72% return of the Fund's benchmark, the Lehman 3-Year
Municipal Bond Index. During the same period, the Fund's Institutional shares
performed well versus its peers, outperforming the 5.16% average annual total
return of its Lipper Short Duration Tax-Free Funds peer group.
The Fund's slight underperformance relative to the benchmark was the result of
an overweight in municipals (compared to the benchmark), which was hedged with
short positions in U.S. Treasury futures contracts.
Municipal Market Performance
Despite good performance, technical forces -- unprecedented new issue supply and
moderate demand -- worked against the municipal market for most of the 12-month
period.
During the period, the municipal market posted strong returns up and down the
yield curve. Unfortunately, this strong absolute performance was overshadowed by
weak relative performance when compared against U.S. Treasury returns (the
overriding benchmark for many fixed income investors). For the municipal market,
a direct result of the low yield environment during this time was a significant
increase in new issue volume from levels of prior years. For example, in May,
the Long Island Power Authority conducted the largest municipal bond
underwriting in history -- at $3.4 billion in long-term debt and $1.5 billion in
short-term debt. One month later, in June, single-month new issuance was the
heaviest seen since 1993. Although difficult to absorb, the high percentage of
new money borrowing this year bodes well for the longer term municipal outlook.
At period end, although tax-exempt yields fell significantly, the rally was less
obvious when compared with a massive rally occurring in the Treasury market. The
rapidly changing Treasury markets created a significant liquidity problem, a
factor that translated into heightened skittishness for municipal bond traders
and investors.
Portfolio Composition
During the period, reflecting continuing tight credit spreads, we emphasized
higher credit quality issues. Thus we substantially decreased the Fund's
position in revenue bonds, from 52.5% on October 31, 1997 to 32.9% on October
31, 1998, as well as the Fund's position in general obligation bonds (9.8% to
1.5%). Conversely, we added to the Fund's positions in insured revenue bonds
(23.9% to 39.6%), insured general obligations (9.0% to 15.3%), and pre-refunded
bonds (4.5% to 8.4%), which are generally of higher quality and are higher
yielding than generic high quality securities such as AAAand AA GOs.
3
<PAGE>
PERFORMANCE OVERVIEW
The Goldman Sachs Short Duration Tax-Free Fund seeks current income, consistent
with low volatility of principal, that is exempt from regular federal income
tax, primarily through investments in municipal securities.
Portfolio Highlights
o $2 million Nebraska Public Power District Revenue Bonds 5% maturing 1/1/02
(NPPD) -- These bonds were bought in June at a slightly above-market
yield. Investors have been concerned about public power bonds due to
deregulation of the industry; however, these bonds are insured by MBIA.
Furthermore, NPPD is considered well positioned due to limited competition
and the slow pace of deregulation within Nebraska. The District is
financially sound, retires debt rapidly and has a diverse customer base.
New Acquisition
o $1 million Alabama Building Renovation Finance Authority Building
Renovation Revenue Bonds 7.4% maturing 9/1/06 -- These bonds, which are
rated A2/A+, finance renovations on seven state buildings. The bonds are
secured by lease payments which will be appropriated annually by the
State. The buildings are considered essential structures; thus the bonds
are an indirect obligation of the State and are rated based on the State,
albeit slightly lower to reflect the unlikely but potential uncertainty of
appropriation. The bonds have the potential to appreciate because they can
be refunded.
Portfolio Outlook
During the period of global volatility that occurred in the fall, it became
apparent that municipal relative performance was highly correlated with other
"spread" sectors and that relative performance would be a function of movements
in Treasury yields and not municipal technicals. Our municipal overweight trades
are designed to exploit technical weakness in municipals where we see the
potential for quick reversions to normal relationships. The trades are not
intended to become bets on the direction of interest rates, which is what they
became during the late summer/early fall of 1998.
Our current outlook is guarded optimism for municipal market performance. While
tax reform is always a risk for municipals, the current political environment is
one in which tax reform is not a priority.
We thank you for your investment and look forward to your continued confidence.
Goldman Sachs U.S. Fixed Income -- Municipal Investment Management Team
November 30, 1998
4
<PAGE>
FUND BASICS
Municipal Income Fund
as of October 31, 1998
Assets Under Management
-----------------------
$106.9 Million
-----------------------
NASDAQ SYMBOLS
Class A Shares
-----------------------
GSMIX
-----------------------
Class B Shares
-----------------------
GSMBX
-----------------------
Class C Shares
-----------------------
GSMUX
-----------------------
Institutional Shares
-----------------------
GSMTX
-----------------------
Service Shares
-----------------------
GSMEX
-----------------------
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PERFORMANCE REVIEW
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 31, 1997- Fund Total Return 30-Day Taxable 30-Day SEC Lehman 15-Year
October 31, 1998 (based on NAV)/1/ Equivalent Yield/2/ Yield/3/ Muni Index/4/
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 7.79% 6.28% 3.72% 8.98%
Class B 6.91% 5.30% 3.14% 8.98%
Class C 6.98% 5.32% 3.15% 8.98%
Institutional 8.00% 7.30% 4.32% 8.98%
Service 7.68% N/A N/A 8.98%
- -------------------------------------------------------------------------------------
</TABLE>
/1/The net asset value represents the net assets of the Fund (ex-dividend)
divided by the total number of shares.
/2/The Taxable Equivalent Yield of the Fund is calculated by dividing the
current 30-day SEC yield by 1 minus the highest 1997 federal income tax rate
of 40.8% (adjusted for the 3% phaseout of itemized deductions for individuals
at high income levels).
/3/The 30-Day SEC Yield of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a 30-day period (ending on the stated month-end date)
by the maximum public offering price per share of the Fund on the last day of
the period. This number is compounded semiannually and then annualized. This
yield does not necessarily reflect income actually earned and distributed by
the Fund and, therefore, may not be correlated with the dividends or other
distributions paid to shareholders.
/4/The Lehman Brothers 15-Year Municipal Bond Index is a total return
performance benchmark for the 15-year maturity, investment-grade tax-exempt
bond market. Returns and attributes for the Index are calculated semi-monthly
using approximately 5,000 municipal bonds, which are priced by Muller Data
Corporation. Please note that the benchmark return reflects performance data
from the Fund's first full month of operation (8/1/93), which does not
directly correlate with the Fund's performance since its inception. The Index
figures do not reflect any fees or expenses.
- --------------------------------------------------------------------------------
SEC RETURNS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period ending 9/30/98 Class A Class B Class C Institutional Service
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One Year/5/ 3.60% 2.44% 6.58% 8.78% 8.31%
Five Years/5/ 5.28% N/A N/A N/A 6.21%
Since Inception/5/ 5.70% 7.14% 8.09% 9.24% 6.60%
(7/20/93) (5/1/96) (8/15/97) (8/15/97) (7/20/93)6
- --------------------------------------------------------------------------------------
</TABLE>
/5/The SEC Average Annualized Return is determined by computing the annual
percentage change in the value of $1,000 invested at the maximum public
offering price for specified periods, assuming reinvestment of all
distributions at NAV. The total return calculation reflects a maximum initial
sales charge of 4.5% for Class A shares, the assumed deferred sales charge
for Class B shares (5% maximum declining to 0% after six years), and the
assumed deferred sales charge for Class C shares (1% if redeemed within 12
months of purchase). The public offering price of the Class A shares on
9/30/98 was $16.29 and represents the NAV plus the maximum sales charge of
4.5%.
/6/Performance data for Service shares prior to 8/15/97 is that of Class A
shares (excluding the impact of front-end sales charges applicable to Class A
shares since Service shares are not subject to any sales charges).
Performance of Class A shares in the Fund reflects the expenses applicable to
the Fund's Class A shares. The fees applicable to Service shares are
different from those applicable to Class A shares which impact performance
ratings and rankings for a class of shares.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION AS OF 10/31/987
- --------------------------------------------------------------------------------
Sector Allocation Credit Allocation
- --------------------------------------------------------------------------------
Insured Revenue Bonds 53.9% AAA 64.7%
Revenue Bonds 25.2% AA 19.0%
Insured General Obligations 13.7% A 11.9%
General Obligations 9.5% BBB 4.3%
- --------------------------------------------------------------------------------
/7/The Fund is actively managed and, as such, its composition may differ over
time. Figures represent a percentage of total portfolio investments that have
settled and include an offset to cash equivalents relating to all unsettled
trades and may not sum to 100%.
Total return figures represent past performance and do not indicate future
results, which will vary. The investment return and principal value of an
investment will fluctuate and, therefore, an investor's shares, when
redeemed, may be worth more or less than their original cost. Performance
reflects fee waivers and expense limitations in effect. In their absence,
performance would be reduced.
5
<PAGE>
PERFORMANCE OVERVIEW
Municipal Income Fund
Dear Shareholder,
We are pleased to report on the performance of the Goldman Sachs Municipal
Income Fund for the 12-month period ended October 31, 1998.
Performance Review
Over the 12-month period ended October 31, 1998, the Fund slightly
underperformed the 8.98% return of the Fund's benchmark, the Lehman 15-Year
Municipal Bond Index. During the same period, the Fund performed well versus its
peers. The Fund's Class A, Institutional and Service shares outperformed the
7.12% average annual total return of its peers in the Lipper Municipal Income
Funds category, ranking 44, 29 and 57, respectively, out of 235 funds. The
Fund's Class B and C shares ranked 147 and 138, respectively, out of 235 funds.
Over the five-year period ended October 31, 1998, the Fund's Class A shares
ranked 29 out of 138 funds. Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results.
The Fund's slight underperformance relative to the benchmark was the result of
an overweight position in municipals, which was hedged with short positions in
U.S. Treasury futures contracts. Another component of the Fund's
underperformance was greater exposure, versus the benchmark (which has mostly
15-year bonds), to longer maturity callable bonds whose price appreciation was
inhibited by the increased likelihood that they would be called prior to
maturity.
Municipal Market Performance
Despite good performance, technical forces -- unprecedented new issue supply and
moderate demand -- worked against the municipal market for most of the 12-month
period.
During the period, the municipal market posted strong returns up and down the
yield curve. Unfortunately, the strong absolute performance was overshadowed by
the weak relative performance when compared against U.S. Treasury returns (the
overriding benchmark for many fixed income investors). For the municipal market,
a direct result of the low yield environment during this time was a significant
increase in new issue volume from levels of prior years. For example, in May,
the Long Island Power Authority conducted the largest municipal bond
underwriting in history -- $3.4 billion in long-term debt and $1.5 billion in
short-term debt. One month later, in June, single-month new issuance was the
heaviest seen since 1993. Although difficult to absorb, the high percentage of
new money borrowing this year bodes well for the longer term municipal outlook.
At period end, although tax-exempt yields fell significantly, the rally was less
obvious when compared with a massive rally occurring in the Treasury market. The
rapidly changing Treasury markets created a significant liquidity problem, a
factor that translated into heightened skittishness for municipal bond traders
and investors.
Portfolio Composition
During the 12-month period under review, reflecting tight credit spreads, we
placed greater emphasis on high quality, higher yielding (than generic high
quality securities, such as AAA
6
<PAGE>
PERFORMANCE OVERVIEW
and AAGOs) bonds. Thus we increased the Fund's position in insured revenue
bonds, from 45.3% on October 31, 1997 to 53.9% on October 31, 1998. We also
increased the Fund's position in general obligation bonds (6.6% to 9.5%).
