SCHWAB CHARLES FAMILY OF FUNDS, 497, 1995-09-01

SCHWAB CHARLES FAMILY OF FUNDS
497, 1995-09-01

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<PAGE> 1

STATEMENT OF ADDITIONAL INFORMATION

THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104

SCHWAB VALUE ADVANTAGE MONEY FUND(R)

APRIL 30, 1995,
AS AMENDED SEPTEMBER 1, 1995

This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus dated April 30, 1995, as amended
September 1, 1995 (as amended from time to time) for the Schwab Value Advantage
Money Fund (the "Fund"), a separately managed investment portfolio of The
Charles Schwab Family of Funds (the "Schwab Fund Family" or the "Trust"). To
obtain copies of the Prospectus, please call:

SCHWABFunds(R)

800-2 NO-LOAD
(800-266-5623)

TABLE OF CONTENTS

<TABLE>
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Page
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<S> <C>
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PORTFOLIO TRANSACTIONS AND TURNOVER . . . . . . . . . . . . . . . . . . . . 11
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SHARE PRICE CALCULATION . . . . . . . . . . . . . . . . . . . . . . . . . . 16
YIELD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . 19
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
APPENDIX - RATINGS OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . 34
</TABLE>

<PAGE> 2

INVESTMENT RESTRICTIONS

The restrictions set forth below are fundamental and cannot be changed
without approval of the holders of a majority of the outstanding voting
securities (as defined in the Investment Company Act of 1940, as amended,
hereinafter the "1940 Act") of the Fund.

THE FUND MAY NOT:

(1) Underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter under the federal securities laws in
connection with the disposition of securities from its investment
portfolio.

(2) Invest in commodities or commodity contracts, including futures
contracts, or in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest or deal
in real estate.

(3) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that the Fund reserves freedom of action to invest up
to 100% of its assets in certificates of deposit or bankers' acceptances
issued by U.S. banks and U.S. branches of those foreign banks which the
Investment Manager has determined to be subject to the same regulation as
U. S. banks, or obligations of or guaranteed by the U.S. Government, its
agencies or instrumentalities.

(4) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and
policies).

The following restrictions are non-fundamental and may be changed by the
Board of Trustees.

THE FUND MAY NOT:

(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its
assets would be invested in securities of that issuer.

<PAGE> 3

(2) Invest more than 10% of its total assets in illiquid securities,
including repurchase agreements maturing in more than seven days.

(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.

(4) Invest more than 5% of its total net assets in securities of issuers
(other than obligations of, or guaranteed by, the United States
Government, its agencies or instrumentalities) which with their
predecessors have a record of less than three years continuous operation.

(5) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Schwab Fund Family or the Investment Manager
beneficially own more than 1/2 of 1% of the securities of such issuer,
and together beneficially own more than 5% of the securities of such
issuer.

(6) Invest for the purpose of exercising control or management of another
issuer.

(7) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets. 1

(8) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one- third of the value of its
total assets in order to meet redemption requests without immediately
selling any portfolio securities. The Fund will not borrow for leverage
purposes or purchase securities or make investments while reverse
repurchase agreements or borrowings are outstanding. Borrowings by the
Fund may be collateralized. If, for any reason, the current value of the
Fund's total net assets falls below an amount equal to three times the
amount of its indebtedness from money borrowed, the Fund will, within
three business days, reduce its indebtedness to the extent necessary.

(9) Write, purchase or sell puts, calls or combinations thereof.

(10) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions.

--------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" in this Statement of Additional Information for
an exception to this investment restriction.

<PAGE> 4

(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of issuers
which invest in or sponsor such programs. Except as otherwise noted, if a
percentage restriction is adhered to at the time of investment, a later
increase in percentage beyond the specified limit resulting from a change
in values or net assets will not be considered a violation.

INVESTMENT SECURITIES

The Fund is a money market fund, and accordingly will only purchase
securities that present minimal credit risks and that are First Tier or Second
Tier Securities (otherwise referred to "Eligible Securities"). An Eligible
Security is:

(1) a security with a remaining maturity of 397 days or less: (a) that is
rated by the requisite nationally recognized statistical rating
organizations (NRSROs) designated by the Securities and Exchange
Commission (the "SEC") (currently Moody's Investors Service, Standard &
Poor's Corporation, Duff and Phelps Credit Rating Co., Fitch Investors
Services, Inc., Thomson Bankwatch and, with respect to debt issued by
banks, bank holding companies, United Kingdom building societies,
broker-dealers and broker-dealers' parent companies, and bank-supported
debt, IBCA Limited and its affiliate, IBCA, Inc.) in one of the two
highest rating categories for short-term debt obligations (requisite
NRSRO being any two or, if only rated by one, that one NRSRO), or (b)
that itself was unrated by an NRSRO, but was issued by an issuer that has
outstanding a class of short-term debt obligations (or any security
within that class) meeting the requirements of subparagraph 1(a) above
that is of comparable priority and security;

(2) a security that at the time of issuance was a long-term security but has
a remaining maturity of 397 days or less and (a) whose issuer received a
rating within one of the two highest rating categories from the requisite
NRSROs for short-term debt obligations with respect to a class of
short-term debt obligations (or any security within that class) that is
now comparable in priority and security with the subject security; or (b)
that has long-term ratings from the requisite NRSROs that are in one of
the two highest categories; or

(3) a security not rated by an NRSRO but deemed by the Investment Manager,
pursuant to guidelines adopted by the Board of Trustees, to be of
comparable quality to securities described in (1) and (2) above and to
present minimal credit risks.

A First Tier Security is any Eligible Security which carries top NRSRO
ratings from at least two NRSROs (a single top rating is sufficient if only one
NRSRO rates the security),

<PAGE> 5

or has been determined by the Investment Manager, pursuant to guidelines adopted
by the Board of Trustees, to be of comparable quality to such a security. A
Second Tier Security is any other Eligible Security.

The Fund will limit its investments in the First Tier Securities of any
one issuer to no more than five percent of its assets. (Repurchase agreements
collateralized by non-Government securities will be taken into account when
making this calculation.) Moreover, the Fund's total holdings of Second Tier
Securities will not exceed 5% of its assets, with investment in the Second Tier
Securities of any one issuer being limited to the greater of 1% of the Fund's
assets or $1 million. In addition, the underlying securities involved in
repurchase agreements collateralized by non-Government securities will be First
Tier Securities at the time the repurchase agreements are executed.

ASSET-BACKED COMMERCIAL PAPER AND OTHER SECURITIES

The Schwab Value Advantage Money Fund(R) can invest a portion of its
assets in asset-backed commercial paper and other money market fund Eligible
Securities (as that term is hereinafter defined). The credit quality of most
asset-backed commercial paper depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator (or any other affiliated
entities), and the amount and quality of any credit support provided to the
securities.

Asset-backed commercial paper is often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two classes: liquidity protection and protection against ultimate default
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate default ensures payment on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction, or through a combination of such
approaches. The degree of credit support provided on each issue is based
generally on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-backed security.

<PAGE> 6

MANAGEMENT OF THE TRUST

OFFICERS AND TRUSTEES. The officers and trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Charles Schwab & Co., Inc. ("Schwab"), and
Charles Schwab Investment Management, Inc., are as follows:

<TABLE>
<CAPTION>
POSITION WITH
NAME THE TRUST PRINCIPAL OCCUPATION
---- ------------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Founder, Chairman, Chief Executive Officer and Director, The Charles
Age: 57 Schwab Corporation; Founder, Chairman and Director, Charles Schwab &
Co., Inc. and Charles Schwab Investment Management, Inc.; Chairman and
Director, The Charles Schwab Trust Company and Mayer & Schweitzer,
Inc. (a securities brokerage subsidiary of The Charles Schwab
Corporation); Director, The Gap, Inc.(a clothing retailer),
Transamerica Corporation (a financial services organization) and
AirTouch Communications (a telecommunications company).

ELIZABETH G. SAWI ** President and Trustee Executive Vice President - Mutual Funds, Charles Schwab & Co., Inc. and
Age: 43 The Charles Schwab Corporation; President, Charles Schwab Investment
Management, Inc. Prior to April 1994, Ms. Sawi was Executive Vice
President - Marketing and Advertising for Charles Schwab & Co., Inc.
and The Charles Schwab Corporation.

DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward & Associates (advertising
Age: 63 and marketing/consulting).

ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director, Semloh Financial, Inc.
Age: 63 (international financial services).

DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (real estate investment). Prior to
Age: 56 1993, Mr. Stephens was Chairman and Chief Executive Officer of the Bank
of San Francisco.
</TABLE>

--------------
* Mr. Schwab is an "interested person" of the Trust.

