SCHWAB CHARLES FAMILY OF FUNDS, 497, 1995-06-07

SCHWAB CHARLES FAMILY OF FUNDS
497, 1995-06-07

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SCHWAB NEW YORK TAX-EXEMPT MONEY FUND -- SWEEP SHARES
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PROSPECTUS June 6, 1995

TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD.

THE SCHWAB NEW YORK TAX-EXEMPT MONEY FUND (the "Fund") is designed for investors
who seek maximum current income that is exempt from federal income taxes and
personal income taxes imposed by New York State and New York municipalities to
the extent consistent with liquidity and stability of capital. The Fund is a
non-diversified investment portfolio of The Charles Schwab Family of Funds (the
"Schwab Fund Family"), a no-load, open-end, management investment company.
Shares of the Fund are offered to New York residents and the residents of
selected other states. This Prospectus describes the Sweep Shares of the Fund,
one of the two classes of shares of the Fund offered by Schwab ("Sweep Shares").
Prior to the date of this Prospectus, the Fund was not offered in two classes of
shares. The existing shares of the Fund are redesignated as Sweep Shares. For a
prospectus describing the other class of shares of the Fund (the "Value
Advantage Shares"), call your local Schwab office or 800-2 NO-LOAD.

ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information pertaining to this Fund in the Statement of Additional
Information, dated June 6, 1995 (as may be amended from time to time), and filed
with the Securities and Exchange Commission. The Statement of Additional
Information is incorporated by reference into this Prospectus, and may be
obtained without charge by contacting Schwab at 800-2 NO-LOAD or 101 Montgomery
Street, San Francisco, CA 94104.

ATTENTION OHIO INVESTORS. THE OHIO ADMINISTRATIVE CODE REQUIRES US TO MAKE THE
FOLLOWING DISCLOSURE. UNLIKE CERTAIN OTHER MUTUAL FUNDS WHICH MAY INVEST NO MORE
THAN 15% OF THEIR TOTAL ASSETS IN THE SECURITIES OF ISSUERS WHICH TOGETHER WITH
ANY PREDECESSORS HAVE A RECORD OF LESS THAN THREE YEARS CONTINUOUS OPERATIONS OR
SECURITIES OF ISSUERS WHICH ARE RESTRICTED AS TO DISPOSITION, THIS FUND MAY
INVEST UP TO 50% OF ITS TOTAL ASSETS IN SUCH SECURITIES.

TABLE OF CONTENTS

<TABLE>
<S> <C>
KEY FEATURES OF THE FUND............................................................... 2
SUMMARY OF EXPENSES.................................................................... 3
MATCHING THE FUND TO YOUR INVESTMENT NEEDS............................................. 3
INVESTMENT OBJECTIVE AND POLICIES...................................................... 4
MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES......................................... 6
MANAGEMENT OF THE FUND................................................................. 9
DISTRIBUTIONS AND TAXES................................................................ 11
SHARE PRICE CALCULATION................................................................ 13
HOW THE FUND SHOWS PERFORMANCE......................................................... 13
GENERAL INFORMATION.................................................................... 14
SHAREHOLDER GUIDE...................................................................... 15
HOW TO PURCHASE SHARES............................................................... 15
HOW TO EXCHANGE SHARES............................................................... 17
HOW TO REDEEM SHARES................................................................. 18
OTHER IMPORTANT INFORMATION............................................................ 19
</TABLE>

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

AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 2

KEY FEATURES OF THE FUND

TRIPLE TAX-EXEMPT INCOME AND SAFETY. The Schwab New York Tax-Exempt Money Fund
is designed for investors who seek maximum after-tax current income consistent
with liquidity and stability of capital. The Fund primarily invests in high
quality, short-term debt securities the interest on which is exempt from federal
income taxes and personal income taxes imposed by New York State and New York
municipalities. The Fund attempts to maintain a stable net asset value of $1.00
per share. (See "Investment Objective and Policies.")

AUTOMATIC INVESTMENT/REDEMPTION FEATURE. For the Sweep Shares of the Fund, if
you elect, free credit balances in your Schwab brokerage account (including your
Schwab One(R) account) will be automatically invested or "swept" into the Fund,
subject to the terms and conditions of your brokerage account agreement. Shares
will also be sold as necessary to settle securities transactions, collateralize
margin obligations or cover debit balances. This feature keeps your money
working and saves you the time and trouble of withdrawing and redepositing
funds. (See "How to Purchase Shares" and "How to Redeem Shares.")

LIQUIDITY. You can conveniently place orders to redeem your investment in the
Fund at any time. (See "How to Redeem Shares.")

LOW COST INVESTING. The Fund imposes no sales or transaction fees on purchases
or redemptions of shares of the Fund. (See "Summary of Expenses.") In addition,
the total fund operating expenses of the Sweep Shares of the Fund will not
exceed 0.59% through at least August 31, 1995, as guaranteed by Schwab and
Charles Schwab Investment Management, Inc. (See "Matching the Fund to Your
Investment Needs" and "Management of the Fund.")

PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. (the
"Investment Manager") currently provides investment management services to the
SchwabFunds(R), a family of 19 mutual funds with over $26 billion in assets as
of June 3, 1995. (See "Management of the Fund.")

SHAREHOLDER SERVICE. Schwab's professional representatives are available
toll-free 24 hours a day to receive your Fund orders. Call your local Schwab
office during business hours or 800-2 NO-LOAD. As a discount broker, Schwab
gives you investment choices and lets you make your own decisions. Schwab has
many services that help you make the most informed investment decisions. (See
"How to Purchase Shares," "How to Exchange Between Funds" and "How to Redeem
Shares.")

CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity on one report.

SPECIAL RISK CONSIDERATIONS. An investment in the Fund is subject to certain
risks arising out of the Fund's investment in New York Municipal Securities,
Municipal leases, participation interests and certain other securities. (See
"Municipal Securities and Investment Techniques.")

NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders.

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SUMMARY OF EXPENSES -- SWEEP SHARES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fee (after fee reduction)1........................................ 0.20%
12b-1 Fees................................................................... None
Other Expenses (after reduction and/or expense reimbursement)2............... 0.39%
TOTAL FUND OPERATING EXPENSES2,3,4................................................ 0.59%
</TABLE>

1 This amount reflects a reduction by the Investment Manager, which is
guaranteed through at least August 31, 1995. If there were no such reduction,
the maximum management fee for the Fund would be 0.46%. (See "Management of the
Fund--Fees and Expenses.")

2 See "Management of the Fund--Fees and Expenses" for information regarding the
differing expenses for the multiple classes of shares of the Fund.

3 Schwab currently imposes no fees for opening a standard brokerage account,
including a Schwab One(R) account with a minimum of $5,000 account equity.
Schwab One accounts of less than $5,000 account equity are subject to a fee of
$5 per month if there have been fewer than two commissionable trades within the
last twelve months. See "How to Purchase Shares" for information regarding the
differing minimum balance and minimum investment requirements of the multiple
classes of shares of the Fund.

4 This amount reflects Schwab's and the Investment Manager's guarantee that,
through at least August 31, 1995, the total operating expenses of the Sweep
Shares of the Fund will not exceed 0.59% of the Sweep Shares average daily net
assets. Without this guarantee, and absent Schwab and the Investment Manager's
reduction of its fees, it is estimated that total operating expenses would be
approximately 1.05% of the Sweep Shares' average daily net assets.

EXAMPLE. You would pay the following expenses on a $1,000 investment in the
Sweep Shares of the Fund, assuming (1) a 5% annual return and (2) redemption at
the end of each period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
- ------ -------
<S> <C>
$6 $19
</TABLE>

THE PURPOSE OF THE PRECEDING TABLE IS TO ASSIST INVESTORS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE SWEEP SHARES OF THE FUND WILL
BEAR DIRECTLY OR INDIRECTLY. This example reflects Schwab and the Investment
Manager's guarantee that, through at least August 31, 1995, the total operating
expenses of the Sweep Shares of the Fund will not exceed 0.59%. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of
return pursuant to requirements of the Securities and Exchange Commission. THIS
HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR
FUTURE PERFORMANCE.

MATCHING THE FUND TO YOUR INVESTMENT NEEDS

The Fund may be appropriate for a variety of investment programs which can be
long-term or short-term in nature. While the Fund is not a substitute for
building an investment portfolio tailored to an

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individual's investment needs and risk tolerance, it can be used as a high
quality, conveniently liquid money market investment for your brokerage account
cash when it is not fully invested in other securities. The Fund would not be an
appropriate investment for retirement plans such as IRAs and Keogh plans.
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THE FUND MAY BE ESPECIALLY SUITABLE FOR SHORT-TERM INVESTORS.
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Because the Fund is designed to provide liquidity and stability of capital, as
well as automatic investment of free credit balances, it may be especially
suitable for investors with short-term investment objectives, including those
who are awaiting an opportune time to invest in the equity and/or bond markets.
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THE FUND MAY ALSO BE APPROPRIATE FOR LONG-TERM INVESTORS.
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The Fund may also be appropriate for long-term investors seeking a low-risk
investment alternative which is designed to provide income which is exempt from
federal income taxes and personal income taxes imposed by New York State and New
York municipalities.

In addition to the Sweep Shares of the Fund, Schwab also offers Value Advantage
Shares of the Fund, pursuant to a multiple class plan (the "Plan") adopted by
the Board of Trustees of the Schwab Fund Family. Under the Plan, Value Advantage
Shares of the Fund, which are not available through automatic ("sweep")
investment programs, are subject to lower transfer agency expenses than the
Sweep Shares of the Fund. In addition, the minimum investment and minimum
account balance requirements of the Value Advantage Shares of the Fund are
higher than those applicable to the Sweep Shares. See "Management of the
Fund--Fees and Expenses" and "How to Purchase Shares."

For information regarding Value Advantage Shares, call your local Schwab office
or 800-2 NO-LOAD. You may also obtain information about Value Advantage Shares
from your Schwab broker.

INVESTMENT OBJECTIVE AND POLICIES
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THE FUND SEEKS MAXIMUM CURRENT INCOME CONSISTENT WITH
LIQUIDITY AND STABILITY OF CAPITAL THAT IS EXEMPT FROM FEDERAL
INCOME TAXES AND PERSONAL INCOME TAXES IMPOSED
BY NEW YORK STATE AND NEW YORK MUNICIPALITIES.
- --------------------------------------------------------------------------------

The investment objective of the Fund is maximum current income that is exempt
from federal income taxes and personal income taxes imposed by New York State
and New York municipalities, to the extent consistent with liquidity and
stability of capital. This investment objective is fundamental, and cannot be
changed without approval by holders of a majority of the Fund's outstanding
voting shares, as defined in the Investment Company Act of 1940 (the "1940
Act"). The Fund pursues its objective primarily by investing in short-term high
quality municipal obligations, the income from which is exempt from federal
income taxes and personal income taxes imposed by New York State and New York
municipalities.

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Under normal market conditions, the Fund attempts to invest 100%, and will
invest at least 80%, of its total assets in debt obligations issued by or on
behalf of New York and other states, territories and possessions of the United
States (including the District of Columbia) and their political subdivisions,
agencies and instrumentalities that generate interest which, in the opinion of
bond counsel, is exempt from federal income taxes ("Municipal Securities").
Absent unusual market conditions, the Fund will invest at least 65% of its total
assets in such obligations which also generate interest which, in the opinion of
bond counsel, is exempt from State of New York and New York municipal personal
income tax ("New York Municipal Securities"). Under normal market conditions,
the Fund is authorized to invest up to 20% of its total assets in "private
activity bonds." (See "Distributions and Taxes-Federal Income Taxes.") The
Fund's investment in private activity bonds will not be included in the amount
deemed to be invested in New York Municipal Securities.

Provided that certain minimum conditions are met, dividends paid to New York
residents consisting of interest income received on New York Municipal
Securities will be exempt from State of New York personal income taxes.
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THE FUND ONLY INVESTS IN HIGH QUALITY SECURITIES.
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The Fund invests only in Municipal Securities which at the time of purchase: (a)
are rated in one of the two highest rating categories for municipal commercial
paper or short-term municipal securities assigned by Moody's Investors Service,
Standard & Poor's Corporation or any other nationally recognized statistical
rating organization ("NRSRO"); (b) are guaranteed or insured by the U.S.
Government as to the payment of principal and interest; (c) are fully
collateralized by an escrow of U.S. Government securities acceptable to the
Investment Manager; or (d) are unrated by any NRSRO, if they are determined by
the Investment Manager, using guidelines approved by the Board of Trustees, to
be at least equal in quality to one or more of the above referenced securities.
(For a description of the ratings, see "Appendix--Ratings of Investment
Securities" in the Statement of Additional Information.)

After its purchase by the Fund, a Municipal Security may cease to be rated or
its rating may be reduced below that required for purchase by the Fund. Neither
event would necessarily require the elimination of such an obligation from the
Fund's investment portfolio. However, the obligation generally would be retained
only if such retention was determined by the Board of Trustees to be in the best
interests of the Fund.