Conversely, the Fund's positions in revenue bonds, which are generally lower
quality, and insured general obligations, which tend to yield less, decreased
slightly (from 28.6% to 25.2% and from 15.7% to 13.7%, respectively). The Fund's
position in variable rate demand notes (3.8% on October 31, 1998) was
eliminated.
The Goldman Sachs Municipal Income Fund seeks a high level of current income
exempt from regular federal income tax that is consistent with preservation of
capital, primarily through investments in municipal securities.
Portfolio Highlight
o Michigan Higher Education Facilities Authority Revenue Bonds for the
Thomas M. Cooley Law School -- The Fund holds $4 million of these bonds,
which carry a 5.4% coupon, mature on May 1, 2018, and are a general
obligation of the Law School. In addition, a letter of credit from First
of America Bank is available to pay debt service. Because of the Law
School's unique niche -- it targets evening, weekend and part-time
students -- and the presence of a letter of credit, the holding is an
attractive one, generating additional yield.
New Acquisition
o New Mexico Finance Authority Federal Highway Grant Anticipation Revenue
Bonds 5 1/4% maturing 9/1/14 -- These bonds are issued under a new
structure that utilizes federal funds by issuing bonds in anticipation of
future federal funding. As a result, construction improvements occur more
rapidly and cheaply. Revenues pledged to pay debt service are distributed
to the State from federal moneys generated by federal gas taxes. Given the
long history of federal highway funding, even under various scenarios of
lower revenues, coverage should be sound. Furthermore, bond insurance
provides additional security.
Portfolio Outlook
During the period of global volatility that occurred in the fall, it became
apparent that municipal relative performance was highly correlated with other
"spread" sectors and that relative performance would be a function of movements
in Treasury yields and not municipal technicals. Our municipal overweight trades
are designed to exploit technical weakness in municipals where we see the
potential for quick reversions to normal relationships. The trades are not
intended to become bets on the direction of interest rates, which is what they
became during the late summer/early fall of 1998.
Our current outlook is guarded optimism for municipal market performance. While
tax reform is always a risk for municipals, the current political environment is
one in which tax reform is not a priority.
We thank you for your investment and look forward to your continued confidence.
Goldman Sachs U.S. Fixed Income -- Municipal Investment Management Team
November 30, 1998
7
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Fixed Income Funds --
An Effective Portfolio Diversifier
By putting securities with different correlations to work in your portfolio, you
can expand your investment opportunities while potentially spreading your risk.
Recent global market events -- and resulting price volatility in the stock
market -- have encouraged many investors to seek more stability in their
portfolio through greater diversification. In many cases, investors have
increased their allocation to fixed income securities. What some individuals may
have overlooked is the extent to which they can diversify within the fixed
income arena. Different types of fixed income securities possess varying levels
of market correlation to each other, and therefore should be able to provide an
added measure of protection against market risk.
Differing Correlations May Help Reduce Exposure to Risk
Correlation simply defines how two investments move together. If you own two
highly correlated investments, their returns will tend to move in tandem. If you
own two loosely correlated assets, their returns will tend to move in opposite
directions.
The table below shows the different correlations between fixed income
securities. A high correlation of 0.99, such as that between cash and Treasury
bills, means these two securities tend to react similarly in a given market
environment. A low correlation such as 0.23, such as that between high yield
bonds and intermediate government bonds, means these two securities have a low
correlation -- a difference that could provide an important level of
diversification in a portfolio.
- --------------------------------------------------------------------------------
CORRELATIONS OF FIXED INCOME SECURITIES
- --------------------------------------------------------------------------------
Int. Long Long High
Govt. Govt. Corp. Muni Global Yield
Cash T-Bill Bonds Bonds Bonds Bonds Bonds Bonds
- --------------------------------------------------------------------------------
Cash 1.00
T-Bill 0.99 1.00
Int. Govt. Bonds 0.15 0.12 1.00
Long Govt. Bonds 0.07 0.04 0.91 1.00
Long Corp. Bonds 0.13 0.10 0.98 0.96 1.00
Muni Bonds 0.04 0.03 0.75 0.76 0.78 1.00
Global Bonds 0.00 -0.03 0.73 0.64 0.69 0.54 1.00
High Yield Bonds -0.14 -0.13 0.23 0.26 0.31 0.31 0.09 1.00
- --------------------------------------------------------------------------------
Sources: See back cover.
Past performance is no guarantee of future results.
All of the indices are unmanaged and returns assume the reinvestment of income.
Government bonds and T-bills, unlike Fund shares, are guaranteed as to the
timely payment of principal and interest. The indices do not reflect any fees
and expenses. The information in the chart above is not intended to imply the
future performance of any of the investments mentioned or of any Goldman Sachs
Fund, nor does it reflect any Fund's actual portfolio composition, fees or
expenses.
For More Information
Fixed income mutual funds are a convenient way to acquire a diversified
portfolio of fixed income securities. Goldman Sachs Fixed Income Funds can
provide access to each of the fixed income securities shown above. For
information on how these Funds can potentially help manage risk in your
portfolio, consult your investment professional.
8
<PAGE>
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
Performance Summary
October 31, 1998
The following graph shows the value as of October 31, 1998, of a $10,000
investment made in Institutional shares on October 1, 1992 (commencement of
operations). For comparative purposes, the performance of the Fund's
benchmark (the Lehman Brothers 3-Year Municipal Bond Index ("Lehman 3-Year
Muni Bond Index")) is shown. This performance data represents past
performance and should not be considered indicative of future performance
which will fluctuate with changes in market conditions. These performance
fluctuations will cause an investor's shares, when redeemed, to be worth more
or less than their original cost. Performance of Class A, Class B, Class C,
Administration and Service shares will vary from the Institutional shares due
to differences in fees and loads.
SHORT DURATION TAX-FREE FUND'S LIFETIME PERFORMANCE
GROWTH OF A $10,000 INVESTMENT, DISTRIBUTIONS REINVESTED OCTOBER 1, 1992 TO
OCTOBER 31, 1998.
[LINE GRAPH APPEARS HERE]
Date SDTF Institutional Lehman 3-Year
Muni Bond Index
10/1/92 10000 10000
10/92 9966 9961
11/92 10041 10031
12/92 10127 10091
1/93 10199 10167
2/93 10406 10326
3/93 10350 10295
4/93 10425 10355
5/93 10427 10383
6/93 10512 10449
7/93 10504 10455
8/93 10590 10552
9/93 10656 10598
10/93 10667 10620
11/93 10643 10607
12/93 10755 10718
1/94 10841 10805
2/94 10703 10704
3/94 10562 10575
4/94 10627 10637
5/94 10632 10687
6/94 10618 10690
7/94 10710 10779
8/94 10738 10818
9/94 10715 10791
10/94 10653 10765
11/94 10685 10746
12/94 10707 10792
1/95 10726 10881
2/95 10831 10997
3/95 10879 11096
4/95 10909 11133
5/95 11053 11304
6/95 11087 11331
7/95 11191 11451
8/95 11271 11540
9/95 11287 11573
10/95 11325 11627
11/95 11399 11702
12/95 11428 11751
1/96 11548 11842
2/96 11575 11845
3/96 11521 11816
4/96 11526 11830
5/96 11532 11841
6/96 11597 11912
7/96 11650 11978
8/96 11681 11996
9/96 11758 12069
10/96 11836 12153
11/96 11949 12266
12/96 11967 12272
1/97 12007 12326
2/97 12062 12387
3/97 11995 12322
4/97 12062 12375
5/97 12153 12476
6/97 12232 12549
7/97 12359 12699
8/97 12340 12673
9/97 12432 12764
10/97 12475 12820
11/97 12518 12857
12/97 12610 12945
1/98 12690 13030
2/98 12721 13057
3/98 12750 13078
4/98 12729 13060
5/98 12848 13182
6/98 12878 13226
7/98 12909 13274
8/98 13016 13403
9/98 13085 13489
10/98 13129 13553
<TABLE>
<CAPTION>
SINCE INCEPTION
OF CLASS FIVE YEARS ONE YEAR
AVERAGE ANNUAL TOTAL RETURN THROUGH OCTOBER 31, 1998
<S> <C> <C> <C>
CLASS A (COMMENCED MAY 1, 1997)
Excluding sales charges 5.59% n/a 4.97%
Including sales charges 4.20% n/a 2.83%
-----------------------------------------------------------------------------
CLASS B (COMMENCED MAY 1, 1997)
Excluding sales charges 4.89% n/a 4.25%
Including sales charges 4.21% n/a 2.18%
-----------------------------------------------------------------------------
CLASS C (COMMENCED AUGUST 15, 1997)
Excluding sales charges 4.26% n/a 4.19%
Including sales charges 4.26% n/a 3.16%
-----------------------------------------------------------------------------
INSTITUTIONAL CLASS (COMMENCED OCTOBER
1, 1992) 4.57% 4.24% 5.25%
-----------------------------------------------------------------------------
ADMINISTRATION CLASS (COMMENCED MAY 20,
1993) 4.08% 3.98% 4.99%
-----------------------------------------------------------------------------
SERVICE CLASS (COMMENCED SEPTEMBER 20,
1994) 4.55% n/a 4.73%
-----------------------------------------------------------------------------
</TABLE>
9
<PAGE>
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
Statement of Investments
October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
<S> <C> <C> <C>
DEBT OBLIGATIONS - 82.4%
ALABAMA - 1.3%
Alabama Building Renovation Finance Authority Building Renovation RB
Series 1990 (A2/A+)
$ 1,000,000 7.40% 09/01/2006 $ 1,080,560
-----------------------------------------------------------------------------------------------
ARIZONA - 4.3%
Mesa IDA Health Care Facilities (BIGI) (AAA/Aaa)
$ 890,000 7.50% 01/01/2004 $ 912,980
Tempe Union High School District No. 213 GO Series 1998 (FGIC) (AAA/Aaa)
2,500,000 6.00 07/01/2003 2,734,000
-----------------------------------------------------------------------------------------------
$ 3,646,980
-----------------------------------------------------------------------------------------------
CALIFORNIA - 2.3%
ABAG Finance Authority for Non-Profit Corporations Refunding Bond (BBB)
$ 900,000 5.25% 10/01/2007 $ 918,270
Sacramento County Housing Authority MF Hsg. RB for Rancho Natomas