** Ms. Sawi is an "interested person" of the Trust.

<PAGE> 7

<TABLE>
<CAPTION>
POSITION WITH
NAME THE TRUST PRINCIPAL OCCUPATION
---- ------------- --------------------
<S> <C> <C>
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director, Wilsey Bennett, Inc.
Age: 51 (truck and air transportation, real estate investment and management,
and investments).

A. JOHN GAMBS Treasurer and Principal Executive Vice President - Finance and Chief Financial Officer, The
Age: 49 Financial Officer Charles Schwab Corporation; Executive Vice President, Chief Financial
Officer and Director, Charles Schwab & Co., Inc.; Chief Financial
Officer and Director, Charles Schwab Investment Management, Inc.; and
Chief Financial Officer, The Charles Schwab Trust Company.

WILLIAM J. KLIPP*** Senior Vice President, Senior Vice President, Charles Schwab & Co., Inc. and Chief Operating
Age: 39 Chief Operating Officer Officer, Charles Schwab Investment Management, Inc. Prior to 1993, Mr.
and Trustee Klipp was Treasurer of Charles Schwab & Co., Inc. and Mayer &
Schweitzer, Inc. Prior to 1990, he was Vice President, Director
Funding, Merrill Lynch & Co., Inc.

STEPHEN B. WARD Senior Vice President & Senior Vice President, Charles Schwab Investment Management, Inc. Prior
Age: 39 Chief Investment to 1991, Mr. Ward was Vice President and Portfolio Manager for Federated
Officer Investors.

FRANCES COLE Secretary Chief Counsel and Compliance Officer, Assistant Corporate Secretary,
Age: 39 Charles Schwab Investment Management, Inc. Prior to 1991, Ms. Cole was
Senior Counsel for Equitec Securities Company.

TIMOTHY B. PAWLOSKI Assistant Treasurer Vice President of Finance- SchwabFunds(R), 1991 to 1993, Mr. Pawloski
Age: 36 was Director of Finance for Charles Schwab & Co., Inc. and from 1987 to
1991, he served as a Senior Manager at Price Waterhouse LLP.
</TABLE>

--------------
*** Mr. Klipp is an "interested person" of the Trust.

<PAGE> 8

<TABLE>
<CAPTION>
POSITION WITH
NAME THE TRUST PRINCIPAL OCCUPATION
---- ------------- --------------------
<S> <C> <C>
PAMELA E. HERLICH Assistant Secretary Assistant Corporate Secretary, The Charles Schwab Corporation and
Age: 41 Charles Schwab & Co., Inc.; Corporate Secretary, Charles Schwab
Investment Management, Inc., Mayer & Schweitzer and The Charles Schwab
Trust Company. Prior to 1993, Ms. Herlich was Assistant Corporate
Secretary for Mayer & Schweitzer, Inc. and The Charles Schwab Trust
Company.

DAVID H. LUI Assistant Secretary Senior Counsel - Charles Schwab Investment Management, Inc. From 1991 to
Age: 34 1992, he was Assistant Secretary and Assistant Corporate Counsel for the
Franklin Group of Mutual Funds. Prior to 1991, he was an Associate of
Thelen, Marrin, Johnson & Bridges (a San Francisco law firm).

CHRISTINA M. PERRINO Assistant Secretary Senior Counsel - Charles Schwab Investment Management, Inc. Prior to
Age: 34 1994, she was Counsel and Assistant Secretary for North American
Security Life Insurance Company and Secretary for North American
Funds.
</TABLE>

Each of the above-referenced Officers and/or Trustees also serves in the
same capacity as described for the Trust for Schwab Investments, Schwab Capital
Trust, Schwab Annuity Portfolios, and Schwab Advantage Trust (which has not
commenced operations). The address of each individual listed above is 101
Montgomery Street, San Francisco, California 94104.

TRUSTEE DEFERRED COMPENSATION PLAN

Pursuant to exemptive relief received by the Trust from the SEC, the
Trust may enter into deferred fee arrangements (the "Fee Deferral Plan" or the
"Plan") with the Trust's trustees who are not "interested persons" of any of the
Funds of the Trust (the "Independent Trustees" or the "Trustees").

As of the date of this Statement of Additional Information, none of the
Independent Trustees has elected to participate in the Fee Deferral Plan. In the
event an Independent Trustee does elect to participate in the Plan, the Plan
would operate as described below.

Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account"), as of the
date such fees would have been paid to such Trustee. The value of the Deferred
Fee Account as of any date will be equal to the value the Account would have had
as of that date if the amounts credited to the Account had

<PAGE> 9

been invested and reinvested in the securities of the SchwabFund or
SchwabFunds(R) selected by the participating Trustee (the "Selected SchwabFund
Securities"). "SchwabFunds" include the series or classes of shares of
beneficial interest of the Trust, Schwab Investments, Schwab Capital Trust, and
Schwab Advantage Trust (which has not commenced operations).

Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. These transactions would otherwise be limited or
prohibited by the investment policies and/or restrictions of the Funds. See
"Investment Restrictions."

COMPENSATION TABLE 1

Pension or Retirement Estimated Annual
Aggregate Benefits Accrued as Part Benefits Upon Total Compensation
Name of Person, Compensation of Fund Expenses from Retirement from from the
Position from the Trust the Fund Complex 2 the Fund Complex 2 Fund Complex 2
--------------- -------------- ------------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee

Elizabeth G. Sawi, 0 N/A N/A 0
President and Trustee

William J. Klipp, 0 N/A N/A 0
Sr. Vice President, Chief
Operating Officer, and Trustee

Robert G. Holmes, 16,000 N/A N/A 58,000
Trustee
16,000 N/A N/A 58,000
Donald R. Stephens,
Trustee

Donald F. Dorward, 16,000 N/A N/A 58,000
Trustee

Michael W. Wilsey, Trustee 16,000 N/A N/A 58,000
</TABLE>

1 Figures are for the Trust's fiscal year ended December 31, 1994.

2 "Fund Complex" comprises all 18 funds of the Trust, Schwab Investments,
Schwab Capital Trust, and Schwab Annuity Portfolios.

<PAGE> 10

INVESTMENT MANAGER

Charles Schwab Investment Management, Inc. (the "Investment Manager"), a
wholly-owned subsidiary of The Charles Schwab Corporation, serves as the Fund's
investment adviser and administrator pursuant to an Investment Advisory and
Administration Agreement (the "Advisory Agreement") between it and the Trust.
The Investment Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended and currently provides investment
management services to the SchwabFunds(R), a family of 18 mutual funds with over
$28 billion in assets as of July 31, 1995. The Investment Manager is an
affiliate of Schwab, the Trust's distributor and shareholder services and
transfer agent.

The Advisory Agreement will continue in effect for one-year terms for
each Fund to which it relates, subject to annual approval by: (1) the Trust's
Board of Trustees or (2) a vote of the majority (as defined in the 1940 Act) of
the outstanding voting securities of each Fund subject thereto. In either event,
the continuance must also be approved by a majority of the Trust's Board of
Trustees who are not parties to the Agreement, or interested persons (as defined
in the 1940 Act) of any such party, by vote cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement may be
terminated at any time upon 60 days notice by either party, or by a majority
vote of the outstanding securities of a Fund subject thereto, and will terminate
automatically upon assignment.

Pursuant to the Advisory Agreement, the Investment Manager is entitled to
receive a graduated annual fee, payable monthly, of 0.46% of the Fund's average
daily net assets not in excess of $2 billion, 0.45% of such net assets over $2
billion but not in excess of $3 billion, and 0.40% of such net assets over $3
billion.

For the fiscal period from April 30, 1992 (commencement of operations) to
December 31, 1992, the Fund paid $81,741 in management fees (fees were reduced
by $426,231). For the fiscal period ended December 31, 1993, the Fund paid
$592,000 in management fees (fees were reduced by $1,882,000 ). For the fiscal
period ended December 31, 1994, the Fund paid $2,144,000 in management fees
(fees were reduced by $6,741,000).

Expenses. The Trust pays the expenses of its operations, including the
fees and expenses of independent accountants, counsel, custodian and the cost of
reports and notices to shareholders, costs of calculating net asset value,
brokerage commissions or transaction costs, taxes, registration fees, the fees
and expenses of qualifying the Trust and its shares for distribution under
federal and state securities laws and membership dues in the Investment Company
Institute or any similar organization. The Trust's expenses generally are
allocated among the Funds on the basis of relative net assets at the time of
allocation, except that expenses directly attributable to a particular Fund are
charged to that Fund.