With the exception of securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, the Fund may not:

1. Purchase the securities of any issuer if as a result more than 5% of the
value of the Fund's total assets would be invested in the securities of that
issuer. However, provided that no more than 25% of the value of the Fund's
total assets are invested in the securities of any one issuer, up to 50% of
the value of the Fund's total assets may be invested without regard to this
5% limitation. For purposes of this limitation, a security is considered to
be issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to a private activity or an industrial
revenue bond that is backed only by the assets and revenues of a
non-governmental

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user, by such non-governmental user. In certain circumstances, the guarantor
of a security may also be considered to be an issuer in connection with such
guarantee.

2. Purchase any securities which would cause 25% or more of the value of the
Fund's total assets at the time of purchase to be invested in the securities
of issuers conducting their principal business activities in the same
industry. However, this limitation shall not apply to Municipal Securities
issued by governmental entities.

From time to time, as a defensive measure under abnormal market conditions, the
Fund may invest any or all of its assets in taxable "temporary investments"
which include: obligations of the U.S. Government, its agencies or
instrumentalities; debt securities rated (other than Municipal Securities) in
one of the two highest categories by any NRSRO; commercial paper (other than
Municipal Securities) rated in one of the two highest rating categories by any
NRSRO; certificates of deposit of domestic banks having capital, surplus, and
undivided profits in excess of $100 million; and any of the foregoing temporary
investments subject to repurchase agreements. While purchases by the Fund of
certain temporary investments could cause it to generate dividends taxable to
shareholders as ordinary income (see "Distributions And Taxes"), it is the
Fund's primary intention to produce dividends which are not subject to federal
income or New York personal income taxes.

The investment policies set forth above (except for the policy regarding
temporary investments, or as otherwise noted) are fundamental. They, along with
certain investment restrictions adopted by the Fund (see "Investment
Restrictions" in the Statement of Additional Information), cannot be changed
without approval by holders of a majority of the Fund's outstanding voting
shares, as defined in the 1940 Act.

MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES

The two principal classifications of Municipal Securities which may be held by
the Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being
financed. Revenue securities may include private activity bonds (and industrial
development bonds). Such bonds may be issued by or on behalf of public
authorities to finance various privately operated facilities, and are not
payable from the unrestricted revenues of the issuer. As a result, the credit
quality of private activity bonds is frequently related directly to the credit
standing of private corporations or other entities. From time to time, the Fund
may invest more than 25% of its total assets in industrial development and
private activity bonds.

The Fund's portfolio may also include "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.

Municipal Securities purchased by the Fund may include variable rate demand
instruments issued by industrial development authorities and other government
entities. In the event variable rate demand

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instruments which the Fund can purchase are not rated by credit rating agencies,
such instruments must be determined by the Investment Manager, using guidelines
approved by the Board of Trustees, to be of comparable quality at the time of
purchase to rated instruments which the Fund can purchase. In some cases, the
Fund may require that the issuer's obligation to pay the principal of the note
be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. Although there may be no active secondary market with
respect to a particular variable rate demand instrument purchased by the Fund,
the Fund may (at any time or during specified periods not exceeding one year,
depending upon the instrument involved) demand payment in full of the principal
of the instrument and may resell the instrument to a third party. The absence of
such an active secondary market, however, could make it difficult for the Fund
to dispose of a variable rate demand instrument in the event the issuer
defaulted on its payment obligation or during periods that the Fund is not
entitled to exercise its demand rights, and the Fund could, for this or other
reasons, suffer a loss with respect to such instruments. To the extent that the
absence of an active secondary market for such securities causes them to be
"illiquid," such securities will be subject to the Fund's restrictions on
acquiring and holding illiquid securities.

Participation interests in Municipal Securities with fixed, floating or variable
rates of interest may be purchased by the Fund from financial institutions. The
buyer of a participation interest receives an undivided interest in the
securities underlying the instrument. The Fund will only purchase a
participation interest if: (a) the Municipal Securities subject to it mature in
one year or less or the instrument includes a right to demand payment, usually
within seven days, from the Seller, (b) the instrument meets the Fund's
previously described quality standards for Municipal Securities, and (c) the
instrument is issued with an opinion of counsel or is the subject of a ruling of
the Internal Revenue Service, stating that the interest earned on the
participation interest is exempt from federal income tax.

The Fund may purchase securities on a "when-issued" or "delayed delivery" basis.
When-issued or delayed delivery securities are securities purchased for future
delivery at a stated price and yield. The Fund will generally not pay for such
securities or start earning interest on them until they are received. Securities
purchased on a when-issued or delayed delivery basis are recorded as an asset
and are subject to changes in value based upon changes in the general level of
interest rates. The Fund will not invest more than 25% of its assets in
when-issued or delayed delivery securities, does not intend to purchase such
securities for speculative purposes and will make commitments to purchase
securities on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities. However, the Fund reserves the right to sell
acquired when-issued or delayed delivery securities before their settlement
dates if deemed advisable.

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municipality's appropriating body does not allocate the funds necessary to make
lease payments. In such circumstances, the lessor is typically entitled to
repossess the property. The private sector value of the property is, however,
generally less than the value of the property to the municipality. The
Investment Manager, pursuant to guidelines established by the Board of Trustees,
is responsible for determining the credit quality of unrated municipal leases,
on an ongoing basis, including an assessment of the likelihood of whether the
lease will be terminated.

The Fund may also invest up to 25% of its assets in synthetic variable rate
municipal securities. These securities generally comprise the following elements
in a trust: (i) a fixed-rate municipal bond (of any duration); (ii) a right to
put the bond at par value on seven days notice or after a specific interval of
time depending on the terms of the synthetic security; and (iii) a contractual
agreement pursuant to which the investing Fund and the issuer determine the
lowest rate that would permit the bond to be remarketed at par, taking into
account the put right. The trustee of the trust is generally a bank trust
department.

These securities may include tender option bond trust receipts, in which a
fixed-rate municipal bond (or group of bonds) is placed into a trust from which
two classes of trust receipts are issued, which represent proportionate
interests in the underlying bond(s). Interest payments are made on the bond(s)
based upon a pre-determined rate. Under certain circumstances, the holder of a
trust receipt may also participate in any gain or loss on the sale of such
bond(s). Tender option bond trust receipts generally are structured as private
placements and, accordingly, may be deemed to be restricted securities for
purposes of the Fund's investment limitations. Tender option bond trust receipts
are considered to be Municipal Securities for purposes of the Fund's policy to
invest at least 80% of its total assets in Municipal Securities.

The Fund will limit its investments in tender option bond trust receipts and
other synthetic floating-rate municipal securities to no more than 25% of its
total assets.

The Fund may also acquire "stand-by commitments" with respect to Municipal
Securities held in its portfolio. Under a stand-by commitment, a dealer agrees
to purchase at the Fund's option specified Municipal Securities at a price equal
to their amortized cost value plus accrued interest. The Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder solely for trading purposes.

The Fund may engage in "repurchase agreements." In entering into a repurchase
agreement, the Fund acquires ownership of a security from a broker-dealer or
bank that agrees to repurchase the security at a mutually agreed upon time and
price (which price is higher than the purchase price), thereby determining the
yield during the Fund's holding period. Repurchase agreements with broker-dealer
firms will be limited to obligations of the U.S. Government, its agencies or
instrumentalities. Maturity of the securities subject to repurchase may exceed
one year.

As a matter of fundamental policy, the Fund may borrow money for temporary
purposes, but not for the purpose of purchasing investments, in an amount up to
one-third of the value of the Fund's total assets and may pledge up to 10% of
the Fund's net assets to secure borrowings. The Fund will not purchase illiquid
securities, including repurchase agreements maturing in more than seven days,
if, as a result thereof, more than 10% of the Fund's net assets valued at the
time of the transaction would be invested in such securities.

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Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from federal income tax (and, with respect to New York
Municipal Securities, to the exemption of interest thereon from New York State
and New York municipalities personal income taxes) are rendered by bond counsel
to the respective issuers at the time of issuance. The Fund and the Investment
Manager will not review the proceedings relating to the issuance of Municipal
Securities or the bases for such opinions.

SPECIAL RISK CONSIDERATIONS. The Fund intends to follow the diversification
standards set forth in the 1940 Act, except to the extent that, in the
Investment Manager's judgment, non-diversification is appropriate to maximize
the percentage of the Fund's assets that are New York Municipal Securities. The
investment return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of issuers relative to the number of issuers
held in a diversified portfolio. In the event of changes in the financial
condition or in the market's assessment of certain issuers, the Fund's policy of
acquiring large positions in the obligations of a relatively small number of
issuers may affect the value of the Fund's portfolio to a greater extent than it
would that of a diversified portfolio.

Although the Fund does not presently intend to do so on a regular basis, it may
invest more than 25% of its assets in Municipal Securities the interest on which
is paid solely from revenues on similar projects if such investment is deemed
necessary or appropriate by the Investment Manager. To the extent that the
Fund's assets are concentrated in Municipal Securities payable from revenues on
similar projects, the Fund will be subject to the particular risks presented by
such projects to a greater extent than it would be if the Fund's assets were not
so concentrated.

Certain New York constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could result in certain
adverse consequences affecting New York Municipal Securities. (See "Municipal
Securities" in the Statement of Additional Information for more information
about these significant financial considerations.)

Participation interests in Municipal Securities and other derivative securities
eligible for purchase by the Fund involve special risks, including a risk that
the Internal Revenue Service may characterize some or all of the interest paid
on such securities to the Fund as taxable. There is also an increased risk, most
typically associated with "municipal lease" obligations, that a municipality
will not appropriate the funds necessary to make the scheduled payments on, or
may seek to cancel or otherwise avoid its obligations under, the lease that
supports the security owned by the Fund.

MANAGEMENT OF THE FUND

Responsibility for overall management of the Fund rests with the trustees and
officers of the Schwab Fund Family. Professional investment management for the
Fund is provided by the Investment Manager, Charles Schwab Investment
Management, Inc., 101 Montgomery Street, San Francisco, CA 94104. The Investment
Manager provides a continuous investment program, including general investment
and economic advice regarding the Fund's investment strategies, manages the
Fund's investment portfolio and performs expense management, accounting and
record keeping, and other services necessary to the operation of the Fund and
the Schwab Fund Family. The Investment Manager, formed in 1989, is a
wholly-owned subsidiary of The Charles Schwab Corporation and is the

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investment adviser and administrator of the SchwabFunds(R) mutual funds. As of
June 3, 1995, the SchwabFunds had aggregate net assets in excess of $26 billion.

Charles Schwab & Co., Inc. ("Schwab" or the "Transfer Agent"), 101 Montgomery
Street, San Francisco, CA 94104, serves as shareholder services agent and
transfer agent for the Fund. Schwab provides information and services to
shareholders, which include reporting share ownership, sales and dividend
activity (and associated tax consequences), responding to daily inquiries,
effecting the transfer of Fund shares and facilitating effective cash management
of shareholders' Schwab account balances. It furnishes office space and
equipment, telephone facilities, personnel and informational literature
distribution as is necessary or appropriate in providing shareholder and
transfer agency information and services. Schwab is also the Fund's distributor,
but receives no compensation for its services as such.

Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 2.5 million active customer accounts and has over 200 offices. Schwab
also offers convenient access to financial information services and provides
products and services that help investors make investment decisions. Schwab is a
wholly-owned subsidiary of The Charles Schwab Corporation. Charles R. Schwab is
the founder, Chairman, Chief Executive Officer and a director of The Charles
Schwab Corporation and, as of March 10, 1995, the beneficial owner of
approximately 23.3% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.

FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Schwab Fund Family, the Investment Manager receives from the
Fund a graduated annual fee, payable monthly, of 0.46% of the Fund's average
daily net assets not in excess of $1 billion, 0.41% of such net assets over $1
billion but not in excess of $2 billion and 0.40% of such net assets over $2
billion. The Investment Manager may reduce its management fee from time to time
in the future. Fee reductions lower the Fund's expenses and thus increase the
total return it provides shareholders. At least through August 31, 1995, the
Investment Manager guarantees that the Fund's management fee will not exceed
0.20% of the Fund's average daily net assets and that total operating expenses
will not exceed 0.59% of the average daily net assets of the Sweep Shares.
Interest expenses, taxes and capital items such as, but not limited to, costs
incurred in connection with the purchase or sale of portfolio securities,
including brokerage fees or commissions, are not included as operating expenses
the purpose of this guarantee. The effect of this guarantee is to maintain or
lower expenses of the Sweep Shares and thus maintain or increase the total
return to shareholders. Without this guarantee, and absent the Investment
Manager's reduction of its fee, it is estimated that total operating expenses of
the Sweep Shares would be approximately 1.06% of its average daily net assets.

For the transfer agency services provided, the Transfer Agent receives an annual
fee, payable monthly, of 0.25% of the average daily net assets of the Sweep
Shares. In addition, for shareholder services provided, Schwab receives an
annual fee, payable monthly, of 0.20% of the average daily net assets of the
Sweep Shares. For the Value Advantage Shares, the Transfer Agent receives an
annual fee of 0.05% of the average daily net assets of that class' shares of
beneficial interest. PNC Bank is the Fund's Custodian.