Apartments (LOC) (A1)
1,000,000 4.80 12/15/2007 1,000,000
-----------------------------------------------------------------------------------------------
$ 1,918,270
-----------------------------------------------------------------------------------------------
COLORADO - 2.8%
Denver City & County Airport Prerefunded RB Series 1992 A (AAA/Baa1)
$ 2,000,000 7.50% 11/15/2006 $ 2,316,620
-----------------------------------------------------------------------------------------------
FLORIDA - 1.5%
Broward County GO Series 1986 (Aa2)
$ 1,000,000 12.50% 01/01/2002 $ 1,258,220
-----------------------------------------------------------------------------------------------
ILLINOIS - 10.0%
Illinois Health Facilities Authority Highland Park Hospital, Series A
(FGIC) (AAA/Aaa)
$ 1,000,000 5.20% 10/01/2001 $ 1,045,460
Illinois Housing Development Authority Series 1991 A (A+/A1)
1,000,000 7.90 07/01/1999 1,022,770
Illinois Municipal Electric Power RB Series 1998 (FSA) (AAA/Aaa)
2,095,000 4.75 02/01/2003 2,178,716
Regional Transportation Authority Prerefunded RB Series 1994 D (FGIC)
(AAA/Aaa)
2,000,000 6.75 06/01/2025 2,309,840
Southern Illinois University Housing & Auxiliary Facility RB Series 1996
A (MBIA) (AAA/Aaa)
1,730,000 5.00 04/01/2003 1,812,037
-----------------------------------------------------------------------------------------------
$ 8,368,823
-----------------------------------------------------------------------------------------------
IOWA - 5.4%
Davenport Hospital Facility Prerefunded RB for Mercy Hospital Series 1992
(MBIA) (AAA/Aaa)
$ 4,040,000 6.63% 07/01/2014 $ 4,511,266
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
<S> <C> <C> <C>
DEBT OBLIGATIONS - (CONTINUED)
KENTUCKY - 2.5%
Kentucky State Property and Building Commission RB (A+/A2)
$ 2,000,000 6.10% 10/01/2001 $ 2,128,280
-----------------------------------------------------------------------------------------------
LOUISIANA - 3.9%
Lafayette Parish Public School Board Sales Tax RB (FGIC) (AAA/Aaa)
$ 2,000,000 6.00% 04/01/2004 $ 2,209,680
Louisiana Offshore Deepwater Port Authority Term B RB (A/Baa1)
1,000,000 5.85 09/01/2000 1,032,540
-----------------------------------------------------------------------------------------------
$ 3,242,220
-----------------------------------------------------------------------------------------------
MARYLAND - 3.2%
Maryland Health and Higher Educational Facilities Authority RB (LOC) (A)
$ 1,000,000 4.75% 07/01/2021 $ 1,015,330
Maryland State Health and Higher Educational Facilities Authority (A-)
1,600,000 5.50 01/01/2021 1,671,904
-----------------------------------------------------------------------------------------------
$ 2,687,234
-----------------------------------------------------------------------------------------------
MASSACHUSETTS - 3.3%
Massachusetts Bay Transportation Authority Prerefunded RB Series 1994 B
(AA-/Aa3)
$ 2,500,000 5.88% 03/01/2019 $ 2,769,525
-----------------------------------------------------------------------------------------------
MISSOURI - 2.0%
St. Louis Municipal Finance Leasehold Series A RB (LOC) (A/Aa3)
$ 1,655,000 5.30% 07/15/2002 $ 1,719,512
-----------------------------------------------------------------------------------------------
NEBRASKA - 2.5%
Nebraska Public Power District RB Series 1998 A (MBIA) (AAA/Aaa)
$ 2,000,000 5.00% 01/01/2002 $ 2,072,500
-----------------------------------------------------------------------------------------------
NEVADA - 1.5%
Nevada State Colorado River Community Prerefunded RB Series 1994 (AA/AAA)
$ 1,130,000 6.50% 07/01/2019 $ 1,283,816
-----------------------------------------------------------------------------------------------
NEW JERSEY - 2.6%
Monmouth County Import Authority Sewage Facility Prerefunded RB Series
1991 (MBIA) (AAA/Aaa)
$ 2,000,000 6.75% 02/01/2013 $ 2,173,560
-----------------------------------------------------------------------------------------------
NEW YORK - 17.9%
Metropolitan Transportation Authority Transit Facilities Prefunded RB
Series J (FGIC) (AAA/Aaa)
$ 1,650,000 6.38% 07/01/2010 $ 1,828,481
New York City Prerefunded GO Series 1992 C (MBIA) (AAA/AAA)
3,000,000 6.38 08/01/2006 3,317,040
-----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
10
<PAGE>
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
<S> <C> <C> <C>
DEBT OBLIGATIONS - (CONTINUED)
NEW YORK - (CONTINUED)
New York State Dorm Authority RB Series 1998 (AAA)
$3,050,000 5.50% 02/15/2003 $ 3,244,102
New York State Medical Care RB (MBIA) (AAA/Aaa)
1,520,000 6.00 08/15/2003 1,663,625
New York State Power Authority Prerefunded RB Series 1991 Z (AAA/AAA)
3,000,000 6.50 01/01/2019 3,301,470
Yonkers GO Series C (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/2003 1,636,575
----------------------------------------------------------------------------------------------
$14,991,293
----------------------------------------------------------------------------------------------
OHIO - 2.8%
Ohio State Building Authority RB Series 1996 A (AA-/Aa3)
$2,255,000 5.00% 10/01/2002 $ 2,352,348
----------------------------------------------------------------------------------------------
PENNSYLVANIA - 4.7%
Bethlehem Pennsylvania Area School District GO Series 1997 (FGIC)
(AAA/Aaa)
$1,715,000 5.00% 09/01/2003 $ 1,801,951
Philadelphia GO Series 1996 (MBIA) (AAA/Aaa)
2,005,000 6.00 05/15/2002 2,154,232
----------------------------------------------------------------------------------------------
$ 3,956,183
----------------------------------------------------------------------------------------------
TENNESSEE - 1.8%
Clarksville Public Building Authority (AA)
$1,500,000 4.75% 12/01/2000 $ 1,534,153
----------------------------------------------------------------------------------------------
TEXAS - 3.2%
Edinburg Consolidated Independent School District Public Facilities
Corp. Lease RB (AMBAC) (AAA)
$1,810,000 5.00% 08/15/2001 $ 1,874,925
Memorial Villages Water Authority RB (Aa)
760,000 7.00 09/01/2000 793,653
----------------------------------------------------------------------------------------------
$ 2,668,578
----------------------------------------------------------------------------------------------
WISCONSIN - 2.9%
Milwaukee County Series 1997 A (MBIA) (AAA/Aaa)
$1,030,000 5.25% 10/01/2003 $ 1,094,509
Wisconsin State Health and Educational Facility RB for Medical College
of Wisconsin Series 1993 (A)
1,240,000 5.30 12/01/2003 1,301,901
----------------------------------------------------------------------------------------------
$ 2,396,410
----------------------------------------------------------------------------------------------
TOTAL DEBT OBLIGATIONS
(COST $68,432,892) $69,076,351
</TABLE>
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
<S> <C> <C> <C>
SHORT-TERM OBLIGATIONS - 14.7%
ALABAMA - 2.5%
Columbia Alabama Power Co. Series D VRDN (A/A2)(a)
$2,100,000 3.60% 11/02/1998 $ 2,100,000
----------------------------------------------------------------------------------------------
GEORGIA - 2.0%
Burke County PCRB for Georgia Power Co. Second Series (A+/A1)(a)
$1,700,000 3.70% 11/02/1998 $ 1,700,000
----------------------------------------------------------------------------------------------
INDIANA - 1.8%
Jasper County PCRB for Nipsco Series 1994 C (A/A2)(a)
$1,500,000 3.75% 11/02/1998 $ 1,500,000
----------------------------------------------------------------------------------------------
MICHIGAN - 1.9%
Michigan Strategic Funding Limited Obligation for Dow Chemical Series
1994 (A/A1)(a)
$1,600,000 3.75% 11/02/1998 $ 1,600,000
----------------------------------------------------------------------------------------------
NEW YORK - 2.9%
New York State Energy Research & Development Authority PCRB for New York
State Electric & Gas Series 1994 C (AA+)(a)
$2,400,000 3.60% 11/02/1998 $ 2,400,000
----------------------------------------------------------------------------------------------
TEXAS - 2.8%
Harris County Health Facilities Development Corp. RB for St. Luke's
Episcopal Hospital Series 1997 B (AA)(a)
$2,300,000 3.65% 11/02/1998 $ 2,300,000
----------------------------------------------------------------------------------------------
WYOMING - 0.8%
Sweetwater County PCRB for Idaho Power Co. Series 1998 C (A/A3)(a)
$ 700,000 3.75% 11/02/1998 $ 700,000
----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(COST $12,300,000) $12,300,000
----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $80,732,892)(B) $81,376,351
</TABLE>
------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
11
<PAGE>
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
Statement of Investments (continued)
October 31, 1998
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL INCOME TAX INFORMATION:
Gross unrealized gain for investments in which value
exceeds cost $679,975
Gross unrealized loss for investments in which cost exceeds
value (36,516)
----------------------------------------------------------------------------
Net unrealized gain $643,459
----------------------------------------------------------------------------
</TABLE>
(a) Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
(b) The amount stated also represents aggregate cost for federal income tax
purposes.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
<TABLE>
-------------------------------------------------------------
<C> <S>
INVESTMENT
ABBREVIATIONS:
AMBAC --Insured by American Municipal Bond Assurance Corp.
BIGI --Insured by Bond Investors Guaranty Corporation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Insured by Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
VRDN --Variable Rate Demand Note
-------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
12
<PAGE>
GOLDMAN SACHS MUNICIPAL INCOME FUND
Performance Summary
October 31, 1998
The following graph shows the value as of October 31, 1998, of a $10,000
investment made (with the maximum sales charge of 4.5%) in Class A shares on
August 1, 1993. For comparative purposes, the performance of the Fund's
benchmark (the Lehman Brothers 15-Year Municipal Bond Index ("Lehman 15-Year
Muni Index")) is shown. This performance data represents past performance and
should not be considered indicative of future performance which will fluctu-ate
with changes in market conditions. These performance fluctuations will cause an
investor's shares, when redeemed, to be worth more or less than their original
cost. Performance of Class B, Class C, Institutional and Serv-ice shares will
vary from Class A due to differences in fees and loads.