<PAGE> 11

DISTRIBUTOR

Pursuant to a Distribution Agreement, Schwab is the principal underwriter
for shares of the Trust and is the Trust's agent for the purpose of the
continuous offering of the Funds' shares. Each Fund pays the cost for its
prospectus and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under the
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory Agreements.

CUSTODIAN AND FUND ACCOUNTANT

PNC Bank, National Association, at the Airport Business Center, 200
Stevens Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for
the Trust.

PFPC, Inc., at 103 Bellevue Parkway Wilmington, Delaware 19809, serves as
Fund Accountant for the Trust.

ACCOUNTANTS AND REPORTS TO SHAREHOLDERS

The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial statements of each series of the Trust and review
certain regulatory reports and each Fund's federal income tax return. Price
Waterhouse also performs other professional accounting, auditing, tax and
advisory services when engaged to do so by the Trust. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse LLP is 555 California Street, San Francisco, California 94104.

LEGAL COUNSEL

Ropes & Gray, 1001 Pennsylvania Avenue, N.W., Suite 1200 South,
Washington, D.C. 20004, is counsel to the Trust.

PORTFOLIO TRANSACTIONS AND TURNOVER

PORTFOLIO TRANSACTIONS

Portfolio transactions are undertaken principally to pursue the objective
of the Fund in relation to movements in the general level of interest rates, to
invest money obtained from the sale of Fund shares, to reinvest proceeds from
maturing portfolio securities and to meet redemptions of Fund shares. Portfolio
transactions may increase or decrease the yield of the Fund, depending upon
management's ability to correctly time and execute them.

The Investment Manager, in effecting purchases and sales of portfolio

<PAGE> 12

securities for the account of the Fund, seeks to obtain best price and
execution. Subject to the supervision of the Board of Trustees, the Investment
Manager generally selects broker-dealers primarily on the basis of the quality
and reliability of services provided, including execution capability and
financial responsibility.

When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, utilize the services
of broker-dealers that provide it with investment information and other research
resources. Such research resources may also be used by the Investment Manager
when providing advisory services to other investment advisory clients, including
mutual funds.

The Trust expects that purchases and sales of portfolio securities for
the Fund will usually be principal transactions. Securities will normally be
purchased directly from the issuer or from an underwriter or market maker for
the securities. Purchases from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers will include the spread between the bid and asked
prices.

The investment decisions for the Fund are reached independently from
those for other accounts managed by the Investment Manager. Such other accounts
may also make investments in instruments or securities at the same time as the
Fund. When two or more accounts managed by the Investment Manager have funds
available for investment in similar instruments, available instruments are
allocated as to amount in a manner considered equitable to each account. In some
cases this procedure may affect the size or price of the position obtainable for
the Fund. However, it is the opinion of the Board of Trustees that the benefits
conferred by the Investment Manager outweigh any disadvantages that may arise
from exposure to simultaneous transactions.

PORTFOLIO TURNOVER

Because securities with maturities of less than one year are excluded
from required portfolio turnover rate calculations, the Fund's portfolio
turnover rate for reporting purposes is expected to be zero.

<PAGE> 13

DISTRIBUTIONS AND TAXES

DISTRIBUTIONS

On each day that the net asset value per share of the Fund is determined
("Business Day"), the Fund's net investment income will be declared as of the
close of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
time) as a daily dividend to shareholders of record as of the last calculation
of net asset value prior to the declaration. Shareholders will receive dividends
in additional shares unless they elect to receive cash. Dividends will normally
be reinvested monthly in full and fractional shares of the Fund at the net asset
value on the 15th day of each month if a Business Day, otherwise on the next
Business Day. If cash payment is requested, checks will normally be mailed on
the Business Day following the reinvestment date. The Fund will pay shareholders
who redeem all of their shares all dividends accrued to the time of the
redemption not later than the next dividend payment date.

The Fund calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of the Fund consists of: (1)
accrued interest income, plus or minus amortized discount or premium, minus (2)
accrued expenses allocated to the Fund. If the Fund realizes any short-term
capital gains, they will be distributed at least once during the year as
determined by the Board of Trustees. Any realized capital losses to the extent
not offset by realized capital gains will be carried forward. It is not
anticipated that the Fund will realize any long-term capital gains, but if it
does so, these gains will be distributed annually. Expenses of the Trust are
accrued each day. While the Fund's investments are valued at amortized cost,
there will be no unrealized gains or losses on such investments. However, should
the net asset value of the Fund deviate significantly from market value, the
Board of Trustees could decide to value the investments at market value and any
unrealized gains and losses could affect the amount of distributions.

FEDERAL INCOME TAXES

It is the policy of the Fund to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). By following this policy, the
Fund expects to eliminate or reduce to a nominal amount the federal income taxes
to which it is subject.

In order to qualify as a regulated investment company, the Fund must,
among other things, (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks, securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
derive less than 30% of its gross income from gains from the sale or other
disposition of certain assets

<PAGE> 14

(including stocks and securities) held for less than three months; and (3)
diversify its holdings so that at the end of each quarter of its taxable year
(i) at least 50% of the market value of the Fund's total assets is represented
by cash or cash items, United States Government securities, securities of other
regulated investment companies and other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than United States Government securities or securities of any
other regulated investment company) or of two or more issuers that the Fund
controls, within the meaning of the Code, and that are engaged in the same,
similar or related trades or businesses. These requirements may restrict the
degree to which a Fund may engage in short-term trading and certain hedging
transactions and may limit the range of the Fund's investments. If the Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
distributes during its taxable year at least 90% of its "investment company
taxable income" (as defined in the Code). The Fund intends to make sufficient
distributions to shareholders to meet this requirement.

If the Fund fails to distribute in a calendar year (regardless of whether
it has a non-calendar taxable year) substantially all of its (i) ordinary income
for such year and (ii) capital gain net income for the year ending October 31
(or later if the Fund is permitted so to elect and so elects), plus any retained
amount from the prior year, the Fund will be subject to a nondeductible 4%
excise tax on the undistributed amounts. The Fund intends generally to make
distributions sufficient to avoid imposition of this excise tax.

Any distribution declared in October, November or December to
shareholders of record during those months and paid during the following January
is treated, for tax purposes, as if it were received by each shareholder on
December 31 of the prior year. The Fund may adjust its schedule for the
reinvestment of distributions for the month of December to assist in complying
with the reporting and minimum distribution requirements of the Code.

The Fund does not expect to realize any significant amount of long-term
capital gain. However, any distributions of long- term capital gain will be
taxable to shareholders as long-term capital gain, regardless of how long a
shareholder has held the Fund's shares. If a shareholder disposes of shares at a
loss before holding such shares for longer than six months, the loss will be
treated as a long-term capital loss to the extent the shareholder received a
capital gain dividend on the shares.

The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends paid to any shareholder (1) who
fails to provide a taxpayer identification number

<PAGE> 15

certified to under penalties of perjury; (2) who provides an incorrect taxpayer
identification number; (3) who is subject to withholding by the Internal Revenue
Service for failure to properly report all payments of interest or dividends; or
(4) who fails to certify that he or she is not subject to "backup withholding."
This "backup withholding" is not an additional tax and any amounts withheld may
be credited against the shareholder's ultimate U.S. tax liability.

The Fund may engage in investment techniques that may alter the timing
and character or the Fund's income. The Fund may be restricted in its use of
these techniques by rules relating to its qualification as a regulated
investment company.

The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) generally are subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from net investment income and
short-term capital gains. Distributions to foreign shareholders of long-term
capital gains generally are not subject to U.S. taxation, unless the recipient
is an individual who meets the Code's definition of "resident alien". Different
tax consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above. Distributions by the Fund may also be
subject to state, local and foreign taxes, and their treatment under applicable
tax laws may differ from the federal income tax treatment.

The discussion of federal income taxation presented above only summarizes
some of the important federal tax considerations generally affecting purchasers
of shares of the Fund. No attempt has been made to present a detailed
explanation of the federal income tax treatment of the Fund and its
shareholders, and the discussion is not intended as a substitute for careful tax
planning. Accordingly, prospective investors (particularly those not residing or
domiciled in the United States) should consult their own tax advisers regarding
the consequences of investing in the Fund.