10
<PAGE> 11

The Schwab Fund Family pays the expenses of its operations, including the fees
and expenses of independent accountants, counsel and custodian, and the costs of
calculating net asset values, brokerage commissions or transaction costs, taxes,
registration fees, and the fees and expenses of qualifying the Schwab Fund
Family and its shares for distribution. These expenses are generally allocated
among the Schwab Fund Family's investment portfolios ("Series") on the basis of
relative net assets at the time of allocation. However, expenses directly
attributable to a particular Series or class of a Series are charged to that
Series or class, respectively. The differing expenses applicable to the Sweep
Shares and the Value Advantage Shares will cause the performance of the two
classes of shares of the Fund Sweep Shares to differ.

DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
THE FUND DECLARES DAILY DIVIDENDS WHICH ARE PAID MONTHLY.
- --------------------------------------------------------------------------------

DIVIDENDS AND OTHER 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 (the "Exchange") (generally 4:00 p.m. Eastern time) as a dividend to
shareholders already of record at the previous net asset value calculation.
Dividends are normally paid (and, where applicable, reinvested) on the 15th of
each month, if a Business Day, otherwise on the next Business Day.

TAX INFORMATION. The Fund intends to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code") and
applicable state laws. In order to so qualify, the Fund will distribute on a
current basis substantially all of its investment company taxable income, its
net exempt-interest income and its capital gain net income (if any), and will
meet certain other requirements. Such qualification relieves the Fund of
liability for federal and New York income taxes to the extent the Fund's
earnings are distributed. In addition, if the Fund does not distribute 98% of
its taxable investment income and capital gains, it will be subject to a
non-deductible 4% excise tax on such undistributed amounts.

FEDERAL INCOME TAXES. Dividends derived from exempt-interest on state and local
obligations (known as "exempt-interest dividends") may be treated by the Fund's
shareholders as items of interest excludable from their federal gross income. A
shareholder should consult his or her own tax adviser with respect to whether
exempt-interest dividends would be excludable from gross income if the
shareholder were treated as a "substantial user" of facilities financed by an
obligation held by the Fund or a "related person" to such user under the Code.
Any loss on the sale or exchange of any share held for six months or less will
be disallowed to the extent of the amount of the exempt-interest dividend
received with respect to such share. The U.S. Treasury Department is authorized
to issue regulations reducing the period to not less than 31 days for certain
regulated investment companies, but no such regulations have been issued as of
the date of this Prospectus. To the extent dividends paid to shareholders are
derived from taxable interest or short-term or long-term capital gains, such
dividends will be subject to federal income tax whether paid in the form of cash
or additional shares. Fund dividends derived from interest on U.S. Treasury and
agency obligations are subject to federal income tax.

11
<PAGE> 12

The Fund may at times purchase Municipal Securities or New York Municipal
Securities at a discount from the price at which they were initially issued. For
federal income tax purposes, some or all of this market discount will be
included in the Fund's ordinary income and will be taxable to shareholders as
such when it is distributed to them.

If the Fund holds certain "private activity bonds" ("industrial development
bonds" under prior law), dividends derived from interest on such obligations
will be classified as an item of tax preference which could subject certain
shareholders to federal alternative minimum tax liability. Corporate
shareholders must also take all exempt-interest dividends into account in
determining "adjusted current earnings" for purposes of calculating their
alternative minimum tax.

Private activity bonds and industrial development bonds generally are bonds
issued by or on behalf of public authorities to obtain funds to provide
financing to certain privately owned or operated facilities. Private activity
bonds and industrial development bonds also are generally limited obligation (or
revenue) securities, which means that they are payable only from the revenues
derived from a particular facility or class of facilities, or, in some cases,
from some other specific revenue source. (See "Municipal Securities" in the
Statement of Additional Information.)

Reinvested distributions will be taxable as if they had been received by
shareholders in cash. It is not expected that any portion of the dividends paid
by the Fund will be eligible for the corporate dividends received deduction.
Shareholders should note that all exempt-interest dividends will be taken into
account in determining the taxability of Social Security benefits or Railroad
Retirement Act benefits. (See "Distributions and Taxes" in the Statement of
Additional Information.)

NEW YORK INCOME TAXES. Dividends paid by the Fund to non-corporate shareholders
and derived from interest on New York Municipal Securities or federal
obligations are also exempt from personal income taxes imposed by New York State
and New York municipalities. For this purpose, federal obligations are
obligations the interest on which is excludable from gross income for state
income tax purposes under the Constitution or laws of the United States.
However, dividends paid to shareholders that are corporations subject to New
York franchise tax or corporate income tax will be taxed as ordinary income to
such shareholders, notwithstanding that all or a portion of such dividends are
exempt from New York personal income tax. Moreover, to the extent that the
Fund's dividends are derived from interest on debt obligations other than New
York Municipal Securities or federal obligations, such dividends will be subject
to New York personal income tax, even though such dividends may be exempt for
federal income tax purposes.

To the extent, if any, that dividends paid to shareholders are derived from
taxable interest or from long-term or short-term capital gains, such dividends
will not be exempt from New York personal income tax whether received in cash or
reinvested in shares.

Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' regular Schwab brokerage statements. The Fund will
notify shareholders at least annually as to the federal income and New York
personal income tax consequences of distributions made each year.

12
<PAGE> 13

The foregoing is only a brief summary of some of the federal and New York income
tax considerations affecting the Fund and its shareholders. (See the Trust's
Statement of Additional Information for more information.) Potential investors
should consult their tax advisers with specific reference to their own tax
situations.

SHARE PRICE CALCULATION
- -------------------------------------------------------------------------------
THERE ARE NO SALES CHARGES OR TRANSACTION FEES TO PURCHASE
OR REDEEM SHARES OF THE FUND.
- -------------------------------------------------------------------------------

The price of a Sweep Share of the Fund on any given day is its "net asset value"
per share or "NAV." This figure is computed by dividing total Fund assets
allocable to that class, less any liabilities allocable to the class, by the
number of shares of the class outstanding. The net asset value per share of the
Sweep Shares of the Fund is determined on each day both the Federal Reserve Bank
of New York and the Exchange are open for business, first at 10:00 a.m. (Eastern
time), then again as of the close of normal trading on the Exchange (generally
4:00 p.m. Eastern time). While the Fund attempts to maintain its net asset value
at a constant $1.00 per share, Fund shares are not insured against reduction in
net asset value.

The Fund values its portfolio securities 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 using the amortized cost method
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. If a deviation of 1/2 of 1% or more were to occur between the net
asset value per share of the Sweep Shares of the Fund calculated by reference to
market values and the $1.00 per share amortized cost value of the Sweep Shares
of the Fund, or if there were any other deviation which the Board of Trustees
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.

HOW THE FUND SHOWS PERFORMANCE

From time to time the Fund may advertise the yield, effective yield,
tax-equivalent yield and tax-equivalent effective yield of the Sweep Shares of
the Fund. Performance figures are based upon historical results and are not
intended to indicate future performance.

The yield of the Sweep Shares of the Fund refers to the income generated by a
hypothetical investment in Sweep Shares of the Fund over a specific 7-day
period. This income is then annualized, which means that the income generated
during the 7-day period is assumed to be generated each week over an annual
period and is shown as a percentage of the hypothetical investment.

Effective yield is calculated similarly, but the 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.

13
<PAGE> 14

Tax-equivalent yield is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) the Sweep Share's yield for
an investor in stated federal, State of New York, and New York Municipal income
tax brackets (normally assumed to be the applicable maximum tax rate).
Tax-equivalent yield is based upon, and will be higher than, the portion of the
Sweep Share's yield that is tax-exempt. (See "Yield" in the Statement of
Additional Information.)

The tax-equivalent effective yield is computed in the same manner as is the
tax-equivalent yield, except that the effective yield is substituted for yield
in the calculation.

The performance of the Sweep Shares of the Fund may be compared to that of other
mutual funds tracked by mutual fund rating services, various indices of
investment performance, United States government obligations, bank certificates
of deposit, other investments for which reliable performance data is available
and the consumer price index.

Because the Sweep Shares of the Fund are subject to different expenses than the
Value Advantage Shares, the performance of the two classes of shares will
differ.

Additional performance information about the Sweep Shares of the Fund is
available in the Fund's Annual Report, which is sent to all shareholders. To
request a free copy, call your local Schwab office at 800-2 NO-LOAD.

GENERAL INFORMATION

The Schwab Fund Family was organized as a business trust under the laws of
Massachusetts on October 20, 1989 and may issue an unlimited number of shares of
beneficial interest or classes of shares in one or more Series. Currently,
Schwab Fund Family offers shares of nine Series which may be organized into one
or more classes of shares of beneficial interest. The Board of Trustees may
authorize the issuance of shares of additional Series or classes if it deems it
desirable to do so. Shares of each Series have equal noncumulative voting rights
and equal rights as to dividends, assets, and liquidation of such Series, except
to the extent such voting rights or rights as to dividends, assets, and
liquidation vary among classes of a Series.

The Schwab Fund Family is not required to hold annual shareholders' meetings. It
will, however, hold special meetings as required or deemed desirable by the
Board of Trustees for such purposes as electing trustees, changing fundamental
policies, or approving an investment advisory or sub-advisory agreement. In
addition, a Trustee may be elected or removed by shareholders at a special
meeting called upon written request of shareholders owning at least 10% of the
outstanding shares of the Schwab Fund Family. Shareholders will vote by Series
and not in the aggregate (for example, when voting to approve the investment
advisory agreement), except when voting in the aggregate is permitted under the
1940 Act, such as for the election of Trustees. In addition, holders of the
Sweep Shares will vote exclusively as a class on any matter relating solely to
the Sweep Shares' arrangement as a class and on any matter in which the
interests of the holders of the Sweep Shares differ from the interests of the
holders of Value Advantage Shares.

14
<PAGE> 15

SHAREHOLDER GUIDE
- ----------------------------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE SHAREHOLDER
SERVICE INFORMATION.
- ----------------------------------------------------------------------------

SHAREHOLDER SERVICE. You may place Fund purchase and redemption orders as well
as request exchanges at any one of over 200 Schwab offices nationwide or by
calling 800-2 NO-LOAD, where trained representatives are available to answer
questions about the Fund and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmation of such instructions and tape
recording telephone transactions.

HOW TO PURCHASE SHARES
- ----------------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND ONLY THROUGH
A SCHWAB ACCOUNT.
- ----------------------------------------------------------------------

You may purchase shares of the Fund exclusively through an account maintained
with Schwab, and payment for shares must be made directly to Schwab. The
Securities Investor Protection Corporation ("SIPC") will provide account
protection, in an amount up to $500,000, for securities, including Fund shares
which you hold in a Schwab brokerage account. Of course, SIPC account protection
does not protect shareholders from share price fluctuations.

If you already have a Schwab brokerage account, you may purchase shares in the
Fund as described below and need not open a new account.

If you do not presently maintain a Schwab brokerage account and wish to
establish one, simply complete a Schwab Brokerage Account Application available
at any Schwab office. Corporations and other organizations should contact their
local Schwab office to determine which additional forms may be necessary to open
a Schwab brokerage account.

You may deposit funds into your Schwab brokerage account by check or wire. All
deposit checks should be made payable to Charles Schwab & Co., Inc. If you would
like to wire funds into your Schwab brokerage account, please contact your local
Schwab office for instructions.

WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. You must have funds in your
Schwab brokerage account in order to purchase Fund shares. If funds (including
those transmitted by wire) are received by Schwab before 4:00 p.m. (Eastern
time), they will be available for investment on the day of receipt. If funds
arrive after that time, they will be available for investment the next Business
Day.

Orders to purchase shares will be executed at the next determined net asset
value after receipt by Schwab's Mutual Fund Transfer Agency Department. (See
"Share Price Calculation.")

15
<PAGE> 16

- ---------------------------------------------------------------------------
THE FUND MAY BE USED TO "SWEEP" FREE CREDIT BALANCES
IN YOUR SCHWAB BROKERAGE ACCOUNT.
- ---------------------------------------------------------------------------

METHODS OF PURCHASING SHARES. Automatic Investment: When opening a Schwab
brokerage account, an investor will be asked to select a SchwabFunds(R) class or
series with sweep privileges as a "primary fund." (If a selection is not made,
the Schwab Money Market Fund will automatically become the investor's primary
fund.) An initial purchase of shares of the primary fund selected will be made
automatically pursuant to the procedures described below when the free credit
balance in the investor's Schwab brokerage account (including deposits, proceeds
of sales of securities, and miscellaneous cash dividends and interest, but not
amounts held by Schwab as collateral for margin obligations to Schwab) exceeds
$1,000 on the last Business Day of the week. Thereafter, free credit balances in
the investor's Schwab brokerage account which, in total, equal or exceed $100 on
the last Business Day of any week will be automatically invested in the primary
fund on the first Business Day of the following week. If an investor's free
credit balance is less than $100, it will not be invested in the primary fund,
but will remain a credit to the investor's Schwab brokerage account. In certain
limited circumstances, free credit balances in certain accounts may be
automatically invested at different times. Upon request, a free credit balance
in a Schwab brokerage account totaling $20,000 or more may be invested in the
appropriate primary fund on the Business Day following receipt by the Transfer
Agent of investor instructions.