MUNICIPAL INCOME FUND'S LIFETIME PERFORMANCE
GROWTH OF A $10,000 INVESTMENT, DISTRIBUTIONS REINVESTED AUGUST 1, 1993 TO
OCTOBER 31, 1998.(A)
Date Municipal Income Class A Lehman
15-Year
Muni Index
8/1/93 9550 10000
8/93 9786 10237
9/93 9926 10374
10/93 9983 10389
11/93 9891 10293
12/93 10082 10538
1/94 10202 10677
2/94 9933 10355
3/94 9459 9863
4/94 9514 9974
5/94 9591 10077
6/94 9542 10003
7/94 9753 10201
8/94 9776 10233
9/94 9613 10061
10/94 9433 9862
11/94 9245 9651
12/94 9468 9889
1/95 9774 10223
2/95 9972 10560
3/95 10085 10691
4/95 10105 10695
5/95 10406 11066
6/95 10277 10940
7/95 10348 11045
8/95 10494 11213
9/95 10573 11314
10/95 10734 11478
11/95 10936 11682
12/95 11068 11804
1/96 11224 11913
2/96 11134 11836
3/96 10920 11662
4/96 10870 11611
5/96 10851 11601
6/96 10981 11733
7/96 11071 11857
8/96 11074 11855
9/96 11235 12009
10/96 11394 12169
11/96 11621 12422
12/96 11570 12353
1/97 11608 12398
2/97 11741 12526
3/97 11584 12349
4/97 11687 12471
5/97 11833 12669
6/97 11993 12823
7/97 12390 13236
8/97 12214 13086
9/97 12392 13252
10/97 12446 13340
11/97 12534 13428
12/97 12777 13657
1/98 12907 13825
2/98 12912 13821
3/98 12899 13832
4/98 12822 13767
5/98 13045 14012
6/98 13087 14074
7/98 13098 14100
8/98 13297 14347
9/98 13447 14556
10/98 13416 14537
<TABLE>
<CAPTION>
SINCE INCEPTION
OF CLASS FIVE YEARS ONE YEAR
AVERAGE ANNUAL TOTAL RETURN THROUGH OCTOBER 31, 1998
<S> <C> <C> <C>
CLASS A (COMMENCED JULY 20, 1993)
Excluding sales charges 6.48% 6.09% 7.79%
Including sales charges 5.56% 5.11% 2.92%
---------------------------------------------------------------------------
CLASS B (COMMENCED MAY 1, 1996)
Excluding sales charges 7.94% n/a 6.91%
Including sales charges 6.76% n/a 1.73%
---------------------------------------------------------------------------
CLASS C (COMMENCED AUGUST 15, 1997)
Excluding sales charges 7.24% n/a 6.98%
Including sales charges 7.24% n/a 5.94%
---------------------------------------------------------------------------
INSTITUTIONAL CLASS (COMMENCED AUGUST
15, 1997) 8.39% n/a 8.00%
---------------------------------------------------------------------------
SERVICE CLASS (COMMENCED AUGUST 15,
1997) 6.45% n/a 7.68%
---------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on
the first day of the month following the commencement of operations.
13
<PAGE>
GOLDMAN SACHS MUNICIPAL INCOME FUND
Statement of Investments
October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
<S> <C> <C> <C>
DEBT OBLIGATIONS - 98.0%
ARIZONA - 4.5%
Maricopa County MF Hsg. IDA RB (A)
$1,795,000 5.85% 01/01/2008 $ 1,983,385
Maricopa County United School District No. 41 RB (FSA) (AAA)
2,500,000 6.25 07/01/2015 2,848,976
----------------------------------------------------------------------------------------------
$ 4,832,361
----------------------------------------------------------------------------------------------
CALIFORNIA - 8.5%
California State GO Bonds (A+/A1)
$3,000,000 5.00% 02/01/2014 $ 3,066,090
Carlsbad Unified School District GO Series 1997 (FGIC) (AAA/Aaa)(a)
2,700,000 4.86 11/01/2014 1,253,313
Orange County Public Finance Authority Waste Management Systems RB
(AMBAC) (Aaa)
2,110,000 5.25 12/01/2013 2,236,326
Santa Clara County Housing Authority MF Hsg. RB for Orchard Glen Apart-
ments Series 1998 (LOC) (AA)(b)
2,500,000 4.50 11/01/2007 2,490,075
----------------------------------------------------------------------------------------------
$ 9,045,804
----------------------------------------------------------------------------------------------
CONNECTICUT - 5.4%
Connecticut State GO Bonds Series A (AA-/Aa3)
$3,265,000 5.25% 03/15/2013 $ 3,439,482
Mashantucket Western Pequot Tribe Prerefunded RB Series A (BBB-)(c)
1,000,000 6.50 09/01/2005 1,141,550
Mashantucket Western Pequot Tribe Unrefunded RB Series A (BBB-/Baa2)(c)
1,000,000 6.50 09/01/2005 1,128,240
----------------------------------------------------------------------------------------------
$ 5,709,272
----------------------------------------------------------------------------------------------
FLORIDA - 3.3%
Escambia County Housing Authority (AMT) (Aaa)
$ 680,000 6.80% 10/01/2015 $ 738,915
Santa Rosa Bay Bridge Authority RB (BBB-)
2,500,000 6.25 07/01/2028 2,780,250
----------------------------------------------------------------------------------------------
$ 3,519,165
----------------------------------------------------------------------------------------------
HAWAII - 1.6%
Hawaii GO Bond Series CA (FGIC) (AAA)
$1,500,000 6.00% 01/01/2009 $ 1,704,795
----------------------------------------------------------------------------------------------
ILLINOIS - 11.0%
Chicago Midway Airport RB (MBIA) (AAA/Aaa)
$2,500,000 5.50% 01/01/2010 $ 2,681,475
Lake County Unified School District No. 116 GO (FSA) (AAA)
1,000,000 7.60 02/01/2013 1,299,710
2,000,000 7.60 02/01/2014 2,607,980
Lake, Cook, Kane and McHenry County's Community Unit School District No.
220 GO Bonds (FSA) (AAA/Aaa)
2,465,000 6.20 12/01/2012 2,872,760
Rock Island County School District No. 41 GO Series 1998 (FSA) (AAA)
2,300,000 5.13 12/01/2014 2,341,469
----------------------------------------------------------------------------------------------
$11,803,394
----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
<S> <C> <C> <C>
DEBT OBLIGATIONS - (CONTINUED)
INDIANA - 4.1%
Indiana Bond Bank for Hendricks County RB (LOC) (AA-)
$1,420,000 6.00% 02/01/2012 $ 1,537,945
Indiana Transportation Airport Series A RB (AMBAC) (AAA/Aaa)
2,500,000 6.00 11/01/2011 2,865,400
----------------------------------------------------------------------------------------------
$ 4,403,345
----------------------------------------------------------------------------------------------
KENTUCKY - 1.0%
Nelson County Industrial Building Mabex Universal Corp. Project (AMT)
(LOC) (A3)
$1,000,000 6.50% 04/01/2005 $ 1,089,220
----------------------------------------------------------------------------------------------
LOUISIANA - 2.0%
Orleans Levee District Improvement Bonds (FSA) (AAA/Aaa)
$1,945,000 5.95% 11/01/2015 $ 2,161,906
----------------------------------------------------------------------------------------------
MAINE - 0.6%
Maine Educational Loan Authority RB Series A-1 (AMT) (Aaa)(d)
$ 640,000 6.80% 12/01/2007 $ 687,699
----------------------------------------------------------------------------------------------
MICHIGAN - 11.9%
Birmingham Michigan City School District GO Bonds (AA+/Aa2)
$3,500,000 5.25% 11/01/2012 $ 3,680,040
Michigan Higher Education Facility RB for the Thomas M. Cooley Law
School Series 1998 (LOC) (A+)
4,000,000 5.40 05/01/2018 4,046,120
Oakland County Econimic Development Corp. RB for Cranbrook Community Se-
ries 1998 (Aa2)
5,000,000 5.00 11/01/2017 4,975,500
----------------------------------------------------------------------------------------------
$12,701,660
----------------------------------------------------------------------------------------------
MISSOURI - 2.0%
St. Louis Municipal Finance Leasehold Series A RB (LOC) (A/Aa3)
$2,100,000 5.30% 07/15/2002 $ 2,181,858
----------------------------------------------------------------------------------------------
NEVADA - 1.9%
Washoe County GO RB (MBIA) (AAA/Aaa)
$2,000,000 5.00% 06/01/2017 $ 1,998,740
----------------------------------------------------------------------------------------------
NEW MEXICO - 8.2%
New Mexico Finance Authority Anticipation RB for Federal Highway Grant
Series 1998 A (AMBAC) (AAA/Aaa)(d)
$5,100,000 5.25% 09/01/2014 $ 5,295,687
Santa Fe County Correctional System RB (FSA) (AAA/Aaa)
3,000,000 6.00 02/01/2027 3,518,370
----------------------------------------------------------------------------------------------
$ 8,814,057
----------------------------------------------------------------------------------------------
NEW YORK - 5.0%
New York City Municipal Water Finance Authority Series B (MBIA)
(AAA/Aaa)
$3,000,000 5.50% 06/15/2027 $ 3,137,460
New York State Dormatory RB for Department of Health Series 1996 (MBIA)
(AAA)
2,000,000 5.63 07/01/2012 2,154,160
----------------------------------------------------------------------------------------------
$ 5,291,620
----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
14
<PAGE>
GOLDMAN SACHS MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
DEBT OBLIGATIONS - (CONTINUED)
<S> <C> <C> <C>
NORTH DAKOTA - 2.1%
Mercer County PCRB for Basin Electric & Power 2nd Series (AMBAC)
(AAA/Aaa)
$2,000,000 6.05% 01/01/2019 $ 2,204,280
-----------------------------------------------------------------------------------------------
OHIO - 5.1%
Cuyahoga County for Rock & Roll Hall of Fame RB
$600,000 5.45% 12/01/2005 $ 618,366
Ohio State Turnpike Community RB Series 1998 A (FGIC) (AAA/Aaa)(d)
4,500,000 5.50 02/15/2017 4,880,250
-----------------------------------------------------------------------------------------------
$ 5,498,616
-----------------------------------------------------------------------------------------------
PENNSYLVANIA - 5.3%
Pennsylvania Higher Education RB for University of Pennsylvania Health
Services Series 1998 A (MBIA) (AAA/Aaa)
$2,040,000 5.38% 01/01/2014 $ 2,123,926
Philadelphia Gas Works RB Series 1998 B (FSA) (AAA/Aaa)
3,420,000 5.38 07/01/2015 3,547,292
-----------------------------------------------------------------------------------------------
$ 5,671,218
-----------------------------------------------------------------------------------------------
TENNESSEE - 3.2%
Dickson County GO Bonds (FGIC) (Aaa)
$1,840,000 5.00% 04/01/2016 $ 1,849,973
McMinnville Housing Authority RB (A2)
1,420,000 6.00 10/01/2009 1,519,783
-----------------------------------------------------------------------------------------------
$ 3,369,756
-----------------------------------------------------------------------------------------------
TEXAS - 6.1%
East Texas Criminal Justice Facilities Financing Corp. Prerefunded RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75% 11/01/2009 $ 2,200,600
Lago Vista Independent School District Refunding Bonds Series 1997 (Aaa)
1,000,000 5.50 08/15/2027 1,038,900
Tarrant County Health Facilities Development Corp. RB (MBIA) (AAA/Aaa)
3,000,000 5.75 02/15/2015 3,311,850
-----------------------------------------------------------------------------------------------
$ 6,551,350
-----------------------------------------------------------------------------------------------
WASHINGTON - 5.2%
Chelan County Public Utility RB (MBIA) (AAA/Aaa)
$2,500,000 6.35% 07/01/2028 $ 2,838,050
Washington State Public Power Supply System Series A RB (AMBAC) (AAA/Aaa)
2,500,000 5.70 07/01/2011 2,718,000
-----------------------------------------------------------------------------------------------
$ 5,556,050
-----------------------------------------------------------------------------------------------
TOTAL DEBT OBLIGATIONS
(COST $99,945,528) $104,796,166
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY
AMOUNT RATE DATE VALUE
SHORT-TERM OBLIGATIONS - 2.6%
<S> <C> <C> <C>
GEORGIA - 1.7%
Burke County IDA for Georgia Power Co. (A/A2)(e)
$800,000 3.80% 11/02/1998 $ 800,000
Monroe County Development Authority PCRB (A2)(e)
700,000 3.70 11/02/1998 700,000
Monroe County PCRB for Georgia Power Company Series 1998-2 (A+/A1)(e)
300,000 3.70 11/02/1998 300,000
-----------------------------------------------------------------------------------------------
$ 1,800,000
-----------------------------------------------------------------------------------------------
NEW YORK - 0.6%
New York City IDRB for Nippon Cargo Airlines Co. Series 1998 (A-)(e)
$400,000 4.25% 11/02/1998 $ 400,000
New York State Energy Research and Development PCRB for Niagara Mohawk
Power Series 1998 A (AA)(e)
300,000 3.70 11/02/1998 300,000
-----------------------------------------------------------------------------------------------
$ 700,000
-----------------------------------------------------------------------------------------------
WYOMING - 0.3%
Sweetwater County PCRB for Idaho Power Co. Series 1998 C (A/A3)(e)
$300,000 3.75% 11/02/1998 $ 300,000
-----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(COST $2,800,000) $ 2,800,000
-----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST $102,745,528)(F) $107,596,166
-----------------------------------------------------------------------------------------------
</TABLE>
Futures contracts open at October 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS SETTLEMENT UNREALIZED
TYPE (SHORT) (G) MONTH GAIN
---------------------- ----------- ---------- ----------
<S> <C> <C> <C>
Municipal Bond Futures (47) December 1998 $24,920
-------
$24,920
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
FEDERAL INCOME TAX
INFORMATION
Gross unrealized gain for in-
vestments in which
value exceeds cost
$4,875,731
Gross unrealized loss for in-
vestments in which
cost exceeds value
(25,093)
----------------------------------
Net unrealized gain
$4,850,638
----------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
15
<PAGE>
GOLDMAN SACHS MUNICIPAL INCOME FUND
Statement of Investments (continued)
October 31, 1998
------------------------------------------------------------------------------
(a) The interest rate disclosed for this security represents effective yield
to maturity.