<PAGE> 16

SHARE PRICE CALCULATION

The Fund values its portfolio instruments at amortized cost, which means
that they are valued at their acquisition cost, as adjusted for amortization of
premium or discount, rather than at current market value. Calculations are made
to compare the value of the Fund's investments at amortized cost with market
values. Market valuations are obtained by using actual quotations provided by
market makers, estimates of market value, or values obtained from yield data
relating to classes of money market instruments published by reputable sources
at the mean between the bid and asked prices for the instruments. The amortized
cost method of valuation seeks to maintain a stable $1.00 per share net asset
value even where there are fluctuations in interest rates that affect the value
of portfolio instruments. Accordingly, this method of valuation can in certain
circumstances lead to a dilution of a shareholder's interest. If a deviation of
1/2 of 1% or more were to occur between the net asset value per share calculated
by reference to market values and the Fund's $1.00 per share net asset value, or
if there were any other deviation that the Board of Trustees of the Trust
believed would result in a material dilution to shareholders or purchasers, the
Board of Trustees would promptly consider what action, if any, should be
initiated. If the Fund's net asset value per share (computed using market
values) declined, or were expected to decline, below $1.00 (computed using
amortized cost), the Board of Trustees might temporarily reduce or suspend
dividend payments in an effort to maintain the net asset value at $1.00 per
share. As a result of such reduction or suspension of dividends or other action
by the Board of Trustees, an investor would receive less income during a given
period than if such a reduction or suspension had not taken place. Such action
could result in investors receiving no dividend for the period during which they
hold their shares and receiving, upon redemption, a price per share lower than
that which they paid. On the other hand, if the Fund's net asset value per share
(computed using market values) were to increase, or were anticipated to increase
above $1.00 (computed using amortized cost), the Board of Trustees might
supplement dividends in an effort to maintain the net asset value at $1.00 per
share.

YIELD

The historical performance of the Fund may be shown in the form of yield
and effective yield. These measures of performance are described below.

YIELD

Yield refers to the net investment income generated by a hypothetical investment
in the Fund over a specific 7-day period. This net investment income is then
annualized, which means that the net investment income generated during the
7-day period is assumed to be generated in each 7-day

<PAGE> 17

period over an annual period, and is shown as a percentage of the investment.
The Fund's 7-day yield for the period ended December 31, 1993 and 1994 was 3.05%
and 5.55%, respectively.

EFFECTIVE YIELD

Effective yield is calculated similarly, but the net investment income
earned by the investment is assumed to be compounded weekly when annualized. The
effective yield will be slightly higher than the yield due to this compounding
effect. The Fund's 7- day effective yield for the period ended December 31, 1993
and 1995 was 3.10% and 5.70%, respectively.

GENERAL INFORMATION

The Trust is generally not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
election or removal of trustees if a meeting is requested in writing by a
shareholder or shareholders who beneficially own(s) 10% or more of the Trust's
shares; (2) adoption of any contract for which shareholder approval is required
by the 1940 Act; (3) any termination of the Trust to the extent and as provided
in the Declaration of Trust; (4) any amendment of the Declaration of Trust
(other than amendments changing the name of the Trust or any of its investment
portfolios, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); (5)
determining whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the shareholders, to the same extent as the stockholders of a Massachusetts
business corporation; and (6) such additional matters as may be required by law,
the Declaration of Trust, the Bylaws or any registration of the Trust with the
SEC or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to the Fund's fundamental investment
objective, policies or restrictions.

Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing trustees and until the election and
qualification of his or her successor or until death, resignation, retirement or
removal by a majority vote of the shares entitled to vote (as described below)
or of a majority of the Trustees. In accordance with the 1940 Act (i) the Trust
will hold a shareholder meeting for the election of trustees when less than a
majority of the trustees have been elected by shareholders, and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.

Upon the written request of 10 or more shareholders who have been such
for

<PAGE> 18

at least six months and who hold shares constituting at least 1% of the Trust's
outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.

The Bylaws provide that the presence at a shareholder meeting in person
or by proxy of at least 30% of the shares entitled to vote on a matter shall
constitute a quorum, unless otherwise provided by the 1940 Act or other
applicable law. Thus, even if less than a majority of shareholders were
represented, a meeting of the Trust's shareholders could occur. Attending
shareholders would in such case be permitted to take action not requiring the
vote of more than a majority of a quorum. Some matters requiring a larger vote
under the Declaration of Trust, such as termination or reorganization of the
Trust, and certain amendments of the Declaration of Trust, could not be decided
at such a meeting; nor could matters which under the 1940 Act require the vote
of a "majority of the outstanding voting securities," as defined in the 1940
Act. The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Trust (or any of its investment portfolios) by notice to the
shareholders without shareholder approval.

Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
Trust itself is unable to meet its obligations.

<PAGE> 19

PURCHASE AND REDEMPTION OF SHARES

The minimum initial investment for the Schwab Value Advantage Money Fund
(R) is $25,000 ($15,000 for IRAs and other retirement plans) and subsequent
investments of $5,000 ($2,000 for IRAs and other retirement plans) or more may
be made. These minimum requirements may be changed at any time.

A Fund shareholder may request that the Trust waive the minimum initial
and subsequent investment requirements, as well as the minimum balance
requirement and the minimum redemption amount described in the Fund's
Prospectus, if (a) that shareholder owns Fund shares equaling an aggregate of $5
million or more; or (b) that shareholder is the customer of a financial adviser
whose assets under management include a current aggregate balance of $5 million
or more invested in Fund shares and an average balance of at least $20,000 per
customer account. In addition, the Trust may waive the minimums for purchases by
trustees, directors, officers or employees of the Trust, Schwab or the
Investment Manager. The Trust has made an election with the SEC to pay in cash
all redemptions requested by any shareholder of record limited in amount during
any 90 day period to the lesser of $250,000 or 1% of its net assets at the
beginning of such period. This election is irrevocable without the SEC's prior
approval. Redemption requests in excess of the stated limits may be paid, in
whole or in part, in investment securities or in cash, as the Trust's Board of
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Board of Trustees believes that economic or market conditions exist that
would make such a practice detrimental to the best interests of the Fund. If
redemption proceeds are paid in investment securities, such securities will be
valued as set forth in the respective Prospectus of the Fund under "Share Price
Calculation" and a redeeming shareholder would normally incur brokerage expenses
if he or she converted the securities to cash.

<PAGE> 20

OTHER INFORMATION

The Prospectus of the Fund and this Statement of Additional Information
do not contain all the information included in the Registration Statement filed
with the SEC under the Securities Act of 1933, as amended with respect to the
securities offered by the Prospectus. Certain portions of the Registration
Statement have been omitted from the Prospectuses and this Statement of
Additional Information pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.

Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.

THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING
BY THE TRUST, ANY SERIES THEREOF, OR BY THE DISTRIBUTOR, IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.