An investor with an existing Schwab brokerage account may add the automatic
investment feature to his or her account by completing the appropriate section
of the Schwab brokerage account application available at any Schwab office. A
shareholder may change primary funds by calling or writing his or her local
Schwab office or writing Schwab at the address listed on the cover of this
Prospectus. Note that the automatic reinvestment feature is not available for
Value Advantage Shares of any Fund.
- ----------------------------------------------------------------------
SHARES OF THE FUND MAY ALSO BE PURCHASED DIRECTLY.
- ----------------------------------------------------------------------

DIRECT PURCHASE: A Schwab brokerage account holder may buy shares of the Fund
(if it is not his or her primary fund) by placing an order directly with a
Schwab registered representative. The minimum initial investment for such a
"secondary fund" purchase is $1,000, and subsequent investments must be at least
$100. The minimum initial investment for the Value Advantage Shares is $25,000
and the minimum account balance for the Value Advantage Shares is $20,000.
- -----------------------------------------------------
TWO DISTRIBUTION OPTIONS ARE AVAILABLE.
- -----------------------------------------------------

DISTRIBUTION OPTIONS. The brokerage account standing instructions that you
selected in your Schwab Brokerage Account Application will determine which of
the two distribution options listed below will apply to you. Fund distributions
will be automatically reinvested, unless the Transfer Agent has received
instructions that distributions be mailed to you as they are paid. Please
contact your local Schwab office if you already have a Schwab brokerage account
and wish to change your brokerage account standing instructions.

16
<PAGE> 17

1.AUTOMATIC REINVESTMENT: All distributions will be reinvested in additional
full Sweep Shares of the Fund at the net asset value next determined after
their payable date.

2. RECEIVE DIVIDENDS BY MAIL: All distributions will be credited to your Schwab
account as of the payable date. If your account is coded to have dividends
mailed immediately, checks will normally be mailed the Business Day after
distributions are credited.

For information on how to wire funds from your Schwab brokerage account to your
bank, see "Other Important Information--Wire Transfers to Your Bank."

OTHER PURCHASE INFORMATION. The minimum amounts required for automatic
investment/direct purchase may be reduced or waived on certain occasions. (See
"Purchase and Redemption of Shares" in the Statement of Additional Information.)
Free credit balances in accounts of certain categories of investors, such as
holders of Schwab custodial accounts, may be invested automatically irrespective
of amount. The Fund reserves the right, in its sole discretion and without prior
notice to shareholders, to withdraw or suspend all or any part of the offering
made by this Prospectus, to reject purchase orders or to change the minimum
investment requirements. All orders to purchase shares of the Fund are subject
to acceptance by the Fund and are not binding until confirmed or accepted.
Schwab will charge a $15 service fee against an investor's Schwab brokerage
account should his or her check be returned because of insufficient or
uncollected funds or a stop payment order.

HOW TO EXCHANGE SHARES
- --------------------------------------------------------------------------------
SHARES OF THE FUND MAY BE EXCHANGED FOR SHARES OF OTHER FUNDS
SPONSORED BY SCHWAB WITHOUT CHARGE.
- --------------------------------------------------------------------------------

The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state. Thus, you can conveniently modify your investments if your goals or
market conditions change. An exchange will involve the redemption of shares at
the net asset value next determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received your request,
if it was received by 4:00 p.m. (Eastern time) and on the next business day if
the request was received after that time) and the purchase of shares in another
fund at the net asset value of that fund next determined after sale of the
shares involved in the exchange (on the same day as the Transfer Agent received
your request, if it was received by 4:00 p.m. (Eastern time) and on the next
business day if the request was received after that time). An exchange of shares
will be treated as a sale of the shares for federal income tax purposes. Note
that you must meet the minimum initial or subsequent investment requirements
applicable to the shares you wish to receive in an exchange. The Fund reserves
the right on 60 days' written notice to modify, limit or terminate the exchange
privilege.

17
<PAGE> 18

METHODS OF EXCHANGING SHARES.

BY PHONE:

To exchange between any of the SchwabFunds by telephone, please call your
local Schwab office during regular business hours or 800-2 NO-LOAD, 24 hours a
day. Investors should be aware that telephone exchanges may be difficult to
implement during periods of drastic economic or market changes.

To properly process your telephone exchange request, we will need the
following information:

- your Schwab brokerage account number;
- the name of the fund into which shares are to be exchanged; and the
number of shares of the Fund to be exchanged.

BY MAIL:

You may also request an exchange by writing your local Schwab office or Schwab
at the address listed on the Prospectus cover page.

To properly process your mailed exchange request, we will need a letter from
you which:

- references your Schwab brokerage account number;
- specifies that you would like to exchange shares from the Fund;
- indicates the fund into which shares are to be exchanged; describes
the number of shares of the Fund to be exchanged; and
- is signed by at least one of the registered Schwab account holders, in
the exact form specified in the account.

IN PERSON AT A SCHWAB OFFICE:

You can also place your exchange request in person at your local Schwab
office.

HOW TO REDEEM SHARES

THE PRICE AT WHICH SHARES WILL BE REDEEMED. Sweep Shares will be redeemed at the
net asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions, as set forth below. Investors will receive
dividends declared for the day on which shares are redeemed.

AUTOMATIC REDEMPTION. Redemptions will be automatically effected by the Transfer
Agent to satisfy debit balances in an investor's Schwab brokerage account or to
provide necessary cash collateral for an investor's margin obligation to Schwab.
Redemptions will also be automatically effected to settle securities
transactions with Schwab if an investor's free credit balance on the day before
settlement is insufficient to settle the transactions. Each Schwab brokerage
account will, as of the close of business each Business Day, be automatically
reviewed for debits and pending securities settlements, and, after application
of any free credit balances in the account to such debits, a sufficient number
of shares of the primary fund and, to the extent necessary, any other Schwab
Money Fund(s) in the account, will be redeemed the following Business Day to
satisfy any remaining debits.

18
<PAGE> 19

DIRECT REDEMPTION. Shareholders may also place redemption orders directly by
contacting their local Schwab office by telephone, mail or in person, or by
mailing written instructions to Schwab (at the address listed on the Prospectus
cover page). Investors should be aware that telephone redemption may be
difficult to implement during periods of drastic economic or market changes.
Shareholders who experience difficulties in redeeming by telephone can utilize
one of the above-noted alternatives to place their redemption orders.

Telephone redemption orders received prior to 6:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's identity and
account ownership, will be deemed to be received by Schwab's Mutual Fund
Transfer Agency Department prior to the next net asset value determination. All
subsequent telephone redemption orders received prior to the first net asset
value determination on the following day will be deemed received prior to that
day's second net asset value determination.

Normally a check for a shareholder's redemption proceeds will be available at
the investor's local Schwab office on the Business Day after the Transfer Agent
receives proper redemption instructions. Checks will normally be mailed to
investors who specifically request such mailing on the Business Day following
share redemption. If you purchased shares by check, your redemption proceeds may
be held in your Schwab brokerage account until your check clears (which may take
up to 15 days). Depending on the type of Schwab brokerage account you have, your
money may earn interest during any holding period.

The Fund may suspend redemption rights or postpone payments at times when
trading on the Exchange is restricted, the Exchange is closed for any reason
other than its customary weekend or holiday closings, emergency circumstances as
determined by the Securities and Exchange Commission exist, or for such other
circumstances as the Commission may permit.

OTHER IMPORTANT INFORMATION

MINIMUM BALANCE AND BROKERAGE ACCOUNT REQUIREMENTS. Due to the relatively high
cost of maintaining smaller holdings, the Fund reserves the right to redeem a
shareholder's shares if, as a result of redemptions, their aggregate value drops
below the $100 minimum balance requirement for the Sweep Shares of the Fund. The
Fund will notify shareholders in writing 30 days before taking such action to
allow them to increase their holdings to at least the minimum level. Also note
that, because they can only be held in Schwab brokerage accounts, Fund shares
will be automatically redeemed should the Schwab brokerage account in which they
are carried be closed.

CONSOLIDATED MAILINGS. In an effort to reduce the Fund's mailing costs, the Fund
consolidates shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write to SchwabFunds at
101 Montgomery Street, San Francisco, CA 94104 to that effect.

WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
can be wired from your Schwab brokerage account to your bank account. Call your
local Schwab office for additional information. A $15 service fee will be
charged against your Schwab brokerage account for each wire sent.

19
<PAGE> 20

SCHWAB ONE(R) ACCOUNT FEATURES. Shareholders who hold shares of the Fund in
Schwab One(R) accounts are entitled to redeem Fund shares through debit cards
and checks. Investors should contact Schwab if they are interested in the
benefits and requirements of a Schwab One account.

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

20
<PAGE> 21

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 22

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 23

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 24

2239-2(06/95) Printed on recycled paper

PROSPECTUS JUNE 6, 1995

PROSPECTUS JUNE 6, 1995
<PAGE> 25

SCHWAB MONEY MARKET FUND
SCHWAB GOVERNMENT MONEY FUND
SCHWAB U.S. TREASURY MONEY FUND
SCHWAB TAX-EXEMPT MONEY FUND--SWEEP SHARES
- --------------------------------------------------------------------------------

PROSPECTUS June 6, 1995

TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD.

THE SCHWAB MONEY MARKET FUND, SCHWAB GOVERNMENT MONEY FUND, SCHWAB U.S. TREASURY
MONEY FUND, AND SCHWAB TAX-EXEMPT MONEY FUND (the "Funds") are designed for
investors who seek current income consistent with liquidity and stability of
capital. The Funds are diversified investment portfolios of The Charles Schwab
Family of Funds (the "Schwab Fund Family"), a no-load, open-end, management
investment company. With respect to the Schwab Tax-Exempt Money Fund, this
Prospectus describes the Sweep Shares of the Fund, one of the two classes of
shares of the Fund (the "Sweep Shares") offered by Schwab. Prior to the date of
this Prospectus, the Schwab Tax-Exempt Money Fund was not offered in two classes
of shares. The existing shares of the Schwab Tax-Exempt Money Fund are
redesignated as Sweep Shares. The Schwab Money Market Fund, Schwab Government
Money Fund, and the Schwab U.S. Treasury Money Fund are not offered in multiple
classes of shares. For a prospectus describing the other class of shares of the
Schwab Tax-Exempt Money Fund (the "Value Advantage Shares"), call your local
Schwab office or 800-2 NO-LOAD.

ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUNDS. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information pertaining to the Funds in the Statement of Additional
Information dated June 6, 1995 (as may be amended from time to time), and filed
with the Securities and Exchange Commission. The Statement of Additional
Information is incorporated by reference into this Prospectus, and may be
obtained without charge by contacting Schwab at 800-2 NO-LOAD or 101 Montgomery
Street, San Francisco, CA 94104.

ATTENTION OHIO INVESTORS. THE OHIO ADMINISTRATIVE CODE REQUIRES US TO MAKE THE
FOLLOWING DISCLOSURE. UNLIKE CERTAIN OTHER MUTUAL FUNDS WHICH MAY INVEST NO MORE
THAN 15% OF THEIR TOTAL ASSETS IN THE SECURITIES OF ISSUERS WHICH TOGETHER WITH
ANY PREDECESSORS HAVE A RECORD OF LESS THAN THREE YEARS CONTINUOUS OPERATIONS OR
SECURITIES OF ISSUERS WHICH ARE RESTRICTED AS TO DISPOSITION, THE SCHWAB
TAX-EXEMPT MONEY FUND MAY INVEST UP TO 50% OF ITS TOTAL ASSETS IN SUCH
SECURITIES.

TABLE OF CONTENTS

<TABLE>
<S> <C>
KEY FEATURES OF THE FUNDS.............................................................. 2
SUMMARY OF EXPENSES.................................................................... 3
FINANCIAL HIGHLIGHTS................................................................... 5
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS............................................ 6
INVESTMENT OBJECTIVES AND POLICIES..................................................... 7
MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES......................................... 11
MANAGEMENT OF THE FUNDS................................................................ 14
DISTRIBUTIONS AND TAXES................................................................ 16
SHARE PRICE CALCULATION................................................................ 17
HOW THE FUNDS SHOW PERFORMANCE......................................................... 19
TAX-ADVANTAGED RETIREMENT PLANS........................................................ 20
GENERAL INFORMATION.................................................................... 20
SHAREHOLDER GUIDE...................................................................... 21
HOW TO PURCHASE SHARES............................................................... 21
HOW TO EXCHANGE SHARES............................................................... 23
HOW TO REDEEM SHARES................................................................. 24
OTHER IMPORTANT INFORMATION............................................................ 25
</TABLE>

AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 26

KEY FEATURES OF THE FUNDS

CURRENT INCOME AND SAFETY. The Funds are designed for investors who seek current
income consistent with liquidity and stability of capital. The Funds invest in
high quality, short-term debt securities. The Schwab Tax-Exempt Money Fund also
seeks to produce income for its shareholders which is exempt from federal income
taxes. Each Fund attempts to maintain a stable net asset value of $1.00 per
share. (See "Investment Objectives and Policies.")