(b) When-issued security.
(c) Securities are exempt from registration under rule 144A of the Securities
Act of 1933. Such securities may be resold, normally to qualified
institutional buyers in transactions exempt from registration. Total
market value of Rule 144A securities amounted to $2,269,790 as of October
31, 1998.
(d) Portion of these securities are segregated for a when issued security,
open futures contracts and futures margin requirements.
(e) Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
(f) The amount stated also represents aggregate cost for federal income tax
purposes.
(g) Each Municipal Bond Future contracts represents $100,000 in notional par
value. The total notional amount and market value at risk are $4,700,000
and $5,897,031, respectively. The determination of notional amounts as
presented here are indicative only of volume of activity and not a
measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
<TABLE>
<C> <S>
INVESTMENT ABBREVIATIONS:
AMBAC --Insured by American Municipal Bond Assurance Corp.
AMT --Alternative Minimum Tax
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Insured by Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
-------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
16
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Statements of Assets and Liabilities
October 31, 1998
<TABLE>
<CAPTION>
SHORT DURATION MUNICIPAL
TAX-FREE FUND INCOME FUND
ASSETS:
<S> <C> <C>
Investment in securities, at value (identified
cost $80,732,892 and $102,745,528,
respectively) $81,376,351 $107,596,166
Cash 792,930 342,083
Receivables:
Investment securities sold 1,901,021 --
Interest 1,199,975 1,681,132
Fund shares sold 46,316 366,727
Variation margin -- 35,250
Other assets 111,416 122,060
------------------------------------------------------------------------------
TOTAL ASSETS 85,428,009 110,143,418
------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment securities purchased 701,790 2,801,080
Income distribution 21,826 124,292
Fund shares repurchased 731,482 117,519
Amounts owed to affiliates 41,014 98,711
Accrued expenses and other liabilities 88,771 103,715
------------------------------------------------------------------------------
TOTAL LIABILITIES 1,584,883 3,245,317
------------------------------------------------------------------------------
NET ASSETS:
Paid in capital 86,792,633 101,765,249
Accumulated undistributed net investment income 62,046 138,393
Accumulated net realized gain (loss) on
investment transactions (3,655,012) 118,901
Net unrealized gain on investments and futures 643,459 4,875,558
------------------------------------------------------------------------------
NET ASSETS $83,843,126 $106,898,101
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Net asset value per share:(a)
Class A $10.19 $15.47
Class B $10.18 $15.47
Class C $10.18 $15.47
Institutional $10.18 $15.47
Administration $10.18 --
Service $10.18 $15.48
------------------------------------------------------------------------------
Shares Outstanding:
Class A 1,951,709 5,891,043
Class B 95,661 434,408
Class C 221,543 184,954
Institutional 5,660,817 397,731
Administration 51,537 --
Service 251,505 106
------------------------------------------------------------------------------
Total Shares Outstanding, $.001 Par Value
(unlimited number of shares authorized) 8,232,772 6,908,242
------------------------------------------------------------------------------
</TABLE>
(a) Maximum public offering price per share for Class A shares is $10.40 (NAV
per share plus the maximum sales charge of 2.0%) and $16.20 (NAV per
share plus the maximum sales charge of 4.5%) for Short Duration Tax-Free
and Municipal Income, respectively. At redemption, Class B and Class C
shares may be subject to a contingent deferred sales charge, assessed on
the amount equal to the lesser of the current net asset value or the
original purchase price of the shares.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
17
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Statements of Operations
For the Year Ended October 31, 1998
<TABLE>
<CAPTION>
SHORT DURATION MUNICIPAL
TAX-FREE FUND INCOME FUND
<S> <C> <C>
INVESTMENT INCOME:
Interest $2,059,329 $ 4,344,155
-----------------------------------------------------------------------------
TOTAL INCOME 2,059,329 4,344,155
-----------------------------------------------------------------------------
EXPENSES:
Management fees 189,646 467,578
Transfer agent fees 129,376 176,709
Distribution and service fees(a) 68,846 426,683
Custodian fees 83,823 71,330
Registration fees 64,947 98,906
Professional fees 55,339 51,165
Printing fees 39,638 65,795
Amortization of deferred organization expenses -- 12,545
Trustee fees 5,861 5,779
Service share fees 2,142 --
Administration share fees 221 --
Other 36,690 26,444
-----------------------------------------------------------------------------
TOTAL EXPENSES 676,529 1,402,934
-----------------------------------------------------------------------------
Less -- expenses reimbursable and fees waived
by Goldman Sachs (406,089) (630,379)
-----------------------------------------------------------------------------
NET EXPENSES 270,440 772,555
-----------------------------------------------------------------------------
NET INVESTMENT INCOME 1,788,889 3,571,600
-----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVEST-
MENT AND FUTURES TRANSACTIONS:
Net realized gain (loss) from:
Investment transactions 393,554 697,378
Futures transactions (123,687) (554,852)
Net change in unrealized gain on:
Investments 263,420 2,434,663
Futures -- 1,295
-----------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENT
AND FUTURES TRANSACTIONS 533,287 2,578,484
-----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $2,322,176 $ 6,150,084
-----------------------------------------------------------------------------
</TABLE>
(a) Class A, Class B and Class C had distribution and service fees of
$53,564, $2,943 and $12,339 and $376,793, $37,316 and $12,574 for Short
Duration Tax-Free and Municipal Income Funds, respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
18
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Statements of Changes in Net Assets
For the Year Ended October 31, 1998
<TABLE>
<CAPTION>
SHORT
DURATION
TAX-FREE MUNICIPAL
FUND INCOME FUND
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,788,889 $ 3,571,600
Net realized gain from investment and futures
transactions 269,867 142,526
Net change in unrealized gain on investments and
futures 263,420 2,435,958
-----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 2,322,176 6,150,084
-----------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (420,239) (3,301,234)
Class B (9,424) (125,487)
Class C (36,571) (41,577)
Institutional shares (1,297,489) (34,610)
Administration shares (9,873) --
Service shares (70,477) (64)
Net realized gain on investment transactions
Class A -- (123,858)
Class B -- (3,541)
Class C -- (467)
Institutional shares -- (658)
Administration shares -- --
Service shares -- (3)
-----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,844,073) (3,631,499)
-----------------------------------------------------------------------------
FROM SHARE TRANSACTIONS:
Net proceeds from sales of shares 79,620,422 50,919,586
Reinvestment of dividends and distributions 1,551,849 2,344,160
Cost of shares repurchased (32,887,113) (15,670,581)
-----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM SHARE
TRANSACTIONS 48,285,158 37,593,165
-----------------------------------------------------------------------------
TOTAL INCREASE 48,763,261 40,111,750
-----------------------------------------------------------------------------
NET ASSETS:
Beginning of year 35,079,865 66,786,351
-----------------------------------------------------------------------------
End of year $83,843,126 $106,898,101
-----------------------------------------------------------------------------
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME $ 62,046 $ 138,393
-----------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
19
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Statement of Changes in Net Assets
For the Year Ended October 31, 1997
<TABLE>
<CAPTION>
SHORT
DURATION
TAX-FREE MUNICIPAL
FUND INCOME FUND
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,495,109 $ 2,677,281
Net realized gain from investment and futures
transactions 214,761 1,129,596
Net change in unrealized gain on investments and
futures 177,615 1,448,471
------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 1,887,485 5,255,348
------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (36,026) (2,651,661)
Class B (864) (33,375)
Class C (18) (172)
Institutional shares (1,407,585) (56)
Administration shares (3,501) --
Service shares (47,115) (14)
------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,495,109) (2,685,278)
------------------------------------------------------------------------------
FROM SHARE TRANSACTIONS:
Net proceeds from sales of shares 28,091,361 21,242,873
Reinvestment of dividends and distributions 1,232,957 1,598,487
Cost of shares repurchased (30,193,481) (11,147,479)
------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM SHARE TRANSACTIONS (869,163) 11,693,881
------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) (476,787) 14,263,951
------------------------------------------------------------------------------
NET ASSETS:
Beginning of year 35,556,652 52,522,400
------------------------------------------------------------------------------
End of year $ 35,079,865 $ 66,786,351
------------------------------------------------------------------------------
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME $ 110,881 $ 69,879
------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Notes to Financial Statements
October 31, 1998
1. ORGANIZATION
Goldman Sachs Trust (the "Trust") is a Delaware business trust registered un-
der the Investment Company Act of 1940 (as amended) as an open-end, manage-
ment investment company. The Trust includes the Goldman Sachs Short Duration
Tax-Free Fund (Short Duration Tax-Free) and the Goldman Sachs Municipal In-
come Fund (Municipal Income), collectively, "the Funds" or individually a
"Fund." Short Duration Tax-Free is a diversified portfolio offering six clas-
ses of shares -- Class A, Class B, Class C, Institutional, Administration,
and Service. Municipal Income, also a diversified portfolio, offers five
classes of shares -- Class A, Class B, Class C, Institutional and Service.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make es-
timates and assumptions that may affect the reported amounts.
A. INVESTMENT VALUATION -- Portfolio securities for which accurate market
quotations are readily available are valued on the basis of quotations fur-
nished by a pricing service or provided by dealers in such securities. Port-
folio securities for which accurate market quotations are not readily
available are valued based on yield equivalents, pricing matrices or other
sources, under valuation procedures established by the Trust's Board of
Trustees. Short-term debt obligations maturing in sixty days or less are val-
ued at amortized cost.
B. SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated using the identified cost basis. Interest income is
recorded on the basis of interest accrued. Market premiums resulting from the
purchase of long-term debt securities are amortized to interest income over
the life of the security with a corresponding decrease in the cost basis of
the security.
C. FEDERAL TAXES -- It is each Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute each year substantially all of its investment company tax-ex-
empt and taxable income and capital gains to its shareholders. Accordingly,
no federal tax provisions are required.
The characterization of distributions to shareholders for financial report-
ing purposes is determined in accordance with income tax rules. Therefore,
the source of a portfolio's distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or
net realized gain on investment transactions, or from paid-in capital, de-
pending on the type of book/tax differences that may exist as well as timing
differences associated with having different book and tax year ends.
The Short Duration Tax-Free Fund, at its most recent tax year-end of Decem-
ber 31, 1997 had approximately the following amount of capital loss
carryforwards for U.S. federal tax purposes. This amount is available to be
carried forward to offset future capital gains to the extent permitted by ap-
plicable laws or regulations.
<TABLE>
<CAPTION>
YEAR OF
FUND AMOUNT EXPIRATION
-----------------------------------------------
<S> <C> <C>
Short Duration Tax-Free $3,868,000 2002-2003
-----------------------------------------------
</TABLE>
21
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Notes to Financial Statements (continued)
October 31, 1998
D. EXPENSES -- Expenses incurred by the Trust that do not specifically relate
to an individual Fund of the Trust are allocated to the Funds based on the
nature of the expense.
Class A, Class B and Class C shareholders of the Funds bear all expenses
and fees relating to their respective distribution and service plans. Share-
holders of Service and Administration shares bear all expenses and fees paid
to service organizations for their services with respect to such shares. Ef-
fective October 1, 1998, each class of shares of the Funds now separately
bears its respective class-specific transfer agency fees.
E. DEFERRED ORGANIZATION EXPENSES -- Organization-related costs were amor-
tized on a straight-line basis over a period of five years. The Short Dura-
tion Tax-Free and Municipal Income Fund's organizational costs are fully
amortized.
F. FUTURES CONTRACTS -- The Funds may enter into futures transactions in or-
der to hedge against changes in interest rates, securities prices or to seek
to increase total return.
Upon entering into a futures contract, the Funds are required to deposit
with a broker an amount of cash or securities equal to the minimum "initial
margin" requirement of the associated futures exchange. Subsequent payments
for futures contracts ("variation margin") are paid or received by the Funds
daily, dependent on the daily fluctuations in the value of the contracts, and
are recorded for financial reporting purposes as unrealized gains or losses.
When contracts are closed, the Funds realize a gain or loss which is reported
in the Statements of Operations.
The use of futures contracts involve, to varying degrees, elements of mar-
ket and counterparty risk which may exceed the amounts recognized in the
Statements of Assets and Liabilities. Changes in the value of the futures
contract may not directly correlate with changes in the value of the under-
lying securities. This risk may decrease the effectiveness of the Funds'
hedging strategies and potentially result in a loss.
G. OPTION ACCOUNTING PRINCIPLES -- When the Funds write call or put options,
an amount equal to the premium received is recorded as an asset and as an
equivalent liability. The amount of the liability is subsequently marked-to-
market to reflect the current market value of the option written. When a
written option expires on its stipulated expiration date or the Funds enter
into a closing purchase transaction, the Funds realize a gain or loss without
regard to any unrealized gain or loss on the underlying security, and the li-
ability related to such option is extinguished. When a written call option is
exercised, the Funds realize a gain or loss from the sale of the underlying
security, and the proceeds of the sale are increased by the premium origi-
nally received. When a written put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the
Funds purchase upon exercise. There is a risk of loss from a change in value
of such options which may exceed the related premiums received.
Upon the purchase of a call option or a protective put option by the Funds,
the premium paid is recorded as an investment and subsequently marked-to-mar-
ket to reflect the current market value of the option. If an option which the
Funds have purchased expires on the stipulated expiration date, the Funds
will realize a loss in the amount of the cost of the option. If the Funds en-
ter into a closing sale transaction, the Funds will realize a gain or loss,
depending on whether the sale proceeds for the closing sale transaction are
greater or less than the cost of the option. If the Funds exercise a pur-
chased put option, the Funds will realize a gain or loss from the sale of the
underlying security, and the proceeds from such sale will be decreased by the
premium originally paid. If the Funds exercise a purchased call option, the
cost of the security which the Funds purchase upon exercise will be increased
by the premium originally paid.
22
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
3. AGREEMENTS
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment ad-
viser pursuant to Investment Management Agreements (the "Agreements"). Under
the Agreements, GSAM, subject to the general supervision of the Trust's Board
of Trustees, manages the Funds' portfolios. As compensation for the services
rendered pursuant to the Agreements and the assumption of the expenses re-
lated thereto and administering the Funds' business affairs, including pro-
viding facilities, GSAM is entitled to a fee, computed daily and payable
monthly at an annual rate equal to .40% and .55% of average daily net assets
of Short Duration Tax-Free and Municipal Income, respectively. GSAM has vol-
untarily agreed to waive a portion of its management fee for each Fund. For
the period ended October 31, 1998, GSAM waived approximately $3,000 and
$4,000 of its management fee attributable to the Short Duration Tax-Free and
Municipal Income Funds, respectively. GSAM may discontinue or modify these
waivers in the future at its discretion.
GSAM voluntarily agreed to limit "Other Expenses" (excluding management,
distribution and service fees, Administration and Service share fees, taxes,
interest, brokerage, litigation, indemnification costs and other extraordi-
nary expenses) through September 30, 1998 to the extent such expenses ex-
ceeded .05% of the average daily net assets of each Fund. Effective October
1, 1998, the expense limitations were modified until further notice to .00%
of the average daily net assets of each Fund. For the year ended October 31,
1998, Goldman Sachs reimbursed approximately $402,000 and $509,000 to Short
Duration Tax-Free and Municipal Income, respectively. At October 31, 1998 ap-
proximately $103,000 and $122,000 was owed to Short Duration Tax-Free and Mu-
nicipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to
a Distribution Agreement. Goldman Sachs may receive a portion of the Class A
sales load and Class B and Class C contingent deferred sales charges and has
advised the Funds that it retained approximately $55,000 and $126,000 for the
year ended October 31, 1998 for Short Duration Tax-Free and Municipal Income,
respectively.
The Trust, on behalf of each Fund, had adopted Distribution Plans (the
"Distribution Plans") pursuant to Rule 12b-1. Under the Distribution Plans,
Goldman Sachs was entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25%, .75% and .75% of each Fund's
average daily net assets attributable to Class A, Class B and Class C shares,
respectively. For the year ended October 31, 1998, the Distributor had
voluntarily agreed to waive approximately $25,000 and $179,000 of its
distribution fee attributable to Class A shares of Short Duration Tax-Free
and Municipal Income, respectively.
The Trust, on behalf of each Fund, had also adopted Authorized Dealer Serv-
ice Plans (the "Dealer Service Plans") pursuant to which Goldman Sachs and
Authorized Dealers were compensated for providing personal and account main-
tenance services. Each Fund paid a fee under its Dealer Service Plan equal,
on an annual basis, up to .25% of the average daily net assets attributable
to the Class A, Class B and Class C shares.
Effective October 1, 1998, the Distribution Plans and Dealer Service Plans
were combined into Distribution and Service Plans. Under the Distribution and
Service Plans, Goldman Sachs and/or Authorized Dealers are entitled to a
monthly fee from each fund for distribution and shareholder maintenance serv-
ices equal, on an annual basis, to .25%, 1.00% and 1.00% of the average daily
net assets attributable to Class A, Class B and Class C shares, respectively.
For the year ended October 31, 1998, Goldman Sachs has voluntarily agreed to
waive approximately $1,000 of the combined prior 12b-1 Distribution fees and
Distribution and Service fees attributable to the Class B shares of Short Du-
ration Tax-Free. Goldman Sachs may discontinue or modify this waiver in the
future at its discretion.
23
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Notes to Financial Statements (continued)
October 31, 1998
Goldman Sachs also serves as the Transfer Agent of the Funds for a fee. Ef-
fective October 1, 1998, fees charged for such transfer agency services are
calculated daily and payable monthly at an annual rate as follows: .19% of
average daily net assets for Class A, Class B and Class C Shares and .04% of
average daily net assets for Institutional, Service and Administration
Shares.
The Trust, on behalf of the Funds, has adopted Service Plans. In addition,
the Trust, on behalf of Short Duration Tax-Free, has adopted an Administra-
tion Plan. These plans allow for Service shares and Administration shares,
respectively, to compensate service organizations for providing varying lev-
els of account administration and shareholder liaison services to their cus-
tomers who are beneficial owners of such shares. The Service and
Administration Plans provide for compensation to the service organizations in
an amount up to .50% and .25% (on an annualized basis), respectively, of the
average daily net asset value of the respective shares.
At October 31, 1998, the amounts owed to affiliates were as follows (in
thousands):
<TABLE>
<CAPTION>
DISTRIBUTION TRANSFER
FUND MANAGEMENT AND SERVICE AGENT
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short Duration Tax-Free $21,000 $ 6,000 $14,000
----------------------------------------------------------------------------------------
Municipal Income 44,000 27,000 28,000
----------------------------------------------------------------------------------------
</TABLE>
4. PORTFOLIO SECURITIES TRANSACTIONS
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1998, were as follows:
<TABLE>
<CAPTION>
SALES OR
FUND PURCHASES MATURITIES
-------------------------------------------------
<S> <C> <C>
Short Duration Tax-Free $97,878,412 $64,401,870
-------------------------------------------------
Municipal Income 84,053,318 47,308,925
-------------------------------------------------
</TABLE>
For the year ended October 31, 1998, Short Duration Tax-Free and Municipal
Income incurred commission expenses of approximately $1,000 and $3,000, re-
spectively, in connection with futures contracts entered into with Goldman
Sachs. At October 31, 1998, Goldman Sachs owed approximately $35,000 to Mu-
nicipal Income related to variation margin on futures contracts.
24
<PAGE>
GOLDMAN SACHS TAX-FREE FUND
5. LINE OF CREDIT FACILITY
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line
of credit facility to be used solely for temporary or emergency purposes. Un-
der the most restrictive arrangement, each Fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest
rate on borrowings is based on the federal funds rate. For the year ended Oc-
tober 31, 1998, the Funds did not have any borrowings under this facility.
6. CERTAIN RECLASSIFICATIONS
In accordance with Statement of Position 93-2, Short Duration Tax-Free has
reclassified $6,349 and $229 from paid-in capital to accumulated undistrib-
uted net investment income and accumulated net realized loss, respectively.
Municipal Income Fund has reclassified $82 and $114 from paid-in capital and
undistributed net investment income, respectively, to accumulated net real-
ized gain. These reclassifications have no impact on the net asset value of
the Funds and are designed to present the Fund's capital accounts on a tax
basis.