<PAGE> 21
SchwabFunds(R) 1
--------------------------------------------------------------------------------
SCHWAB VALUE ADVANTAGE MONEY FUND(TM)
SCHEDULE OF INVESTMENTS (in thousands)
December 31, 1994
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
CORPORATE
OBLIGATIONS--84.8%(a)
ASSET BACKED SECURITIES--20.2%
Asset Securitization
Cooperative Corp.
5.72%, 01/20/95 $23,000 $ 22,931
5.73%, 01/27/95 24,000 23,902
Banc One Funding Corp.
5.76%, 01/17/95 11,126 11,098
5.71%, 01/19/95 28,000 27,921
5.54%, 01/27/95 20,000 19,921
5.88%, 02/24/95 10,000 9,913
Beta Finance, Inc.
5.18%, 02/06/95 20,000 19,899
5.24%, 02/22/95 16,000 15,882
5.20%, 03/08/95 15,000 14,861
5.34%, 03/13/95 13,000 12,867
5.45%, 03/20/95 19,000 18,782
5.34%, 03/20/95 3,000 2,966
5.60%, 03/24/95 14,500 14,320
5.66%, 04/03/95 5,000 4,930
5.82%, 04/04/95 3,000 2,956
6.03%, 04/20/95 5,000 4,911
5.83%, 04/24/95 10,000 9,822
6.04%, 05/10/95 9,000 8,811
Broadway Capital Corp.
6.16%, 02/27/95 12,188 12,071
Budget Funding Corp.
5.56%, 01/11/95 7,000 6,989
Ciesco, LP
5.21%, 01/10/95 4,000 3,995
Corporate Asset Funding Co.
5.24%, 02/07/95 5,400 5,372
ESC Securitization, Inc.
5.58%, 01/24/95 10,000 9,965
Enterprise Funding Corp.
6.08%, 01/11/95 9,000 8,985
6.12%, 01/12/95 19,000 18,965
5.86%, 01/13/95 9,230 9,212
6.13%, 01/17/95 4,043 4,032
6.10%, 01/18/95 23,676 23,608
5.72%, 01/20/95 9,464 9,436
5.59%, 01/23/95 25,000 24,916
5.59%, 01/24/95 25,000 24,912
5.77%, 01/26/95 13,500 13,447
6.22%, 02/02/95 10,158 10,102
6.07%, 02/07/95 15,122 15,029
Falcon Asset
Securitization Corp.
5.97%, 01/23/95 22,000 21,920
First Deposit Master Trust
Series 1993-3
5.71%, 01/11/95 10,000 9,984
5.64%, 01/13/95 3,960 3,953
5.49%, 01/17/95 5,600 5,587
5.91%, 02/06/95 18,500 18,392
6.27%, 02/14/95 28,300 28,086
5.89%, 02/17/95 26,200 26,002
6.38%, 03/01/95 4,400 4,355
6.33%, 03/06/95 17,800 17,603
Fleet Funding Co.
5.70%, 01/05/95 20,000 19,987
Preferred Receivables Corp.
5.92%, 01/11/95 6,000 5,990
5.91%, 03/01/95 42,725 42,317
Ranger Funding Corp.
5.52%, 01/06/95 20,000 19,985
5.57%, 01/12/95 7,000 6,988
5.52%, 01/12/95 12,000 11,980
6.11%, 01/20/95 10,000 9,968
5.55%, 01/23/95 15,000 14,950
6.01%, 02/27/95 10,000 9,906
Receivables Capital Corp.
6.13%, 01/13/95 18,028 17,991
United Airlines First
Funding Corp.
5.89%, 02/16/95 14,132 14,027
--------
757,700
--------
AUTOMOTIVE--10.1%
BMW U.S. Capital Corp.
5.16%, 01/23/95 5,000 4,985
5.16%, 01/30/95 3,000 2,988
5.18%, 02/01/95 3,000 2,987
5.20%, 02/07/95 9,000 8,953
5.16%, 02/07/95 10,000 9,948
5.76%, 02/15/95 2,500 2,482
5.60%, 03/22/95 10,000 9,879
5.66%, 04/05/95 20,000 19,713
5.90%, 04/25/95 13,000 12,764
6.56%, 04/27/95 17,000 16,648
6.05%, 05/15/95 10,000 9,782
Ford Credit Europe PLC
5.57%, 01/19/95 17,100 17,053
Ford Motor Credit Co.
5.90%, 02/21/95 18,000 17,852
General Motors
Acceptance Corp.
5.73%, 01/09/95 9,000 8,989
5.74%, 01/11/95 15,000 14,976
5.71%, 01/12/95 15,000 14,974
6.27%, 02/02/95 7,000 6,961
6.27%, 02/09/95 5,000 4,966
5.79%, 02/10/95 10,000 9,937
5.91%, 02/13/95 24,000 23,833
5.99%, 02/21/95 30,000 29,749
5.99%, 02/23/95 40,000 39,653
5.99%, 02/27/95 17,000 16,841
Renault Acceptance B.V.
5.56%, 01/23/95 8,000 7,973
Renault Credit International
6.14%, 01/09/95 23,500 23,468
5.92%, 02/10/95 14,000 13,909
6.11%, 02/15/95 27,500 27,292
--------
379,555
--------
BANKING--AUSTRALIA--0.3%
National Australia Funding
(Delaware)
5.24%, 02/10/95 10,000 9,943
--------
BANKING--CANADA--0.2%
Canadian Imperial
Holdings Inc.
6.12%, 02/28/95 7,000 6,932
--------
BANKING--DOMESTIC BANK
HOLDING COMPANY--1.2%
Chemical Banking Corp.
6.01%, 03/02/95 44,000 43,566
--------
</TABLE>

21
<PAGE> 22

SchwabFunds(R) 2
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>

BANKING--DOMESTIC--0.7%
Bankers Trust New York Corp.
6.31%, 03/03/95 $ 6,000 $ 5,937
Vehicle Services of America /
(NationsBank LOC)
6.15%, 01/20/95 12,000 11,961
5.94%, 02/16/95 10,000 9,925
--------
27,823
--------
BANKING--GERMANY--0.1%
Siemens Corp.
5.78%, 04/04/95 5,000 4,927
--------
BANKING--JAPAN--10.0%
Anchor Funding Corp. /
(Dai-Ichi Kangyo Bank
Irrevocable Purchase
Commitment)
6.17%, 01/03/95 20,000 19,993
5.54%, 01/20/95 10,000 9,971
5.89%, 01/23/95 8,000 7,971
Bancal Tri-State Corp. /
(Mitsubishi Bank
Keepwell Agreement)
5.89%, 02/14/95 6,000 5,957
Bridgestone/Firestone, Inc. /
(Sumitomo Bank LOC)
6.22%, 02/02/95 10,000 9,945
6.28%, 03/06/95 19,000 18,791
DIC Americas, Inc. /
(Mitsubishi Bank LOC)
5.83%, 02/06/95 5,000 4,971
Deerfield Capital Corp. /
(Sumitomo Bank LOC)
6.14%, 01/04/95 11,630 11,624
Mitsubishi Motors Credit of
America, Inc. /
(Bank of Tokyo LOC)
5.72%, 01/03/95 15,000 14,995
Mitsubishi Motors Credit of
America, Inc. /
(Mitsubishi Bank LOC)
5.52%, 01/13/95 5,000 4,991
Ridge Capital II / (Dai-Ichi
Kangyo Bank LOC)
6.14%, 01/05/95 37,470 37,445
5.52%, 01/11/95 19,400 19,371
5.74%, 01/13/95 15,250 15,221
5.61%, 01/18/95 12,000 11,969
6.16%, 01/23/95 10,950 10,909
5.63%, 01/26/95 11,000 10,958
SRD Finance, Inc. /
(Sakura Bank LOC)
6.18%, 01/12/95 5,000 4,991
6.13%, 01/12/95 10,000 9,981
Tri-Lateral Capital (U.S.A.),
Inc. / (Industrial Bank of
Japan LOC)
6.18%, 01/03/95 24,133 24,125
6.23%, 02/07/95 20,000 19,873
6.21%, 02/07/95 17,000 16,893
5.94%, 02/27/95 10,151 10,057
6.35%, 02/28/95 25,000 24,747
6.33%, 02/28/95 8,736 8,648
6.10%, 03/03/95 20,794 20,583
5.99%, 03/03/95 20,000 19,800
--------
374,780
--------
BANKING--SPAIN--3.2%
BEX America Finance, Inc.
6.01%, 01/03/95 21,000 20,993
6.06%, 01/04/95 20,000 19,990
6.06%, 01/06/95 20,000 19,983
6.06%, 01/10/95 19,000 18,971
Central Hispano N.A.
Capital Corp.
5.58%, 01/25/95 22,000 21,919
6.40%, 03/27/95 20,000 19,703
--------
121,559
--------
BANKING--UNITED KINGDOM--0.8%
Yorkshire Building Society
5.78%, 02/09/95 10,000 9,938
5.18%, 02/09/95 20,000 19,890
--------
29,828
--------
CHEMICALS--0.1%
BASF Corp.
5.87%, 04/03/95 5,000 4,927
--------
COMPUTER AND OFFICE EQUIPMENT--0.5%
CSC Enterprises
6.18%, 01/19/95 10,000 9,969
6.18%, 01/20/95 10,000 9,968
--------
19,937
--------
DATA PROCESSING--2.9%
Electronic Data Systems Corp.
5.76%, 01/17/95 5,000 4,987
5.59%, 01/17/95 8,585 8,564
5.58%, 01/17/95 11,000 10,973
5.57%, 01/17/95 12,000 11,971
5.60%, 01/25/95 20,000 19,926
5.60%, 01/27/95 5,000 4,980
5.89%, 02/15/95 26,000 25,812
5.86%, 02/15/95 9,000 8,935
6.34%, 03/15/95 7,000 6,912
--------
103,060
--------
ELECTRICAL AND ELECTRONICS--2.0%
MCA Funding Corp.
5.29%, 01/18/95 20,200 20,150
5.39%, 03/21/95 10,000 9,885
5.60%, 03/27/95 10,000 9,871
5.76%, 04/03/95 10,000 9,857
5.79%, 04/07/95 10,000 9,850
5.76%, 04/07/95 15,000 14,776
--------
74,389
--------
FINANCE (COMMERCIAL)--5.4%
CIT Group Holdings, Inc.
5.55%, 01/09/95 29,000 28,965
General Electric Capital Corp.
5.57%, 01/18/95 10,000 9,974
5.16%, 01/20/95 18,000 17,952
5.09%, 02/01/95 2,000 1,991
5.21%, 02/08/95 13,000 12,930
5.23%, 02/09/95 4,000 3,978
6.29%, 04/04/95 26,000 25,586
5.82%, 04/06/95 16,000 15,761
6.53%, 04/26/95 10,000 9,796
</TABLE>