AUTOMATIC INVESTMENT/REDEMPTION FEATURE. For the Sweep Shares of the Schwab
Tax-Exempt Money Fund and for the other Funds, if you elect, free credit
balances in your Schwab brokerage account (including your Schwab One(R) account)
will be automatically invested or "swept" into the Fund you select, subject to
the terms and conditions of your brokerage account agreement. Shares will also
be sold as necessary to settle securities transactions, collateralize margin
obligations or cover debit balances. This feature keeps your money working and
saves you the time and trouble of withdrawing and redepositing funds. (See "How
to Purchase Shares" and "How to Redeem Shares.")

LIQUIDITY. You can conveniently place orders to redeem your investment in any of
the Funds at any time. (See "How to Redeem Shares.")

LOW COST INVESTING. The Funds impose no sales or transaction fees on purchases
or redemptions of shares of the Funds. In addition, the total fund operating
expenses of the Schwab Money Market Fund, Schwab Government Money Fund, Schwab
U.S. Treasury Money Fund and the Sweep Shares of the Schwab Tax-Exempt Money
Fund will not exceed 0.75%, 0.75%, 0.65% and 0.66%, respectively, through at
least August 31, 1995, as guaranteed by Charles Schwab Investment Management,
Inc. (See "Matching the Fund to Your Investment Needs,"and "Management of the
Funds.")

SPECIAL RISK CONSIDERATIONS. An investment in the Schwab Tax-Exempt Money Fund
is subject to certain risks arising out of the Fund's investment in municipal
securities, municipal leases, participation interests and certain other
securities. (See "Municipal Securities and Investment Techniques.")

CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity on one report.

NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders.

2
<PAGE> 27

SUMMARY OF EXPENSES

SHAREHOLDER TRANSACTION EXPENSES: None
<TABLE>
<CAPTION>
SCHWAB SCHWAB
SCHWAB SCHWAB U.S. TAX-EXEMPT
MONEY GOVERNMENT TREASURY MONEY
MARKET MONEY MONEY FUND-
FUND FUND FUND SWEEP SHARES
------- ----------- --------- ------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees (after fee reductions)(1)... 0.29% 0.29% 0.19% 0.20%
12b-1 Fees.................................. None None None None
Other Expenses (after expense
reimbursement)............................ 0.46% 0.46% 0.46% 0.46%(2)
TOTAL FUND OPERATING EXPENSES(2,3,4)............. 0.75% 0.75% 0.65% 0.66%
</TABLE>

(1) These amounts reflect reductions by the Investment Manager, which are
guaranteed through at least August 31, 1995. If there were no such reductions,
the maximum management fee for the Schwab Money Market Fund, Schwab Government
Money Fund, Schwab U.S. Treasury Money Fund and Schwab Tax-Exempt Money Fund
would have been 0.42%, 0.44%, 0.46% and 0.43%, respectively, for the fiscal year
ended December 31, 1994. (See Management of the Funds--Fees and Expenses).

(2) See "Management of the Funds--Fees and Expenses" for information
regarding the differing expenses for the multiple classes of shares of the
Schwab Tax-Exempt Money Fund.

(3) Schwab currently imposes no fees for opening a standard brokerage account,
including a Schwab One(R) account with a minimum of $5,000 account equity.
Schwab One accounts of less than $5,000 account equity are subject to a fee of
$5 per month if there have been fewer than two commissionable trades within the
last twelve months. Schwab Individual Retirement Accounts with account equity of
$10,000 or more by September 15, 1995 are currently free from Schwab's annual
account fee of $29. Schwab Keogh plans are currently charged an annual fee of
$45. The Schwab Tax-Exempt Money Fund would not be an appropriate investment for
retirement plans such as IRAs and Keoghs. See "How to Purchase Shares" for
information regarding the differing minimum balance and minimum investment
requirements of the multiple classes of shares of the Schwab Tax-Exempt Money
Fund.

(4) These amounts reflect the Investment Manager's guarantee that, through at
least August 31, 1995, the total fund operating expenses of the Schwab Money
Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury Money Fund and
the Schwab Tax-Exempt Money Fund-Sweep Shares will not exceed 0.75%, 0.75%,
0.65% and 0.66%, respectively. Without similar guarantees, which were in effect
during the prior fiscal year as to the Schwab Money Market Fund, Schwab
Government Money Fund, Schwab Tax-Exempt Money Fund-Sweep Shares and the Schwab
U.S. Treasury Money Fund, total fund operating expenses would have been 0.90%,
0.92%, 0.91%, and 1.00%, respectively.

3
<PAGE> 28

EXAMPLE. You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Schwab Money Market Fund.................................... $8 $24 $42 $ 93
Schwab Government Money Fund................................ $8 $24 $42 $ 93
Schwab U.S. Treasury Money Fund............................. $7 $21 $36 $ 81
Schwab Tax-Exempt Money Fund-Sweep Shares................... $7 $21 $37 $ 82
</TABLE>

The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in any of the Funds will bear
directly or indirectly. This example reflects the Investment Manager's guarantee
that, through at least August 31, 1995, the total fund operating expenses of the
Schwab Money Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury
Money Fund and the Sweep Shares of the Schwab Tax-Exempt Money Fund will not
exceed 0.75%, 0.75%, 0.65% and 0.66%, respectively. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of return
pursuant to requirements of the Securities and Exchange Commission. THIS
HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR
FUTURE PERFORMANCE.

<PAGE> 29

FINANCIAL HIGHLIGHTS

The following information with respect to per share data and ratios for each
Fund has been audited by Price Waterhouse LLP, independent accountants, whose
unqualified report covering each of the periods presented is incorporated by
reference herein. This information should be read in conjunction with the
financial statements and accompanying notes which are also incorporated by
reference to the Statement of Additional Information.
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------ ------------------------
NET DIVIDENDS
REALIZED & TOTAL FROM NET
NET ASSET NET UNREALIZED FROM DIVIDENDS REALIZED ASSET
PERIOD VALUE INVEST- GAINS INVEST- FROM NET GAIN ON VALUE
ENDED BEGINNING MENT (LOSSES) ON MENT INVESTMENT INVEST- TOTAL END OF
DEC. 31 OF YEAR INCOME INVESTMENT OPERATION INCOME MENT DISTRIBUTIONS YEAR
------- --------- ------ ----------- --------- ---------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SCHWAB MONEY MARKET FUND
1994 $1.00 $0.04 -- $0.04 $(0.04) -- $ (0.04) $ 1.00
1993 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1991 1.00 0.06 -- 0.06 (0.06) -- (0.06) 1.00
1990(1) 1.00 0.07 -- 0.07 (0.07) -- (0.07) 1.00
SCHWAB GOVERNMENT MONEY FUND
1994 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
1993 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1991 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00
1990(1) 1.00 0.07 -- 0.07 (0.07) -- (0.07) 1.00
SCHWAB U.S. TREASURY MONEY FUND
1994 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
1993 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1991(2) 1.00 0.01 -- 0.01 (0.01) -- (0.01) 1.00
SCHWAB TAX-EXEMPT MONEY FUND-SWEEP SHARES
1994 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1993 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1991 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
1990(1) 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00

RATIOS/SUPPLEMENTAL DATA RATIO OF
------------------------------------ NET
RATIO OF INVESTMENT
EXPENSES INCOME
PERIOD TOTAL NET ASSETS TO AVERAGE TO AVERAGE
ENDED RETURN END OF YEAR NET ASSETS NET ASSETS
DEC. 31 (%) (000'S) (%) (%)
- ------- ------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
SCHWAB MONEY MARKET FUND
1994 3.68 $11,227,305 0.74 3.68
1993 2.67 8,164,599 0.73 2.64
1992 3.48 6,134,167 0.70 3.40
1991 5.70 4,866,584 0.78 5.52
1990 7.23 4,058,408 0.82* 7.51*
SCHWAB GOVERNMENT MONEY FUND
1994 3.62 1,897,328 0.74 3.56
1993 2.66 1,744,603 0.73 2.63
1992 3.42 1,592,793 0.72 3.36
1991 5.53 1,458,705 0.70 5.38
1990 7.23 1,424,377 0.70* 7.51*
SCHWAB U.S. TREASURY MONEY FUND
1994 3.52 803,871 0.65 3.60
1993 2.54 378,143 0.65 2.50
1992 3.26 178,895 0.59 2.91
1991 0.68 16,906 0.24* 4.11*
SCHWAB TAX-EXEMPT MONEY FUND-SWEEP SHARES(3)
1994 2.32 3,015,951 0.65 2.31
1993 1.93 2,423,317 0.63 1.92
1992 2.49 1,744,903 0.63 2.45
1991 4.01 1,359,121 0.63 3.91
1990 5.08 1,185,974 0.63* 5.33*
</TABLE>

(1) For the period January 26, 1990 (commencement of operations) to December 31,
1990.
(2) For the period November 6, 1991 (commencement of operations) to December 31,
1991.
(3) Prior to June 6, 1995, The Schwab Tax-Exempt Money Fund did not offer
multi classes of shares of beneficial interest. The information contained in
this table regarding the Schwab Tax-Exempt Money Fund-Sweep Shares relates to
shares which were redesignated as Sweep Shares as of June 6, 1995.

The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit each Fund's ratio of operating expenses to
average net assets. Had these fees and

*Annualized

<PAGE> 30

expenses not been reduced and absorbed, the ratio of expenses to average net
assets for the Schwab Money Market Fund for the periods ended December 31, 1994,
1993, 1992, 1991 and 1990 would have been 0.90%, 0.91%, 0.92%, 0.94% and 0.95%*,
respectively, and the ratio of net investment income to average net assets would
have been 3.52%, 2.46%, 3.18%, 5.36% and 7.38%*, respectively. With respect to
the Schwab Government Money Fund, the ratio of expenses to average net assets
for the periods ended December 31, 1994, 1993, 1992, 1991 and 1990 would have
been 0.92%, 0.93%, 0.94%, 0.95% and 0.96%*, respectively, and the ratio of net
investment income to average net assets would have been 3.38%, 2.43%, 3.14%,
5.13% and 7.25%*, respectively. With respect to the Schwab U.S. Treasury Money
Fund, the ratio of expenses to average net assets for the periods ended December
31, 1994, 1993, 1992 and 1991 would have been 1.00%, 1.05%, 1.15% and 4.11%*,
respectively, and the ratio of net investment income to average net assets would
have been 3.25%, 2.10%, 2.35% and 0.24%*, respectively. With respect to the
Schwab Tax-Exempt Money Fund--Sweep Shares, the ratio of expenses to average net
assets for the periods ended December 31, 1994, 1993, 1992, 1991 and 1990 would
have been 0.91%, 0.93%, 0.94%, 0.95% and 0.95%*, respectively, and the ratio of
net investment income to average net assets would have been 2.05%, 1.62%, 2.14%,
3.59% and 5.01%*, respectively.

MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS

The Funds may be appropriate for a variety of investment programs which can be
long-term or short-term in nature. While a Fund is not a substitute for building
an investment portfolio tailored to an individual's investment needs and risk
tolerance, it can be used as a high quality, conveniently liquid money market
investment for your brokerage account cash when it is not fully invested in
other securities. The Schwab Tax-Exempt Money Fund would not be an appropriate
investment for retirement plans such as IRAs and Keogh plans.
- --------------------------------------------------------------------------------
THE FUNDS MAY BE ESPECIALLY SUITABLE FOR SHORT-TERM INVESTORS.
- --------------------------------------------------------------------------------

Because the Funds are designed to provide liquidity and stability of capital, as
well as automatic investment of free credit balances, they may be especially
suitable for investors with short-term investment objectives, including those
who are awaiting an opportune time to invest in the equity and/or bond markets.
- --------------------------------------------------------------------------------
THE FUNDS MAY ALSO BE APPROPRIATE FOR LONG-TERM INVESTORS.
- --------------------------------------------------------------------------------

The Funds may also be appropriate for long-term investors seeking low-risk
investment alternatives which are designed to provide current (and in the case
of the Schwab Tax-Exempt Money Fund, federally tax-free) income.

In addition to the Sweep Shares of the Schwab Tax-Exempt Money Fund, Schwab also
offers Value Advantage Shares of the Fund, pursuant to a multiple class plan
(the "Plan") adopted by the Board of Trustees of the Schwab Fund Family. Under
the Plan, Value Advantage Shares of the Schwab Tax-Exempt Money Fund, which are
not available through automatic ("sweep") investment programs,

* Annualized

<PAGE> 31

are subject to lower transfer agency expenses than the Sweep Shares of the Fund.
In addition, the minimum investment and minimum account balance requirements of
the Value Advantage Shares of the Schwab Tax-Exempt Money Fund are higher than
those applicable to the Sweep Shares. See "Management of the Funds -- Fees and
Expenses" and "How to Purchase Shares."