25
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Notes to Financial Statements (continued)
October 31, 1998
7. SUMMARY OF SHARE TRANSACTIONS
Share activity for the year ended October 31, 1998 is as follows:
<TABLE>
<CAPTION>
SHORT DURATION TAX-
FREE FUND MUNICIPAL INCOME FUND
--------------------------------
SHARES DOLLARS SHARES DOLLARS
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Shares sold 2,956,094 $29,981,070 2,331,248 $35,680,920
Reinvestment of dividends
and distributions 36,408 369,107 144,878 2,217,736
Shares repurchased (1,439,779) (14,600,893) (890,339) (13,671,669)
--------------------------------
1,552,723 15,749,284 1,585,787 24,226,987
---------------------------------------------------------------------------
CLASS B SHARES
Shares sold 113,668 1,154,981 363,405 5,570,533
Reinvestment of dividends
and distributions 716 7,572 4,818 73,917
Shares repurchased (29,252) (296,080) (50,499) (771,483)
--------------------------------
85,132 866,473 317,724 4,872,967
---------------------------------------------------------------------------
CLASS C SHARES
Shares sold 260,602 2,643,664 236,415 3,613,212
Reinvestment of dividends
and distributions 3,289 33,332 2,421 37,200
Shares repurchased (42,508) (430,853) (62,563) (957,474)
--------------------------------
221,383 2,246,143 176,273 2,692,938
---------------------------------------------------------------------------
INSTITUTIONAL SHARES
Shares sold 4,094,699 41,604,670 391,005 6,054,921
Reinvestment of dividends
and distributions 105,149 1,065,181 988 15,243
Shares repurchased (1,399,986) (14,177,195) (17,697) (269,955)
--------------------------------
2,799,862 28,492,656 374,296 5,800,209
---------------------------------------------------------------------------
ADMINISTRATION SHARES
Shares sold 45,558 460,529 -- --
Reinvestment of dividends
and distributions 948 9,613 -- --
Shares repurchased (2,644) (26,596) -- --
--------------------------------
43,862 443,546 -- --
---------------------------------------------------------------------------
SERVICE SHARES
Shares sold 373,021 3,775,508 -- --
Reinvestment of dividends
and distributions 6,622 67,044 4 64
Shares repurchased (331,731) (3,355,496) -- --
--------------------------------
47,912 487,056 4 64
---------------------------------------------------------------------------
NET INCREASE 4,750,874 $48,285,158 2,454,084 $37,593,165
---------------------------------------------------------------------------
</TABLE>
26
<PAGE>
GOLDMAN SACHS TAX-FREE FUNDS
Share activity for the year ended October 31, 1997 is as follows:
<TABLE>
<CAPTION>
SHORT DURATION TAX-FREE
FUND MUNICIPAL INCOME FUND
---------------------------------
SHARES DOLLARS SHARES DOLLARS
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Shares sold 492,769 $ 4,950,140 1,303,279 $19,055,213
Reinvestment of dividends
and distributions 3,459 34,811 107,716 1,579,312
Shares repurchased (97,242) (977,758) (743,175) (10,871,802)
---------------------------------
398,986 4,007,193 667,820 9,762,723
----------------------------------------------------------------------------
CLASS B SHARES
Shares sold 11,933 119,768 116,039 1,702,581
Reinvestment of dividends
and distributions 86 861 1,286 18,970
Shares repurchased (1,490) (15,000) (18,419) (273,177)
---------------------------------
10,529 105,629 98,906 1,448,374
----------------------------------------------------------------------------
CLASS C SHARES
Shares sold 2,151 21,604 8,837 132,078
Reinvestment of dividends
and distributions 1 10 12 176
Shares repurchased (1,992) (20,080) (168) (2,500)
---------------------------------
160 1,534 8,681 129,754
----------------------------------------------------------------------------
INSTITUTIONAL SHARES
Shares sold 1,897,550 18,922,030 23,434 351,500
Reinvestment of dividends
and distributions 115,179 1,152,524 1 15
Shares repurchased (2,646,181) (26,425,414) -- --
---------------------------------
(633,452) (6,350,860) 23,435 351,515
----------------------------------------------------------------------------
ADMINISTRATION SHARES
Shares sold 33,608 336,065 -- --
Reinvestment of dividends
and distributions 281 2,813 -- --
Shares repurchased (31,059) (312,126) -- --
---------------------------------
2,830 26,752 -- --
----------------------------------------------------------------------------
SERVICE SHARES
Shares sold 373,847 3,741,754 101 1,501
Reinvestment of dividends
and distributions 4,184 41,937 1 14
Shares repurchased (244,134) (2,443,102) -- --
---------------------------------
133,897 1,340,589 102 1,515
----------------------------------------------------------------------------
NET INCREASE (DECREASE) (87,050) $ (869,163) 798,944 $11,693,881
----------------------------------------------------------------------------
</TABLE>
27
<PAGE>
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
INCOME (LOSS) FROM
INVESTMENT OPERATIONS(A) DISTRIBUTIONS TO SHAREHOLDERS
------------------------- ------------------------------------
NET REALIZED
AND UNREALIZED FROM NET
GAIN (LOSS) REALIZED GAIN NET
NET ASSET ON INVESTMENT, IN EXCESS ON INVESTMENT, INCREASE
VALUE, NET OPTION AND FROM NET OF NET OPTION (DECREASE)
BEGINNING INVESTMENT FUTURES INVESTMENT INVESTMENT AND FUTURES IN NET
OF PERIOD INCOME(E) TRANSACTIONS(E) INCOME INCOME TRANSACTIONS ASSET VALUE
FOR THE YEARS ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1998 - Class A Shares $10.08 $0.36 $0.13 $(0.38) -- $ -- $0.11
1998 - Class B Shares 10.08 0.30 0.12 (0.32) -- -- 0.10
1998 - Class C Shares 10.07 0.28 0.14 (0.31) -- -- 0.11
1998 - Institutional
Shares 10.07 0.39 0.13 (0.41) -- -- 0.11
1998 - Administration
Shares 10.07 0.36 0.13 (0.38) -- -- 0.11
1998 - Service Shares 10.07 0.34 0.13 (0.36) -- -- 0.11
----------------------------------------------------------------------------------------------------------------
1997 - Class A Shares
(commenced May 1) 9.94 0.20 0.14 (0.20) -- -- 0.14
1997 - Class B Shares
(commenced May 1) 9.94 0.16 0.14 (0.16) -- -- 0.14
1997 - Class C Shares
(commenced August 15) 10.04 0.07 0.03 (0.07) -- -- 0.03
1997 - Institutional
Shares 9.96 0.42 0.11 (0.42) -- -- 0.11
1997 - Administration
Shares 9.96 0.39 0.11 (0.39) -- -- 0.11
1997 - Service Shares 9.97 0.37 0.10 (0.37) -- -- 0.10
----------------------------------------------------------------------------------------------------------------
1996 - Institutional
Shares 9.94 0.42 0.02 (0.42) -- -- 0.02
1996 - Administration
Shares 9.94 0.39 0.02 (0.39) -- -- 0.02
1996 - Service Shares 9.95 0.37 0.02 (0.37) -- -- 0.02
----------------------------------------------------------------------------------------------------------------
1995 - Institutional
Shares 9.79 0.42 0.15 (0.42) -- -- 0.15
1995 - Administration
Shares 9.79 0.40 0.15 (0.40) -- -- 0.15
1995 - Service Shares 9.79 0.37 0.16 (0.37) -- -- 0.16
----------------------------------------------------------------------------------------------------------------
1994 - Institutional
Shares 10.23 0.38 (0.36) (0.38) -- (0.08) (0.44)
1994 - Administration
Shares 10.23 0.35 (0.36) (0.35) -- (0.08) (0.44)
1994 - Service Shares
(commenced September 20) 9.86 0.05 (0.07) (0.05) -- -- (0.07)
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the
investment at the net asset value at the end of period and no sales
charge. Total return would be reduced if a sales or redemption charge
were taken into account.
(c) Annualized.
(d) Not annualized.
(e) Calculated based on the average shares outstanding methodology.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
28
<PAGE>
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF
FEES OR EXPENSE
LIMITATIONS
-----------------------
NET RATIO OF NET RATIO OF NET
ASSETS RATIO OF INVESTMENT RATIO OF INVESTMENT
NET ASSET PORTFOLIO AT END OF NET EXPENSES INCOME EXPENSES INCOME
VALUE, TOTAL TURNOVER PERIOD TO AVERAGE TO AVERAGE TO AVERAGE TO AVERAGE
END OF PERIOD RETURN(B) RATE (IN 000S) NET ASSETS NET ASSETS NET ASSETS NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
$10.19 4.97% 140.72% $19,881 0.71% 3.54% 1.74% 2.51%
10.18 4.25 140.72 974 1.31 3.06 2.27 2.10
10.18 4.19 140.72 2,256 1.46 2.82 2.27 2.01
10.18 5.25 140.72 57,647 0.45 3.92 1.26 3.11
10.18 4.99 140.72 525 0.70 3.58 1.51 2.77
10.18 4.73 140.72 2,560 0.95 3.44 1.76 2.63
- ----------------------------------------------------------------------------------------------------
10.08 3.39(d) 194.75 4,023 0.70(c) 3.81(c) 1.73(c) 2.78(c)
10.08 3.07(d) 194.75 106 1.30(c) 3.31(c) 2.23(c) 2.38(c)
10.07 0.97(d) 194.75 2 1.45(c) 2.60(c) 2.23(c) 1.82(c)
10.07 5.40 194.75 28,821 0.45 4.18 1.23 3.40
10.07 5.14 194.75 77 0.70 3.91 1.48 3.13
10.07 4.77 194.75 2,051 0.95 3.66 1.73 2.88
- ----------------------------------------------------------------------------------------------------
9.96 4.50 231.65 34,814 0.45 4.21 1.01 3.65
9.96 4.24 231.65 48 0.70 3.96 1.26 3.40
9.97 3.98 231.65 695 0.95 3.74 1.51 3.18
- ----------------------------------------------------------------------------------------------------
9.94 5.98 259.52 58,389 0.45 4.31 0.77 3.99
9.94 5.76 259.52 46 0.70 4.14 1.02 3.82
9.95 5.59 259.52 454 0.95 3.87 1.27 3.55
- ----------------------------------------------------------------------------------------------------
9.79 0.17 354.00 83,704 0.45 3.74 0.61 3.58
9.79 (0.11) 354.00 3,866 0.70 3.51 0.86 3.35
9.79 (0.32)(d) 354.00 440 0.95(c) 4.30(c) 1.11(c) 4.14(c)
- ----------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
GOLDMAN SACHS MUNICIPAL INCOME FUND
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
INCOME (LOSS) FROM
INVESTMENT OPERATIONS(A) DISTRIBUTIONS TO SHAREHOLDERS
------------------------- ----------------------------------
NET REALIZED FROM
AND UNREALIZED NET REALIZED
GAIN (LOSS) ON GAIN ON NET
NET ASSET INVESTMENT, FROM IN EXCESS INVESTMENT, INCREASE
VALUE, NET OPTION AND NET OF NET OPTION AND (DECREASE)
BEGINNING INVESTMENT FUTURES INVESTMENT INVESTMENT FUTURES IN NET
OF PERIOD INCOME TRANSACTIONS INCOME INCOME TRANSACTIONS ASSET VALUE
FOR THE YEARS ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1998 - Class A Shares $14.99 $0.65 $ 0.50 $(0.64) $-- $(0.03) $ 0.48
1998 - Class B Shares 15.00 0.53 0.49 (0.52) -- (0.03) 0.47
1998 - Class C Shares 14.99 0.53 0.50 (0.52) -- (0.03) 0.48
1998 - Institutional
Shares 15.00 0.68 0.50 (0.68) -- (0.03) 0.47
1998 - Service Shares 14.99 0.64 0.49 (0.61) -- (0.03) 0.49
-------------------------------------------------------------------------------------------------------------
1997 - Class A Shares 14.37 0.67 0.62 (0.67) -- -- 0.62
1997 - Class B Shares 14.37 0.56 0.63 (0.56) -- -- 0.63
1997 - Class C Shares
(commenced August 15) 14.85 0.12 0.14 (0.12) -- -- 0.14
1997 - Institutional
Shares (commenced August
15) 14.84 0.15 0.16 (0.15) -- -- 0.16
1997 - Service Shares
(commenced August 15) 14.84 0.14 0.15 (0.14) -- -- 0.15
-------------------------------------------------------------------------------------------------------------
1996 - Class A Shares 14.17 0.65 0.20 (0.65) -- -- 0.20
1996 - Class B Shares
(commenced May 1) 14.03 0.27 0.34 (0.27) -- -- 0.34
-------------------------------------------------------------------------------------------------------------
1995 - Class A Shares 13.08 0.67 1.09 (0.67) -- -- 1.09
-------------------------------------------------------------------------------------------------------------
1994 - Class A Shares 14.64 0.73 (1.51) (0.73) -- (0.05) (1.56)
-------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charge. Total return would be reduced if a sales or redemption charge
were taken into account.