22
<PAGE> 23

SchwabFunds(R) 3
--------------------------------------------------------------------------------
SCHWAB VALUE ADVANTAGE MONEY FUND(TM)
SCHEDULE OF INVESTMENTS (in thousands)
December 31, 1994
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
General Electric
Capital Services
5.58%, 01/26/95 $20,000 $ 19,924
5.16%, 02/08/95 9,000 8,952
5.16%, 02/09/95 15,000 14,918
Hanson Finance (UK) PLC
5.58%, 01/24/95 16,000 15,944
5.58%, 01/26/95 6,900 6,874
Transamerica Finance Corp.
5.90%, 04/06/95 9,000 8,864
----------
202,409
----------
FINANCE (CONSUMER)--1.7%
Associates Corp. of
North America
4.85%, 03/23/95 1,000 1,005
Sears Roebuck
Acceptance Corp.
5.53%, 01/19/95 20,000 19,946
5.68%, 01/30/95 11,000 10,950
5.66%, 01/31/95 31,000 30,856
----------
62,757
----------
FOOD PROCESSING--0.2%
American Home Food
Products Corp.
6.30%, 03/09/95 6,525 6,450
----------
MEDICAL SUPPLY--0.3%
Sherwood Medical Co.
5.91%, 01/04/95 12,000 11,994
----------
MINING AND MINERAL RESOURCES--1.0%
BHP Finance (U.S.A.), Inc.
5.81%, 01/17/95 13,000 12,967
6.11%, 01/30/95 25,324 25,201
----------
38,168
----------
PHARMACEUTICALS--2.6%
A.H. Robins Co.
6.49%, 04/05/95 15,000 14,751
American Home Products Corp.
5.87%, 01/04/95 20,000 19,990
5.87%, 01/06/95 8,000 7,994
6.30%, 03/09/95 17,500 17,298
6.17%, 03/21/95 37,000 36,509
----------
96,542
----------
SECURITIES
BROKERAGE-DEALER--20.3%
BT Securities Corp.
6.12%, 01/06/95 25,000 24,979
Bear Stearns Companies Inc.
5.57%, 01/12/95 20,000 19,966
5.58%, 01/25/95 18,000 17,934
5.78%, 02/14/95 18,000 17,875
Goldman Sachs Group, L.P.
5.90%, 02/03/95 40,000 39,785
6.51%, 04/17/95 34,000 33,361
Lehman Brothers Holdings Inc.
5.81%, 01/18/95 8,000 7,978
5.91%, 01/24/95 15,000 14,944
5.91%, 01/25/95 10,000 9,961
5.91%, 01/26/95 10,000 9,959
5.94%, 01/27/95 10,000 9,958
5.91%, 01/27/95 10,000 9,958
6.24%, 02/01/95 23,000 22,878
Merrill Lynch & Co., Inc.
5.55%, 01/26/95 12,000 11,954
5.21%, 02/28/95 19,000 18,844
Morgan Stanley Group Inc.
6.15%, 01/11/95 18,000 17,969
6.15%, 01/12/95 17,000 16,968
6.36%, 03/07/95 40,000 39,548
6.35%, 03/10/95 40,000 39,528
6.40%, 03/14/95 20,000 19,748
6.54%, 04/10/95 40,000 39,296
Nomura Holdings America, Inc.
5.46%, 01/05/95 16,000 15,990
5.88%, 02/14/95 4,000 3,972
6.23%, 02/17/95 20,000 19,839
6.19%, 03/01/95 25,000 24,749
6.26%, 03/08/95 43,000 42,513
6.30%, 03/16/95 25,000 24,681
Paine Webber Group Inc.
5.56%, 01/04/95 15,000 14,993
5.71%, 01/10/95 10,000 9,986
5.71%, 01/13/95 15,000 14,972
5.63%, 01/30/95 38,000 37,830
5.83%, 02/13/95 14,000 13,904
5.99%, 02/16/95 25,000 24,812
5.99%, 02/17/95 9,000 8,931
5.99%, 02/22/95 10,000 9,915
5.99%, 02/27/95 10,000 9,907
Salomon Inc.
6.05%, 01/03/95 1,523 1,522
6.52%, 02/08/95 28,000 27,809
6.40%, 03/23/95 5,000 4,929
6.45%, 03/29/95 5,000 4,923
----------
759,568
----------
UTILITIES (NON-MUNICIPAL)--0.3%
Southern California Gas Co.
6.22%, 02/10/95 13,000 12,911
----------
PAPER AND WOOD PRODUCTS--0.7%
Bowater Inc.
5.57%, 01/10/95 27,000 26,963
----------
TOTAL CORPORATE OBLIGATIONS
(Cost $3,176,688) 3,176,688
----------
VARIABLE RATE
OBLIGATIONS--7.1%(b)
ASSET BACKED SECURITIES--0.6%
Advanta Credit Card
Master Trust
6.33%, 01/07/95 21,200 21,200
Money Market Credit Card
Trust Series 1989-1
6.22%, 06/12/95 2,727 2,727
----------
23,927
----------
BANKING--DOMESTIC--1.8%
Comerica Bank
5.83%, 01/03/95 8,000 7,994
PNC Bank, N.A.
5.82%, 01/03/95 58,200 58,182
----------
66,176
----------
</TABLE>

23
<PAGE> 24

SchwabFunds(R) 4
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
BANKING--JAPAN--0.1%
New York City Industrial
Development Authority
GAF Seelig Series 1993 /
(IBJ Schroder Bank &
Trust LOC)
6.55%, 01/07/95 $ 2,325 $ 2,325
Town of Islip Industrial
Development Agency
1992 Taxable Adjustable
Rate Industrial Revenue
Bonds (Nussdorf
Associates/Quality King
Distributors, Inc. Facility) /
(Bank of Tokyo LOC)
6.65%, 01/05/95 1,710 1,710
--------
4,035
--------
BANKING--UNITED KINGDOM--0.5%
Abbey National Treasury
Services PLC
5.85%, 01/03/95 10,000 9,999
5.82%, 01/03/95 10,000 9,993
--------
19,992
--------
CITY OR COUNTY
GENERAL OBLIGATIONS--0.3%
City of Irvine (Orange
County, California)
Taxable Notes
Series 1994
6.20%, 01/25/95 10,000 10,000
--------
EDUCATION--0.4%
Newport Mesa Unified
School District (Orange
County, California)
Taxable Notes
Series 1994
6.48%, 01/11/95 15,000 15,015
--------
HEALTHCARE--0.1%
Catholic Healthcare West
Taxable Variable Rate
Demand Bonds
Series1993A
7.00%, 01/07/95 5,000 5,000
--------
INSURANCE--0.3%
Commonwealth Life
Insurance Co.
5.83%, 03/31/95 10,000 10,000
--------
MONOLINE INSURANCE--0.1%
New Orleans Aviation
Board Taxable
Refunding Bonds
Series 1993A /
(MBIA Insurance)
6.26%, 01/07/95 1,700 1,700
--------

RESOURCE RECOVERY--0.0%
Keystone Health
Resources Corp.
Variable Rate Taxable
Demand Notes Series 1993 /
(PNC Bank LOC)
6.13%, 01/07/95 1,500 1,500
--------
SECURITIES
BROKERAGE-DEALER--2.8%
Bear Stearns Companies Inc.
6.49%, 01/16/95 20,000 20,002
6.04%, 01/23/95 20,000 20,000
Goldman Sachs Group, L.P.
6.03%, 01/01/95 5,000 5,000
5.92%, 01/03/95 5,000 5,000
5.91%, 01/03/95 20,000 20,000
Lehman Brothers Holdings Inc.
6.09%, 01/18/95 20,000 20,000
Merrill Lynch & Co., Inc.
5.87%, 01/03/95 5,000 5,000
Salomon Inc.
5.34%, 01/01/95 9,000 8,990
--------
103,992
--------
NON-FEDERAL AGENCY--0.1%
Missouri Economic
Development Export &
Infrastructure Board
Adjustable Rate Taxable
Securities (Biocraft
Laboratories, Inc. Project)
Series 1989 /
(Bank of Tokyo LOC)
6.10%, 02/01/95 5,000 5,000
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $266,337) 266,337
--------

BANKER'S
ACCEPTANCES--0.5%
BANKING--JAPAN--0.5%
Dai-Ichi Kangyo Bank, Ltd.
6.58%, 04/26/95 6,200 6,072
Fuji Bank, Ltd.
5.51%, 01/17/95 4,000 3,990
Industrial Bank of Japan, Ltd.
5.47%, 01/04/95 9,700 9,696
--------
TOTAL BANKER'S ACCEPTANCES
(Cost $19,758) 19,758
--------