For information regarding Value Advantage Shares, call your local Schwab office
or 800-2 NO-LOAD. You may also obtain information about Value Advantage Shares
from your Schwab broker.

INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------------------
THE SCHWAB MONEY MARKET FUND SEEKS MAXIMUM CURRENT
INCOME CONSISTENT WITH STABILITY OF CAPITAL.
- -------------------------------------------------------------------------------

THE SCHWAB MONEY MARKET FUND. The Schwab Money Market Fund seeks maximum current
income consistent with stability of capital. The Fund pursues its objective by
investing exclusively in the following types of U.S. dollar-denominated money
market instruments which mature in 12 months or less and which the Investment
Manager has determined to present minimal credit risk:

1. Bank certificates of deposit, time deposits or bankers' acceptances of
domestic banks (including their foreign branches) and Canadian chartered
banks having capital, surplus and undivided profits in excess of $100
million.

2. Bank certificates of deposit, time deposits or bankers' acceptances of United
States branches of foreign banks and foreign branches of foreign banks having
capital, surplus and undivided profits in excess of $100 million.

3. Commercial paper rated in one of the two highest rating categories by Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff &
Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), or any other
nationally recognized statistical rating organization ("NRSRO") or commercial
paper or notes of issuers with an unsecured debt issue outstanding currently
rated in one of the two highest rating categories by any NRSRO where the
obligation is on the same or a higher level of priority and collateralized to
the same extent as the rated issue. Each Fund may also invest in other
corporate obligations such as publicly traded bonds, debentures and notes
rated in one of the two highest rating categories by any NRSRO and other
similar securities which, if unrated by any NRSRO, are determined by the
Investment Manager, using guidelines approved by the Board of Trustees, to be
at least equal in quality to one or more of the above referenced securities.
(For a description of the ratings, see "Appendix--Ratings of Investment
Securities" in the Statement of Additional Information.)

4. Obligations of, or guaranteed by, the United States or Canadian governments,
their agencies or instrumentalities.

5. Repurchase agreements involving obligations that are suitable for investment
under the categories set forth above.

7
<PAGE> 32

To the extent the Schwab Money Market Fund purchases Eurodollar certificates of
deposit, consideration will be given to their marketability and possible
restrictions on international currency transactions and to regulations imposed
by the domicile country of the foreign issuer. Eurodollar certificates of
deposit may not be subject to the same regulatory requirements as certificates
of deposit issued by U.S. banks and associated income may be subject to the
imposition of foreign taxes.

Investments in securities of foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments, including favorable or unfavorable changes in currency
exchanges rates, exchange control regulations (including currency blockage),
expropriation of assets or nationalization, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign companies and foreign securities markets are less liquid and at
times more volatile than securities of comparable U.S. companies and U.S.
securities markets. Foreign brokerage commissions and other fees are also
generally higher than in the United States. There are also special tax
considerations which apply to securities of foreign issuers and securities
principally traded overseas.

The Schwab Money Market Fund may invest in commercial paper issued in reliance
on the so-called "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, and resold to qualified
institutional buyers under Securities Act Rule 144A ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the federal securities
laws, and generally is sold to institutional investors such as the Schwab Money
Market Fund who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction and may be accomplished in accordance with Rule 144A. Section
4(2) paper normally is resold to other institutional investors like the Fund
through or with the assistance of the issuer or investment dealers who make a
market in the Section 4(2) paper, thus providing liquidity. The Schwab Money
Market Fund will invest no more than 10% of its assets in Section 4(2) paper and
illiquid securities unless the Investment Manager determines, by continuous
reference to the appropriate trading markets and pursuant to guidelines approved
by the Board of Trustees, that any Section 4(2) paper held by the Fund in excess
of this level is liquid.

Because it is not possible to predict with assurance exactly how this market for
Section 4(2) paper sold and offered under Rule 144A will continue to develop,
the Investment Manager, pursuant to the guidelines approved by the Board of
Trustees, will carefully monitor the Fund's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity, and
availability of information. Investments in Section 4(2) paper could have the
effect of reducing the Fund's liquidity to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.

The Fund may invest in asset-backed commercial paper. Repayment of this type of
commercial paper is intended to be obtained from an identified pool of assets,
including automobile receivables, credit-card receivables and other types of
receivables. Asset-backed commercial paper is issued by a special purpose
vehicle (usually a corporation) that has been established for the purpose of
issuing the

<PAGE> 33

commercial paper and purchasing the underlying pool of assets. The issuer of the
commercial paper bears the direct risk of prepayment on the receivables
constituting the underlying pool of assets. Credit support for asset-backed
securities may be based on the underlying assets or provided by a third party.
Credit enhancement techniques include letters of credit, insurance bonds,
limited guarantees (which are generally provided by the issuer), and over
collateralization. Asset-backed securities purchased by the Fund will be subject
to the same quality requirements as other securities purchased by the Fund.
- ----------------------------------------------------------------------------
THE SCHWAB GOVERNMENT MONEY FUND SEEKS MAXIMUM
CURRENT INCOME CONSISTENT WITH STABILITY OF CAPITAL.
- ----------------------------------------------------------------------------

THE SCHWAB GOVERNMENT MONEY FUND. The Schwab Government Money Fund seeks maximum
current income consistent with stability of capital. The Fund pursues its
objective by investing exclusively in U.S. Treasury bills, notes, bonds and
other obligations issued or guaranteed by the United States Government, its
agencies, or instrumentalities, and repurchase agreements covering such
obligations. All securities purchased mature within 12 months or less. Some
securities issued by U.S. Government agencies or instrumentalities are supported
only by the credit of the agency or instrumentality, for example, those issued
by the Federal Home Loan Bank, while others, such as those issued by the Federal
National Mortgage Association, Farm Credit System and Student Loan Marketing
Association, have an additional line of credit with the U.S. Treasury.
Short-term U.S. Government obligations generally are considered to be among the
safest short-term investments. The Government guarantee of the securities owned
by the Schwab Government Money Fund, however, does not guarantee the net asset
value of the Fund's shares, which the Fund seeks to maintain at $1.00 per share.
(See "Share Price Calculation.") Also, with respect to securities supported only
by the credit of the issuing agency or instrumentality or by an additional line
of credit with the U.S. Treasury, there is no guarantee that the U.S. Government
will provide support to such agencies or instrumentalities. Accordingly, such
securities may involve risk of loss of principal and interest.
- --------------------------------------------------------------------------------
THE SCHWAB U.S. TREASURY MONEY FUND SEEKS HIGH CURRENT
INCOME CONSISTENT WITH LIQUIDITY AND STABILITY OF CAPITAL.
- --------------------------------------------------------------------------------

THE SCHWAB U.S. TREASURY MONEY FUND. The investment objective of the Schwab U.S.
Treasury Money Fund is high current income consistent with liquidity and
stability of capital. The Fund pursues its objective by investing solely in
United States Treasury notes, bills and other direct obligations of the United
States Treasury that are backed by the "full faith and credit" of the United
States Government. The Fund will only purchase securities that mature in 397
days or less, or which have a variable rate of interest readjusted no less
frequently than every 397 days. Fund shares themselves are not subject to any
U.S. Government guarantee. The Fund does not enter into repurchase agreements,
nor does it purchase obligations of agencies or instrumentalities of the U.S.
Government. The Fund may hold its investments to maturity and receive the entire
face amount of the security, or the Fund may sell its investments at a gain or
loss before maturity to meet redemptions or for other investment purposes.

9
<PAGE> 34

- --------------------------------------------------------------------------------
THE SCHWAB TAX-EXEMPT MONEY FUND SEEKS TO PROVIDE ITS SHAREHOLDERS
WITH MAXIMUM CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAXES.
- --------------------------------------------------------------------------------

THE SCHWAB TAX-EXEMPT MONEY FUND. The investment objective of the Schwab
Tax-Exempt Money Fund is maximum current income that is exempt from federal
income taxes consistent with stability of capital. The Fund pursues its
objective primarily by investing in short-term, high quality municipal
obligations the income from which is exempt from federal income taxes.

Under normal market conditions, the Fund attempts to invest 100%, and will
invest at least 80%, of its total assets in debt obligations issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities that generate interest exempt from federal income tax and not
treated as a tax preference item for purposes of the federal alternative minimum
tax ("Municipal Securities").

Dividends representing net interest income received by the Schwab Tax-Exempt
Money Fund on Municipal Securities will be exempt from federal income tax when
distributed to the Fund's shareholders. Such dividend income may be subject to
state and local taxes. (See "Distributions And Taxes--The Schwab Tax-Exempt
Money Fund.")

The Schwab Tax-Exempt Money Fund will invest only in Municipal Securities which
at the time of purchase: (a) are rated within the two highest rating categories
for municipal commercial paper or short-term municipal securities assigned by
any NRSRO; (b) are guaranteed or insured by the U.S. Government as to the
payment of principal and interest; (c) are fully collateralized by an escrow of
U.S. Government securities acceptable to the Fund's Investment Manager; or (d)
are unrated by any NRSRO, if they are determined by the Investment Manager,
using guidelines approved by the Board of Trustees, to be at least equal in
quality to one or more of the above referenced securities. (For a description of
the ratings, see "Appendix--Ratings of Investment Securities" in the Statement
of Additional Information.)

After its purchase by the Fund, a Municipal Security may cease to be rated or
its rating may be reduced below that required for purchase by the Fund. Neither
event would under all circumstances require the elimination of such an
obligation from the Fund's investment portfolio. However, the obligation
generally would be retained only if such retention was determined by the Board
of Trustees to be in the best interests of the Fund.

From time to time, as a defensive measure, the Schwab Tax-Exempt Money Fund may
invest any or all of its assets in taxable "temporary investments" which
include: obligations of the U.S. Government, its agencies, or instrumentalities;
debt securities rated within the two highest rating categories by any NRSRO;
commercial paper rated in the two highest rating categories by such rating
services; certificates of deposit of domestic banks having capital, surplus, and
undivided profits in excess of $100 million; and any of the foregoing temporary
investments subject to repurchase agreements. While purchase by the Fund of
certain temporary investments could cause it to generate dividends taxable to
shareholders as ordinary income (see "Distributions and Taxes"), it is the
Fund's primary intention to produce dividends which are not subject to federal
income taxes.

10
<PAGE> 35

The investment objective of each Fund and the investment policies set forth
above are fundamental. They, along with certain investment restrictions adopted
by the Funds (see "Investment Restrictions" in the Statement of Additional
Information), cannot be changed without approval by holders of a majority of a
Fund's outstanding voting shares, as defined in the Investment Company Act of
1940 (the "1940 Act").

MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES

The two principal classifications of Municipal Securities which may be held by
the Schwab Tax-Exempt Money Fund are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Industrial development bonds held by the Fund are in
most cases revenue bonds and are not payable from the unrestricted revenues of
the issuer. Among other types of instruments, the Fund may purchase tax-exempt
commercial paper and short-term municipal notes such as tax anticipation notes,
bond anticipation notes, revenue anticipation notes, construction loan notes and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of bond
placements, or other revenues. A more detailed discussion of Municipal
Securities and the ratings outlined above is contained in the Statement of
Additional Information.

In seeking to achieve its investment objective, the Schwab Tax-Exempt Money Fund
may invest all or any part of its assets in Municipal Securities that are
industrial development bonds. Moreover, although the Fund does not currently
intend to do so on a regular basis, it may invest more than 25% of its assets in
Municipal Securities that are repayable out of revenue streams generated from
economically related projects or facilities, if such investment is deemed
necessary or appropriate by the Fund's Investment Manager. To the extent that
the Fund's assets are concentrated in Municipal Securities payable from revenues
on economically related projects and facilities, the Fund will be subject to the
risks presented by such projects to a greater extent than it would be if the
Fund's assets were not so concentrated.

The Fund may invest in municipal leases, which are obligations issued by state
and local governments or authorities to finance the acquisition of equipment and
facilities. These obligations may take the form of a lease, an installment
purchase contract, a conditional sales contract, or a participation interest in
any of the above. Investments in municipal leases may be considered to be
illiquid. The Fund will limit its investment in municipal leases to no more than
25% of its total assets (no more than 10% of which may be illiquid municipal
leases). Municipal leases are subject to "nonappropriation risk," which is the
risk that the municipality may terminate the lease in the event that the
municipality's appropriating body does not allocate the funds necessary to make
lease payments. In such circumstances, the lessor is typically entitled to
repossess the property. The private sector value of the property is, however,
generally less than the value of the property to the municipality. The
Investment Manager, pursuant to guidelines established by the Board of Trustees,
is responsible for

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<PAGE> 36

determining the credit quality of unrated municipal leases, on an ongoing basis,
including an assessment of the likelihood of whether the lease will be
terminated.