(c) Annualized.
(d) Not annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
30
<PAGE>
GOLDMAN SACHS MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
RATIOS ASSUMING NO
VOLUNTARY WAIVER OF FEES
OR EXPENSE LIMITATIONS
--------------------------------
RATIO OF NET RATIO OF NET
NET ASSETS RATIO OF INVESTMENT RATIO OF INVESTMENT
NET ASSET PORTFOLIO AT END OF NET EXPENSES INCOME EXPENSES INCOME
VALUE, TOTAL TURNOVER PERIOD TO AVERAGE TO AVERAGE TO AVERAGE TO AVERAGE
END OF PERIOD RETURN(B) RATE (IN 000S) NET ASSETS NET ASSETS NET ASSETS NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
$15.47 7.79% 56.51% $91,158 0.87% 4.25% 1.64% 3.48%
15.47 6.91 56.51 6,722 1.62 3.44 2.16 2.90
15.47 6.98 56.51 2,862 1.62 3.38 2.16 2.84
15.47 8.00 56.51 6,154 0.58 4.41 1.12 3.87
15.48 7.68 56.51 2 1.08 4.21 1.62 3.67
- ------------------------------------------------------------------------------------------------------------------
14.99 9.23 153.12 64,553 0.85 4.60 1.62 3.83
15.00 8.48 153.12 1,750 1.60 3.74 2.12 3.22
14.99 1.75(d) 153.12 130 1.60(c) 3.24(c) 2.12(c) 2.72(c)
15.00 2.10(d) 153.12 351 0.60(c) 4.41(c) 1.12(c) 3.89(c)
14.99 1.93(d) 153.12 2 1.10(c) 4.24(c) 1.62(c) 3.72(c)
- ------------------------------------------------------------------------------------------------------------------
14.37 6.13 344.13 52,267 0.85 4.58 1.55 3.88
14.37 4.40(d) 344.13 255 1.60(c) 3.55(c) 2.05(c) 3.10(c)
- ------------------------------------------------------------------------------------------------------------------
14.17 13.79 335.55 53,797 0.76 4.93 1.49 4.20
- ------------------------------------------------------------------------------------------------------------------
13.08 (5.51) 357.54 47,373 0.45 5.28 1.55 4.18
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
GOLDMAN SACHS TRUST - TAX-FREE FUNDS
Report of Independent Public Accountants
To the Shareholders and Board of Trustees of Goldman Sachs Trust -- Tax-Free
Fixed Income Funds:
We have audited the accompanying statement of assets and liabilities of
Goldman Sachs Short Duration Tax-Free Fund and Municipal Income Fund, two of
the portfolios constituting Goldman Sachs Trust -- Fixed Income Funds (a Del-
aware Business Trust), including the statement of investments, as of October
31, 1998, and the related statements of operations and the statements of
changes in net assets and the financial highlights for the periods presented.
These financial statements and the financial highlights are the responsibil-
ity of the Funds' management. Our responsibility is to express an opinion on
these financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of Goldman Sachs Short Duration Tax-Free Fund and Municipal Income
Fund as of October 31, 1998, the results of their operations and the changes
in their net assets and the financial highlights for the periods presented,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 11, 1998
32
<PAGE>
GOLDMAN SACHS FUND PROFILE
Goldman Sachs Tax-Free Funds
THE GOLDMAN
SACHS ADVANTAGE
When you invest in Goldman Sachs Tax-Free Funds, you can capitalize on Goldman
Sachs' 129-year history of excellence while benefiting from the firm's
leadership in three areas:
1 Global Resources
With professionals based throughout the Americas, Europe and Asia, Goldman Sachs
possesses first-hand knowledge of the world's markets and economies.
2 Fundamental Research
Goldman Sachs is recognized by the managements of corporations worldwide as a
leader in investment research. As a result, we obtain face-to-face meetings with
managers on a timely, regular basis.
3 Risk Management
Goldman, Sachs & Co. excels in understanding, monitoring and managing investment
risk -- a process that is integrated into all Goldman Sachs investment products.
In general, tax-free fixed income investments have the potential to offer more
attractive after-tax yields than many taxable fixed income investments.
Goldman Sachs Tax-Free Funds offer investors access to the benefits associated
with tax-free investing. The Funds seek high levels of current income exempt
from regular federal income tax, primarily through investments in municipal
securities.
Target Your Needs
The Goldman Sachs Tax-Free Funds have distinct investment objectives and defined
positions on the risk/return spectrum. As your investment objectives change, you
can exchange shares within Goldman Sachs Funds without any additional charge.*
(Please note: in general, greater returns are associated with greater risk.)
Goldman Sachs Fixed Income Funds
<TABLE>
<CAPTION>
[GRAPHIC]
Lower risk/return Higher risk/return
- ------------------------------------------------------------------------------------------------------------------
TAX-FREE TAXABLE HIGH YIELD
<S> <C> <C>
. Municipal Income Fund . Global Income Fund . High Yield Fund
. Short Duration Tax-Free Fund . Core Fixed Income Fund
. Government Income Fund
. Short Duration Government Fund
. Adjustable Rate Government Fund
</TABLE>
For More Information
To learn more about Goldman Sachs Tax-Free Funds and other Goldman Sachs Funds,
call your investment professional today.
* The exchange privilege is subject to termination and its terms are subject to
change.
<PAGE>
- --------------------------------------------------------------------------------
GOLDMAN SACHS ASSET MANAGEMENT
ONE NEW YORK PLAZA, 42ND FLOOR, NEW YORK, NEW YORK 10004
- --------------------------------------------------------------------------------
TRUSTEES
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
John P. McNulty
Mary P. McPherson
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
OFFICERS
Douglas C. Grip, President
Jesse Cole, Vice President
James A. Fitzpatrick, Vice President
Anne Marcel, Vice President
John M. Perlowski, Treasurer
Philip V. Giuca, Jr., Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Valerie A. Zondorak, Assistant Secretary
GOLDMAN, SACHS & CO.
Distributor and Transfer Agent
GOLDMAN SACHS ASSET MANAGEMENT
Investment Adviser
Visit our internet address: www.gs.com/funds
Sources (page 8): Lipper Analytical Services. Correlations based on monthly
returns from 10/31/88 through 10/31/98 of the following: Cash - 1-month
Certificate of Deposit (CD). Treasury Bill - 3-month Treasury Bill; CD and
Treasury bill indices are derived from secondary market interest rates as
published by the Federal Reserve Bank. Intermediate-Term Government Bonds -
Lehman Intermediate Government Bond Index. Long Term Government Bonds - Lehman
Long Term Government Bond Index; Lehman Government Bond Indices are made up of
agency (all publicly issued debt of U.S. Government agencies and quasi-federal
corporations, and corporate debt guaranteed by the U.S. Government) and treasury
securities (all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues). Corporate Bonds - the Lehman Aggregate Bond Index
represents a diversified portfolio of fixed income securities, including U.S.
Treasuries, investment-grade corporation bonds, and mortgage- and asset-backed
securities. Municipal Bonds - the Lehman Muni 10-Year Index, a broad-based total
return index that is comprised of investment grade, fixed rate, long-term
maturities (ranging from nine to 12 years) and are selected from issues larger
than $50 million with dates since January 1984. Global Bonds - the Merrill Lynch
Global Bond Index, a broad-based index consisting of fixed-rate, coupon-bearing
bonds with an outstanding par greater than or equal to $25 million and a
maturity range greater than or equal to one year. High Yield Bonds - Lehman High
Yield Bond Index, includes all fixed income securities having a maximum quality
rating of Ba1 (including defaulted issues), a minimum amount outstanding of
$100mm, and at least one year to maturity; PIKs and Eurodollars are excluded.
This material is not authorized for distribution to prospective investors unless
preceded or accompanied by a current Prospectus. Investors should read the
Prospectus carefully before investing or sending money.
Goldman Sachs & Co., distributor of the Fund, is not a bank, and Fund shares
distributed by it are neither bank deposits nor obligations of, nor endorsed,
nor guaranteed by any bank or other insured depository institution, nor are they
insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve
Board or any other government agency. Investment in the Funds involves risks,
including possible loss of the principal amount invested.
Goldman Sachs Government Income Fund's, Goldman Sachs Short Duration Government
Fund's and Goldman Sachs Adjustable Rate Government Fund's net asset values and
yields are not guaranteed by the U.S. government or by its agencies,
instrumentalities or sponsored enterprises.
Goldman Sachs Municipal Income Fund and Goldman Sachs Short Duration Tax-Free
Fund can invest up to 100% and 20% respectively, in private activity bonds, the
interest from which is subject to the federal alternative minimum tax.
Goldman Sachs High Yield Fund invests primarily in high yield, fixed income
securities rated below investment grade that are considered speculative and
generally involve greater price volatility and greater risk of loss of principal
and interest than investments in higher rated fixed income securities.
Goldman Sachs High Yield Fund's, Goldman Sachs Global Income Fund's and Goldman
Sachs Core Fixed Income Fund's foreign investments and active management
techniques entail risks in addition to those customarily associated with
investing in dollar-denominated securities of U.S. issuers. Compared with U.S.
securities markets, foreign markets may be less liquid, more volatile and less
subject to governmental regulation, and may make available less public
information about issuers. The Fund may incur losses because of changes in
securities prices expressed in local currencies, movements in exchange rates, or
both.
(C) Copyright 1998 Goldman, Sachs & Co.
All rights reserved.
Date of first use: December 30, 1998 FI/TFAR / 13K / 12-98