BANK NOTES--2.0%
BANKING--DOMESTIC--2.0%
PNC Bank, N.A.
6.05%, 04/20/95 20,000 19,978
6.00%, 04/20/95 20,000 19,981
5.93%, 04/20/95 10,000 9,999
5.95%, 04/26/95 23,000 22,996
--------
TOTAL BANK NOTES
(Cost $72,954) 72,954
--------
</TABLE>

24
<PAGE> 25

SchwabFunds(R) 5
--------------------------------------------------------------------------------
SCHWAB VALUE ADVANTAGE MONEY FUND(TM)
SCHEDULE OF INVESTMENTS (in thousands)
December 31, 1994
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
CERTIFICATES OF
DEPOSIT--2.6%
BANKING--FRANCE--0.1%
Societe Generale
5.10%, 02/02/95 $ 2,000 $ 2,000
----------
BANKING--GERMANY--1.3%
Commerzbank, AG
5.17%, 01/31/95 20,000 19,998
5.18%, 02/03/95 22,000 21,997
Westdeutsche Landesbank
5.22%, 03/13/95 5,000 4,995
----------
46,990
----------
BANKING--JAPAN--1.1%
Fuji Bank, Ltd.
6.32%, 02/28/95 17,000 16,988
5.98%, 02/28/95 15,000 15,000
Sanwa Bank, Ltd.
6.07%, 01/03/95 10,000 10,000
----------
41,988
----------
BANKING--SWITZERLAND--0.1%
Credit Suisse
4.91%, 04/13/95 5,000 5,000
----------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $95,978) 95,978
----------
MUNICIPAL TAXABLE
NOTES--0.1%
CITY OR COUNTY
GENERAL OBLIGATIONS--0.1%
City of Anaheim (Orange County,
California) Taxable Notes
Series 1994
4.69%, 04/04/95 5,000 5,004
----------
TOTAL MUNICIPAL TAXABLE NOTES
(Cost $5,004) 5,004
----------
REMARKETED
CERTIFICATES--2.7%
ASSET BACKED SECURITIES--2.7%
Circuit City RECOP Trust
6.07%, 01/09/95 26,000 26,000
6.07%, 01/10/95 26,000 26,000
6.15%, 01/24/95 25,000 25,000
6.15%, 01/25/95 25,000 25,000
----------
TOTAL REMARKETED CERTIFICATES
(Cost $102,000) 102,000
----------
TAXABLE BONDS--0.2%
BANKING--JAPAN--0.2%
Oklahoma Industrial
Finance Authority
Taxable General
Obligation Industrial
Finance Bonds Series P /
(Mitsubishi Bank LOC)
5.80%, 02/01/95 6,250 6,250
----------
TOTAL TAXABLE BONDS
(Cost $6,250) 6,250
----------
TOTAL INVESTMENTS--100.0%
(Cost $3,744,969) $3,744,969
==========
</TABLE>

25
<PAGE> 26
SchwabFunds(R) 6
--------------------------------------------------------------------------------

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

NOTES TO SCHEDULE OF INVESTMENTS.

Yields shown are effective yields at the time of purchase, except for
variable rate securities which are described below. Yields for each type of
security are stated according to the market convention for that security
type. For each security, cost (for financial reporting and federal income
tax purposes) and carrying value are the same.

(a) Certain securities purchased by the Schwab Value Advantage Money Fund
are private placement securities exempt from registration by Section 4(2) of
the Securities Act of 1933. These securities generally are issued to
institutional investors, such as the Schwab Value Advantage Money Fund. Any
resale by the Schwab Value Advantage Money Fund must be in an exempt
transaction, normally to a qualified institutional buyer. At December 31,
1994, the aggregate value of private placement securities held by the Schwab
Value Advantage Money Fund was $1,274,799,000, which represented 34.16% of
net assets. Of this total, $1,110,053,000 or 29.75% of net assets, were
invested in securities determined by the Investment Manager to be liquid in
accordance with a resolution adopted by the Board of Trustees relating to
Rule 144A, promulgated under the Securities Act of 1933.

(b) Variable rate securities. Interest rates vary periodically based on
current market rates. Rates shown are the effective rates on December 31,
1994. Dates shown represent the latter of the demand date or next interest
rate change date, which is considered the maturity date for financial
reporting purposes. For variable rate securities without demand features and
which mature in less than one year, the next interest reset date is shown.

Abbreviations
-------------
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance Corporation
RECOP Remarketed Certificates of Participation

See accompanying Notes to Financial Statements.

<PAGE> 27

SchwabFunds(R) 7
--------------------------------------------------------------------------------
SCHWAB VALUE ADVANTAGE MONEY FUND(TM)
STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS)
December 31, 1994
--------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost: $3,744,969) $3,744,969
Interest receivable 4,757
Receivable for fund shares sold 40,417
Prepaid expenses 60
Deferred organization costs 51
----------
Total assets 3,790,254
----------
LIABILITIES
Payable for:
Dividends 19,412
Fund shares redeemed 37,354
Investment advisory and administration fee 346
Transfer agency and shareholder service fees 383
Other 1,130
----------
Total liabilities 58,625
----------
Net assets applicable to outstanding shares $3,731,629
==========
NET ASSETS CONSIST OF:
Capital paid in $3,731,755
Accumulated net realized loss on investments sold (126)
----------
$3,731,629
==========
THE PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 3,731,755

Net asset value, offering and redemption
price per share $1.00
</TABLE>

See accompanying Notes to Financial Statements.

<PAGE> 28

SchwabFunds(R) 8
--------------------------------------------------------------------------------
SCHWAB VALUE ADVANTAGE MONEY FUND(TM)
STATEMENT OF OPERATIONS (IN THOUSANDS)
For the year ended December 31, 1994
--------------------------------------------------------------------------------

<TABLE>
<S> <C>
Interest income $93,588
-------
Expenses:
Investment advisory and administration fee 8,885
Transfer agency and shareholder service fees 4,872
Custodian fees 279
Registration fees 1,225
Professional fees 74
Shareholder reports 51
Trustees' fees 7
Amortization of deferred organization costs 22
Insurance and other expenses 27
-------
15,442
Less expenses reduced (7,646)
-------
Total expenses incurred by Fund 7,796
-------
Net investment income 85,792
Net realized loss on investments sold (124)
-------
Net increase in net assets resulting from operations $85,668
=======
</TABLE>

See accompanying Notes to Financial Statements.

<PAGE> 29

SchwabFunds(R) 9
--------------------------------------------------------------------------------
SCHWAB VALUE ADVANTAGE MONEY FUND(TM)
STATEMENT OF CHANGES IN NET ASSETS (in thousands)

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

<TABLE>
<CAPTION>
For the For the
year ended year ended
December 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Operations:
Net investment income $ 85,792 $ 15,961
Net realized loss on investments sold (124) --
----------- ----------
Net increase in net assets resulting
from operations 85,668 15,961
----------- ----------
Dividends to shareholders from
net investment income (85,792) (15,961)
----------- ----------
Capital Share Transactions (dollar amounts
and number of shares are the same):
Proceeds from shares sold 6,042,841 1,243,820
Net asset value of shares issued in
reinvestment of dividends 63,079 14,084
Less payments for shares redeemed (3,103,523) (847,572)
----------- ----------
Increase in net assets from capital
share transactions 3,002,397 410,332
----------- ----------

Total increase in net assets 3,002,273 410,332

Net Assets:
Beginning of period 729,356 319,024
----------- ----------
End of period $ 3,731,629 $ 729,356
=========== ==========
</TABLE>

See accompanying Notes to Financial Statements.

<PAGE> 30

SchwabFunds(R) 10
--------------------------------------------------------------------------------
SCHWAB VALUE ADVANTAGE MONEY FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1994
--------------------------------------------------------------------------------

1. DESCRIPTION OF THE FUND

The Schwab Value Advantage Money Fund (the "Fund") is a series of The Charles
Schwab Family of Funds (the "Trust"), an open-end, management investment
company organized as a Massachusetts business trust on October 20, 1989 and
registered under the Investment Company Act of 1940, as amended.

In addition to the Fund, the Trust also offers -- the Schwab Money Market Fund,
the Schwab Government Money Fund, the Schwab U.S. Treasury Money Fund, the
Schwab Tax-Exempt Money Fund, the Schwab California Tax-Exempt Money Fund, the
Schwab Institutional Advantage Money Fund(TM), the Schwab Retirement Money
Fund(TM)and the Schwab New York Tax-Exempt Money Fund. The assets of each series
are segregated and accounted for separately.