These securities may include tender option bond trust receipts, in which a
fixed-rate municipal bond (or group of bonds) is placed into a trust from which
two classes of trust receipts are issued, which represent proportionate
interests in the underlying bond(s). Interest payments are made on the bond(s)
based upon a predetermined rate. Under certain circumstances, the holder of a
trust receipt may also participate in any gain or loss on the sale of such
bond(s). Tender option bond trust receipts are considered to be Municipal
Securities for purposes of the Fund's policy to invest at least 80% of its total
assets in Municipal Securities. Tender option bond trust receipts generally are
structured as private placements and, accordingly, may be deemed to be
restricted securities for purposes of the Fund's investment limitations.

The Fund will limit its investments in tender option bond trust receipts and
other synthetic floating rate municipal securities to no more than 25% of its
total assets.

In addition, the Schwab Tax-Exempt Money Fund may acquire "stand-by commitments"
with respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase at the Fund's option specified Municipal
Securities at a price equal to their amortized cost value plus accrued interest.
Securities may cost more with Standby Commitments than without them. The Fund's
policy is to enter into Standby Commitments only with issuers, banks or dealers
that are determined by the Investment Manager to present minimal credit risks.
If an issuer, bank or dealer should default on its obligations to repurchase an
underlying security, the Fund might be unable to recover all or a portion of any
loss sustained from having to sell the securities elsewhere. The Fund will
acquire stand-by commitments solely to facilitate portfolio liquidity and does
not intend to exercise its rights thereunder solely for trading purposes.

Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from federal income tax are rendered by bond counsel to the
respective issuers at the time of issuance. The Schwab Tax-Exempt Money Fund and
the Investment Manager will not review the proceedings relating to the issuance
of Municipal Securities or the bases for such opinions.

OTHER INVESTMENT TECHNIQUES--"WHEN-ISSUED" SECURITIES, REPURCHASE AGREEMENTS AND
VARIABLE RATE SECURITIES. Each Fund may purchase securities on a "when-issued"
or "delayed delivery" basis. When-issued or delayed delivery securities are
securities purchased for future delivery at a stated price and yield. A Fund
will generally not pay for such securities or start earning interest on them
until they are received. Securities purchased on a when-issued or delayed
delivery basis are recorded as an

12
<PAGE> 37

asset and are subject to changes in value based upon changes in the general
level of interest rates. Each Fund will not invest more than 25% of its assets
in when-issued or delayed delivery securities, does not intend to purchase such
securities for speculative purposes and will make commitments to purchase
securities on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities. However, each Fund reserves the right to sell
acquired when-issued or delayed delivery securities before their settlement
dates if deemed advisable.

Each Fund (except the Schwab U.S. Treasury Money Fund) may invest in repurchase
agreements, which are instruments under which a Fund acquires ownership of a
security from a broker-dealer or bank that agrees to repurchase the security at
a mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the Fund's holding period. Maturity
of the securities subject to repurchase may exceed one year. In the event of a
bankruptcy or other default of a repurchase agreement counterparty, a Fund might
have expenses in enforcing its rights, and could experience losses, including a
decline in the value of the underlying securities and loss of income. The Fund
will only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are deemed by the Investment
Manager to be creditworthy under guidelines adopted by the Board of Trustees. A
Fund will not purchase illiquid securities, including time deposits and
repurchase agreements maturing in more than seven days if, as a result thereof,
more than 10% of the Fund's net assets valued at the time of the transaction
would be invested in such securities.

Each Fund may invest in instruments having rates of interest that are adjusted
periodically or which "float" continuously according to formulae intended to
minimize fluctuation in values of the instruments ("Variable Rate Securities").
The interest rate of Variable Rate Securities ordinarily is determined by
reference to, or is a percentage of, an objective standard such as a bank's
prime rate, the 90-day U.S. Treasury Bill rate, or the rate of return on
commercial paper or bank certificates of deposit. Generally, the changes in the
interest rate on Variable Rate Securities reduce the fluctuation in the market
value of such securities. Accordingly, as interest rates decrease or increase,
the potential for capital appreciation or depreciation is less than for
fixed-rate obligations. Some Variable Rate Securities ("Variable Rate Demand
Securities") have a demand feature entitling the purchaser to resell the
securities at an amount approximately equal to amortized cost or the principal
amount thereof plus accrued interest. As is the case for other Variable Rate
Securities, the interest rate on Variable Rate Demand Securities varies
according to some objective standard intended to minimize fluctuation in the
values of the instruments. Each Fund determines the maturity of Variable Rate
Securities in accordance with Securities and Exchange Commission rules which
allow the Fund to consider certain of such instruments as having maturities
shorter than the maturity date on the face of the instrument. Under such rules,
the maturity date may be considered to be the longer of the period remaining
until the next readjustment of the interest rate or the period remaining until
the principal amount can be recovered through demand.

None of the Funds may 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. Any
borrowings under this provision will not be collateralized, except that the
Schwab Tax-Exempt Money Fund may pledge up to 10% of its net assets, and the
Schwab

13
<PAGE> 38

U.S. Treasury Money Fund may pledge up to 33% of its net assets, to secure
borrowings. No Fund will borrow for leverage purposes.

Participation interests in Municipal Securities and other derivative securities
eligible for purchase by the Funds involve special risks, including a risk that
the Internal Revenue Service may characterize some or all of the interest paid
on such securities to the Fund as taxable. There is also an increased risk, most
typically associated with "municipal lease" obligations, that a municipality
will not appropriate the funds necessary to make the scheduled payments on, or
may seek to cancel or otherwise avoid its obligations under, the lease that
supports the security owned by the Fund.

MANAGEMENT OF THE FUNDS

Responsibility for overall management of the Funds rests with the trustees and
officers of the Schwab Fund Family. Professional investment management for each
Fund is provided by the Investment Manager, Charles Schwab Investment
Management, Inc., 101 Montgomery Street, San Francisco, CA 94104. The Investment
Manager provides a continuous investment program, including general investment
and economic advice regarding each Fund's investment strategies, manages each
Fund's investment portfolio and performs expense management, accounting and
recordkeeping, and other services necessary to the operation of each Fund and
the Schwab Fund Family. The Investment Manager, formed in 1989, is a
wholly-owned subsidiary of The Charles Schwab Corporation and is the investment
adviser and administrator of the SchwabFunds(R) mutual funds. As of June 3,
1995, the SchwabFunds had aggregate net assets in excess of $26 billion.

Charles Schwab & Co., Inc. ("Schwab" or the "Transfer Agent"), 101 Montgomery
Street, San Francisco, CA 94104, serves as shareholder services agent and
transfer agent for the Funds. Schwab provides information and services to
shareholders, which include reporting share ownership, sales and dividend
activity (and associated tax consequences), responding to daily inquiries,
effecting the transfer of Fund shares and facilitating effective cash management
of shareholders' Schwab account balances. It furnishes such office space and
equipment, telephone facilities, personnel and informational literature
distribution as is necessary or appropriate in providing shareholder and
transfer agency information and services. Schwab is also the Funds' distributor,
but receives no compensation for its services as such.

Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 2.5 million active customer accounts and has over 200 offices. Schwab
also offers convenient access to financial information services and provides
products and services that help investors make investment decisions. Schwab is a
wholly-owned subsidiary of The Charles Schwab Corporation. Charles R. Schwab is
the founder, Chairman and Chief Executive Officer and a director of The Charles
Schwab Corporation and, as of March 10, 1995 the beneficial owner of
approximately 23.3% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.

FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Schwab Fund Family, the Investment Manager receives from the
Schwab Money Market Fund a

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<PAGE> 39

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; the
Investment Manager receives from the Schwab Government Money Fund and the Schwab
Tax-Exempt Money Fund a graduated annual fee, payable monthly, of 0.46% of each
Fund's average daily net assets not in excess of $1 billion, 0.41% of such net
assets over $1 billion but not in excess of $2 billion and 0.40% of such net
assets over $2 billion. Pursuant to a separate but substantially similar
Investment Advisory and Administration Agreement with the Schwab Fund Family,
the Investment Manager receives from the Schwab U.S. Treasury Money Fund a
graduated annual fee, payable monthly, of 0.46% of the Fund's average daily net
assets not in excess of $1 billion, 0.41% of such net assets over $1 billion but
not in excess of $2 billion, and 0.40% of such net assets over $2 billion.

The Investment Manager has guaranteed that, at least through August 31, 1995,
the investment management fee of the Schwab Money Market Fund, Schwab Government
Money Fund, Schwab U.S. Treasury Money Fund and Schwab Tax-Exempt Money Fund
will not exceed 0.29%, 0.29%, 0.19% and 0.20%, respectively, of each such Fund's
average daily net assets. In addition, the Investment Manager has guaranteed
that, through at least August 31, 1995, the total fund operating expenses of the
Schwab Money Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury
Money Fund and the Sweep Shares of the Schwab Tax-Exempt Money Fund will not
exceed 0.75%, 0.75%, 0.65% and 0.66%, respectively. The effect of these
guarantees is to maintain or lower the expenses and thus maintain or increase
such Fund's total return to shareholders. For the fiscal year ended December 31,
1994, the Schwab Money Market Fund, the Schwab Government Money Fund, the Schwab
U.S. Treasury Money Fund, and the Schwab Tax-Exempt Money Fund--Sweep Shares
paid investment management fees equal to 0.28%, 0.28%, 0.19%, and 0.19%,
respectively, of each such Fund's average daily net assets and paid total fund
operating expenses of 0.74%, 0.74%, 0.65% and 0.65%, respectively, of each such
Fund's average daily net assets.

For the Schwab Money Market Fund, Schwab Government Money Fund and Schwab U.S.
Treasury Money Fund for transfer agency services provided, the Transfer Agent
receives an annual fee, payable monthly, of 0.25% of the average daily net
assets of each such Fund. In addition, for shareholder services provided, Schwab
receives an annual fee, payable monthly, of 0.20% of the average daily net
assets of each such Fund. For the Sweep Shares of the Schwab Tax-Exempt Money
Fund, for transfer agency services provided, the Transfer Agent receives an
annual fee, payable monthly, of 0.25% of the average daily net assets of that
class. In addition, for shareholder services provided, Schwab receives an annual
fee, payable monthly of 0.20% of the average daily net assets of the class. For
the Value Advantage Shares of the Schwab Tax-Exempt Money Fund, the Transfer
Agent receives an annual fee of 0.05% of the average daily net assets of that
class' shares of beneficial interest. PNC Bank is the Funds' Custodian.

The Schwab Fund Family pays the expenses of its operations. These expenses are
generally allocated among the Schwab Fund Family's investment portfolios
("Series") on the basis of relative net assets at the time of allocation.
However, expenses directly attributable to a particular Series or class of a
Series are charged to that Series or class, respectively. The differing expenses
applicable to the Sweep Shares of the Schwab Tax-Exempt Money Fund and the Value
Advantage Shares will cause the performance of the two classes of shares of the
Schwab Tax-Exempt Money Fund to differ.

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<PAGE> 40

DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
EACH FUND DECLARES DAILY DIVIDENDS WHICH ARE PAID MONTHLY.
- --------------------------------------------------------------------------------

DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that the net asset value per
share of a Fund is determined ("Business Day"), the Fund's net investment income
is declared as of the close of trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time) as a dividend to shareholders already of record at the
previous net asset value calculation. Dividends are normally paid (and, where
applicable, reinvested) on the 15th of each month, if a Business Day, otherwise
on the next Business Day.

FEDERAL INCOME TAX INFORMATION. Each Fund has elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), qualified as such, and intends to continue to so qualify. In order
to so qualify, each Fund will distribute on a current basis substantially all of
its investment company taxable income, its net exempt-interest income (if any),
and its capital gain net income (if any) and will meet certain other
requirements. Such qualification relieves a Fund of liability for federal income
taxes to the extent the Fund's earnings are distributed. In addition, if each
Fund does not distribute 98% of its taxable investment income and capital gains,
it will be subject to a non-deductible 4% excise tax on such undistributed
amounts.

All distributions are taxable to shareholders as ordinary income, except that
long-term capital gains distributions (if any) are taxable as such, regardless
of how long the shareholder has held the shares. Reinvested distributions will
be taxable as if they had been received by shareholders in cash. It is not
expected that any portion of the dividends paid by the Funds will qualify for
the corporate dividends received deduction.

Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' regular Schwab brokerage account statements. The
Funds will notify shareholders at least annually as to the federal income tax
consequences of distributions made each year. The Funds do not expect to realize
any net long-term capital gains and, therefore, do not foresee paying any
capital gains dividends.

THE SCHWAB U.S. TREASURY MONEY FUND: Because this Fund will invest exclusively
in United States Treasury obligations and other securities backed by the full
faith and credit of the U.S. Government, its dividends are free from state and
local income taxes in the vast majority of states. Potential investors in this
Fund should consult their tax advisers with specific reference to their own tax
situations.