The Schwab Value Advantage Money Fund invests primarily in a diversified
portfolio of short-term obligations of major banks and corporations.

2. SIGNIFICANT ACCOUNTING POLICIES

Security valuation -- Investments are stated at amortized cost which
approximates market value.

Security transactions and interest income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Interest income is recorded on the
accrual basis and includes amortization of premium and accretion of discount on
investments. Realized gains and losses from security transactions are determined
on an identified cost basis.

Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.

Dividends to shareholders -- The Fund declares a daily dividend, equal to its
net investment income for that day, payable monthly.

Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from the Fund's commencement of operations.

Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.

Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and
todistribute all of its net investment income and realized net capital gains, if
any, to shareholders. Therefore, no federal income tax provision is required.
The Fund is considered a separate entity for tax purposes.

3. TRANSACTIONS WITH AFFILIATES

Investment advisory and administration agreements -- The Trust has investment
advisory and administration agreements with Charles Schwab Investment
Management, Inc. (the "Investment Manager"). For advisory services and
facilities furnished, the Fund pays an annual fee, payable monthly, of .46% of
the first $2

<PAGE> 31

SchwabFunds(R) 11
--------------------------------------------------------------------------------
SCHWAB VALUE ADVANTAGE MONEY FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1994
--------------------------------------------------------------------------------

billion of average daily net assets, .45% of such assets over $2 billion, and
.40% of such assets in excess of $3 billion. Under these agreements, the Fund
incurred investment advisory and administration fees of $8,885,000 during the
year ended December 31, 1994, before the Investment Manager reduced its fee (see
Note 4).

Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .25% of average daily net assets. In addition,
Schwab receives a fee of $5.00 for redemptions in amounts less than $5,000 and
may impose a $5.00 fee for monthly balances below the minimum required. For the
year ended December 31, 1994, the Fund incurred transfer agency and shareholder
service fees of $4,872,000 before Schwab reduced its fees (see Note 4).

Officers and trustees -- Certain officers and trustees of the Trust are also
officers or directors of the Investment Manager and/or Schwab. During the year
ended December 31, 1994, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Fund incurred fees of $7,000 related to the
Trust's unaffiliated trustees.

4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB

The Investment Manager and Schwab reduced a portion of their fees in order to
limit the Fund's ratio of operating expenses to average net assets. For the year
ended December 31, 1994, the total of such fees reduced by the Investment
Manager and Schwab was $6,741,000 and $905,000, respectively.

5. INVESTMENT TRANSACTIONS

Purchases, sales and maturities of investment securities for the year ended
December 31, 1994, aggregated (in thousands) $10,987,126 and $7,987,142,
respectively.

<PAGE> 32

SchwabFunds(R) 12
--------------------------------------------------------------------------------

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

6. FINANCIAL HIGHLIGHTS

Per share income and capital changes for a share outstanding throughout the
period:

<TABLE>
<CAPTION>
For the period
April 30, 1992
(commencement of
For the year ended operations) to
December 31, December 31,
1994 1993 1992
------------------------ ----------------
<S> <C> <C> <C>
Net asset value at
beginning of period $1.00 $1.00 $1.00
Income from Investment Operations
Net investment income .04 .03 .02
Net realized and unrealized gain
(loss) on investments -- -- --
---------- -------- --------
Total from investment operations .04 .03 .02
Less Distributions
Dividends from net investment
income (.04) (.03) (.02)
Distributions from realized gains
on investments -- -- --
---------- -------- --------
Total distributions (.04) (.03) (.02)
---------- -------- --------
Net asset value at
end of period $1.00 $1.00 $1.00
========== ======== ========
Total return (%) 4.09 3.02 2.33
Ratios/Supplemental Data
Net assets, end of period (000s) $3,731,629 $729,356 $319,024
Ratio of expenses to average
net assets (%) .40 .39 .29*
Ratio of net investment income
to average net assets (%) 4.40 2.97 3.27*
</TABLE>

The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
December 31, 1994, 1993 and 1992 would have been .79%, .82% and .94%*,
respectively, and the ratio of net investment income to average net assets would
have been 4.01%, 2.54% and 2.62%*, respectively.

7. COMMITMENTS AND CONTINGENCIES

At December 31, 1994, the Schwab Value Advantage Money Fund had 0.80% of its net
assets, or $30,019,000, invested in securities issued by municipalities that
participated in the investment pool maintained by Orange County, California. On
December 6, 1994, Orange County, California and the investment pool maintained
by Orange County filed for protection under Chapter 9 of the federal Bankruptcy
Code. Although the issuers of these securities have not filed for bankruptcy,
the Fund continues to be exposed to some risk of loss of principal due to the
issuer's investment in the Orange County investment pool. As of December 31,
1994, no securities held by the Fund are in default and all regularly scheduled
interest and principal payments have been made.

* Annualized

<PAGE> 33

SchwabFunds(R)
--------------------------------------------------------------------------------

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

To the Trustees and Shareholders
of the Schwab Value Advantage Money Fund(TM)

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets present fairly, in all material respects, the financial
position of the Schwab Value Advantage Money Fund (one of the series
constituting The Charles Schwab Family of Funds, hereafter referred to as the
"Trust") at December 31, 1994, and the results of its operations and the changes
in its net assets for the periods presented, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1994 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.

PRICE WATERHOUSE LLP
San Francisco, California
January 31, 1995

<PAGE> 34
APPENDIX - RATINGS OF INVESTMENT SECURITIES

COMMERCIAL PAPER

MOODY'S INVESTORS SERVICE

Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service ("Moody's"). Issuers (or related supporting institutions) of
commercial paper with this rating are considered to have a superior ability to
repay short-term promissory obligations. Issuers (or related supporting
institutions) of securities rated Prime-2 are viewed as having a strong capacity
to repay short-term promissory obligations. This capacity will normally be
evidenced by many of the characteristics of issuers whose commercial paper is
rated Prime-1 but to a lesser degree.

STANDARD & POOR'S CORPORATION

A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates either an overwhelming or very strong degree of safety regarding
timely payment of principal and interest. Issues determined to possess
overwhelming safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is strong, but the relative degree of
safety is not as high as for issues designated A-1.

DUFF & PHELPS CREDIT RATING CO.

Duff-1 is the highest commercial paper rating assigned by Duff & Phelps
Credit Rating Co. ("Duff"). Three gradations exist within this rating category:
a Duff-1+ rating indicates the highest certainty of timely payment (issuer
short-term liquidity is found to be outstanding and safety is deemed to be just
below that of risk-free short-term United States Treasury obligations), a Duff-1
rating signifies a very high certainty of timely payment (issuer liquidity is
determined to be excellent and risk factors are considered minor) and a Duff-1
rating denotes high certainty of timely payment (issuer liquidity factors are
strong and risk is very small). A Duff-2 rating indicates a good certainty of
timely payment; liquidity factors and company fundamentals are sound and risk
factors are small.

FITCH INVESTORS SERVICE, INC.

Fitch's ("Fitch") F-1+ is the highest category, and indicates the
strongest degree of assurance for timely payment. Issues rated F-1 reflect an
assurance of timely payment only slightly less than issues rated F-1+. Issues
assigned an F-2 rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues in the first two
rating categories.

<PAGE> 35

SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS

MOODY'S INVESTORS SERVICE

Short-term notes/variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality, enjoying
strong protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-2 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.

STANDARD & POOR'S CORPORATION

An S&P SP-1 rating indicates that the subject securities' issuer has a
very strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.

IBCA

Obligations supported by the highest capacity for timely repayment are
rated A1+. An A1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated A2 are supported by a
strong capacity for timely repayment, although adverse changes in business,
economic, or financial conditions may affect this capacity.

BONDS

MOODY'S INVESTORS SERVICE

Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or extraordinarily
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with Aaa
rated bonds, they comprise what are generally known as high grade bonds. Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protections, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks.

STANDARD & POOR'S CORPORATION

AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong

<PAGE> 36

capacity to pay interest and repay principal and differs from an AAA rating only
in small degree.

DUFF & PHELPS CREDIT RATING CO.

Duff confers an AAA designation to bonds of issuers with the highest
credit quality. The risk factors associated with these bonds are negligible,
being only slightly more than for risk-free United States Treasury debt. AA
rated bonds are of high credit quality and have strong protection factors. The
risks associated with them are modest but may vary slightly from time to time
because of economic conditions.

COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS AND DEPOSIT OBLIGATIONS
ISSUED BY BANKS

THOMSON BANKWATCH (TBW)

TBW-1 is the highest category and indicates the degree of safety
regarding timely repayment of principal and interest is very strong. TBW-2 is
the second highest category and while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.