THE SCHWAB TAX-EXEMPT MONEY FUND: Dividends paid by the Fund that are derived
from exempt-interest income (known as "exempt-interest dividends") will be
treated by the Fund's shareholders as items of interest excludable from their
federal gross income. (Shareholders should consult their own tax adviser with
respect to whether exempt-interest dividends would be excludable from gross
income if the shareholder were treated as a "substantial user" of facilities
financed by an obligation held by Schwab Tax-Exempt Money Fund or a "related
person" to such user under the Code.) If a shareholder receives an
exempt-interest dividend with respect to any share held for six months or less,
any loss on the sale or exchange of such share will be disallowed to the extent
of the amount of

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<PAGE> 41

the exempt-interest dividend. The U.S. Treasury Department is authorized to
issue regulations reducing the period to not less than 31 days for certain
regulated investment companies. No such regulations have been issued as of the
date of this Prospectus. To the extent dividends paid to shareholders are
derived from taxable income (for example, from interest on certificates of
deposit) or from short-term or long-term capital gains, such dividends will be
subject to federal income tax, whether they are paid in the form of cash or
additional shares.

The Fund may at times purchase Municipal Securities or California Municipal
Securities at a discount from the price at which they were initially issued. For
federal income tax purposes, some or all of this market discount will be
included in the Fund's ordinary income and will be taxable to shareholders as
such when it is distributed to them.

If the Schwab Tax-Exempt Money Fund holds certain "private activity bonds"
("industrial development bonds" under prior law), dividends derived from
interest on such obligations will be classified as an item of tax preference
which could subject certain shareholders to alternative minimum tax liability.
Corporate shareholders must also take all exempt-interest dividends into account
in determining "adjusted current earnings" for purposes of calculating their
alternative minimum tax liability.

Private activity bonds and industrial development bonds generally are bonds
issued by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. Private activity bonds and industrial
development bonds also are generally limited obligation (or revenue) securities,
which means that they are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from some other
specific revenue source. (See "Municipal Securities" in the Statement of
Additional Information.)

Distributions by the Schwab Tax-Exempt Money Fund of net investment income may
be taxable to investors under state or local law as dividend income even though
all or a portion of such distributions may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
income taxes.

Shareholders receiving Social Security benefits or Railroad Retirement Act
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.

The foregoing is only a brief summary of some of the federal and state income
tax considerations affecting the Funds and their shareholders. Accordingly,
potential investors should consult their tax advisers with specific reference to
their own tax situations.

SHARE PRICE CALCULATION
- -------------------------------------------------------------------------------
THERE ARE NO SALES CHARGES OR TRANSACTION FEES TO PURCHASE
OR REDEEM SHARES OF THE FUNDS.
- -------------------------------------------------------------------------------

The price of a share of a Fund class described in this Prospectus on any given
day is its "net asset value" or "NAV." For the Schwab Money Market Fund, Schwab
Government Money Fund and Schwab U.S. Treasury Money Fund, this figure is
computed by dividing total Fund assets, less any liabilities of the Fund, by the
number of shares of the Fund outstanding. For the Sweep Shares of the

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<PAGE> 42

Schwab Tax-Exempt Money Fund, this figure is computed by dividing total Fund
assets allocable to that class, less any liabilities allocable to the class, by
the number of Sweep Shares of the Fund outstanding. The net asset value per
share of a Fund is determined on each day both the Federal Reserve Bank of New
York and the New York Stock Exchange (the "Exchange") are open for business,
first at 10:00 a.m. (Eastern time), then again as of the close of normal trading
on the Exchange (generally 4:00 p.m. Eastern time).

Each Fund values its portfolio securities 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 using the amortized cost method
with market values. Except as described below, market valuations are obtained by
using actual quotations provided by third-party pricing services, market makers,
estimates of market value, or values obtained from yield data relating to
comparable classes of money market instruments published by reputable sources at
the mean between the bid and asked prices for the instruments. If a deviation of
1/2 of 1% or more were to occur between the net asset value per share of a Fund
(or Sweep Shares for the Schwab Tax-Exempt Money Fund) calculated by reference
to market values and the $1.00 per share amortized cost value of a Fund (or
Sweep Shares for the Schwab Tax-Exempt Money Fund), or if there were any other
deviation which the Board of Trustees 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. While each Fund attempts to
maintain a net asset value at a constant $1.00 per share, Fund shares are not
insured against a reduction in net asset value.

The Schwab Tax-Exempt Money Fund and the Schwab Money Market Fund have entered
into transactions with Bank of America National Trust and Savings Association
("Bank of America") pursuant to which each such Fund is a beneficiary of an
irrevocable Letter of Credit (each a "Letter of Credit") issued by Bank of
America. The Letters of Credit provide a degree of credit support for certain
securities held by each such Fund, currently including certain obligations of
Orange County, California and issuers that participated in the investment pool
maintained by Orange County (each a "Covered Security"). Orange County and the
investment pool maintained by the County have filed for protection under Chapter
9 of the federal Bankruptcy Code. Pursuant to each Letter of Credit, Bank of
America will make certain payments to each of the above-referenced Funds (each a
"Payment") upon presentation of a certificate as required under each Letter of
Credit in the event that (i) the issuer of a Covered Security defaults on a
repayment of the principal amount of the Covered Security, or (ii) the proceeds
received in the disposition of a Covered Security are less than a specified
percentage of the Covered Security's par amount. Neither Fund is obligated to
reimburse Bank of America for any amount drawn under the Letters of Credit. The
Letters of Credit, however, do not ensure that each such Fund will receive
Payments equal to the aggregate amount of each Fund's Covered Securities.
Accordingly, although the Board of Trustees has determined that the Covered
Securities subject to the Letters of Credit currently present minimal credit
risks, each Fund could incur losses as a result of its holdings of Covered
Securities.

Each Letter of Credit will continue in effect with respect to each Fund until
the earlier of (i) the date on which Bank of America has made Payments to the
Fund equaling the total amount available under the Letter of Credit, or (ii)
August 1, 1995, after each Covered Security is scheduled to mature.

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<PAGE> 43

The Board of Trustees has approved the payment of fees by each Fund for the
availability of each Letter of Credit, as well as revised pricing procedures
that take into account the effect of the Letters of Credit on the value of the
Covered Securities (the "Pricing Procedures"). Pursuant to the Pricing
Procedures, the value of a Covered Security may be determined in good faith
after consideration of the credit support provided by each Letter of Credit in
order to cause the calculation of that Fund's market-based net asset value per
share to accurately reflect the actual value of all of its assets.

HOW THE FUNDS SHOW PERFORMANCE

From time to time the Schwab Money Market Fund, Schwab Government Money Fund and
Schwab U.S. Treasury Money Fund may advertise its yield and effective yield. In
the case of the Sweep Shares of the Schwab Tax-Exempt Money Fund only, the Fund
may advertise the yield, effective yield, tax-equivalent yield and
tax-equivalent effective yield of the Sweep Shares of the Fund. Performance
figures are based upon historical results and are not intended to indicate
future performance.

Yield refers to the income generated by a hypothetical investment in a Fund (or,
in the case of the Schwab Tax-Exempt Money Fund only, the Sweep Shares of the
Fund) over a specific 7-day period. This income is then annualized, which means
that the income generated during the 7-day period is assumed to be generated
each week over an annual period and is shown as a percentage of the hypothetical
investment.

Tax-equivalent yield is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) the Sweep Shares of the
Schwab Tax-Exempt Money Fund's yield for an investor in a stated federal income
tax bracket (normally assumed to be the applicable maximum tax rate).
Tax-equivalent yield is based upon, and will be higher than, the Sweep Shares of
the Schwab Tax-Exempt Money Fund's tax-exempt yield. (See "Yield" in the
Statement of Additional Information.)

The tax-equivalent effective yield is computed in the same manner as is the tax
equivalent yield, except that the effective yield is substituted for yield in
the calculation.

The performance of the Schwab Money Market Fund, Schwab Government Money Fund,
Schwab U.S. Treasury Money Fund and the Sweep Shares of the Schwab Tax-Exempt
Money Fund may be compared to that of other mutual funds tracked by mutual fund
rating services, various indices of investment performance, United States
government obligations, bank certificates of deposit, other investments for
which reliable performance data is available and the consumer price index.

Because the Sweep Shares of the Schwab Tax-Exempt Money Fund are subject to
different expenses than the Value Advantage Shares, the performance of the two
classes of shares will differ.

Additional performance information about the Schwab Money Market Fund, Schwab
Government Money Fund, Schwab U.S. Treasury Money Fund and the Sweep Shares of
the Schwab Tax-Exempt

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<PAGE> 44

Money Fund is available in the Funds' Annual Reports, which are sent to all
shareholders. To request a free copy, call your local Schwab office or
800-2NO-LOAD.

TAX-ADVANTAGED RETIREMENT PLANS
- --------------------------------------------------------------------------------
THE SCHWAB MONEY MARKET FUND, SCHWAB GOVERNMENT
MONEY FUND AND SCHWAB U.S. TREASURY MONEY FUND MAY
BE SUITABLE INVESTMENTS FOR TAX-ADVANTAGED RETIREMENT PLANS.
- --------------------------------------------------------------------------------

Schwab offers tax-advantaged retirement plans for which the Schwab Money Market
Fund, Schwab Government Money Fund and Schwab U.S. Treasury Money Fund may be
appropriate investments. It is not recommended that the Schwab Tax-Exempt Money
Fund be used as an investment vehicle for Individual Retirement Accounts or
qualified retirement plans. Schwab's retirement plans allow participants to
defer taxes while helping them build their retirement savings.

SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab provides the IRA free of Schwab's $29 annual fee to customers who
establish a $10,000 account balance by September 15, 1995.

SCHWAB KEOGH. A tax-advantaged plan for self-employed individuals and their
employees that permits the employer to make annual tax-deductible contributions
of up to $30,000.

SCHWAB CORPORATE RETIREMENT PLANS. A well designed retirement program can help a
company attract and retain valuable employees. Call your local Schwab office or
800-2 NO-LOAD for more information.

GENERAL INFORMATION

The Schwab Fund Family was organized as a business trust under the laws of
Massachusetts on October 20, 1989 and may issue an unlimited number of shares of
beneficial interest or classes of shares in one or more Series. Currently, the
Schwab Fund Family offers shares of nine Series which may be organized into one
or more classes of shares of beneficial interest. The Board of Trustees may
authorize the issuance of shares of additional Series or classes if it deems it
desirable to do so. Shares of each Series have equal, noncumulative voting
rights and equal rights as to dividends, assets, and liquidation of such Series,
except to the extent such voting rights or rights as to dividends, assets, and
liquidation vary among classes of a Series.

The Schwab Fund Family is not required to hold annual shareholders' meetings. It
will, however, hold special meetings as required or deemed desirable by the
Board of Trustees for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement. In addition, a Trustee
may be elected or removed by shareholders at a special meeting called upon
written request of shareholders owning at least 10% of the outstanding shares of
the Schwab Fund Family. Shareholders will vote by Series and not in the
aggregate (for example, when voting to approve the investment advisory
agreement), except when voting in the aggregate is permitted under the 1940 Act,
such as for the election of Trustees. In addition, holders of the Sweep Shares
of the

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<PAGE> 45

Schwab Tax-Exempt Money Fund will vote exclusively as a class on any matter
relating solely to the arrangement of the Sweep Shares as a class and on any
matter in which the interests of holders of the Sweep Shares differ from the
interests of the holders of the Value Advantage Shares of the Fund.

SHAREHOLDER GUIDE
- ----------------------------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE SHAREHOLDER
SERVICE AND INFORMATION.
- ----------------------------------------------------------------------------

SHAREHOLDER SERVICE. You may place Fund purchase and redemption orders as well
as request exchanges at any one of over 200 Schwab offices nationwide or by
calling 1-800-2 NO-LOAD, where trained representatives are available to answer
questions about the Funds and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. Each Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmation of such instructions and tape
recording telephone transactions.

HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUNDS ONLY THROUGH A
SCHWAB ACCOUNT.
- --------------------------------------------------------------------------

You may purchase shares of the Funds exclusively through an account maintained
with Schwab, and payment for shares must be made directly to Schwab. Schwab
brokerage accounts are free of maintenance fees, although there may be charges
for Schwab IRAs and Keogh plans. (See "Summary of Expenses.") The Securities
Investor Protection Corporation ("SIPC") will provide account protection, in an
amount up to $500,000, for securities, including Fund shares, which you hold in
a Schwab brokerage account. Of course, SIPC account protection does not protect
shareholders from principal fluctuations.

If you already have a Schwab brokerage account, you may purchase shares in a
Fund as described below and need not open a new account.

WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. You must have funds in your
Schwab brokerage account in order to purchase Fund shares. If funds (including
those transmitted by wire) are received

21
<PAGE> 46

by Schwab before 4:00 p.m. (Eastern time), they will be available for investment
on the day of receipt. If funds arrive after that time, they will be available
for investment the next Business Day.

Orders to purchase shares will be executed at the next determined net asset
value after receipt by Schwab's Mutual Fund Transfer Agency Department. (See
"Share Price Calculation.")
- -----------------------------------------------------------------------------
THE FUNDS MAY BE USED TO "SWEEP" FREE CREDIT BALANCES
IN YOUR SCHWAB BROKERAGE ACCOUNT.
- -----------------------------------------------------------------------------

METHODS OF PURCHASING SHARES. Automatic Investment: When opening a Schwab
brokerage account, an investor will be asked to select a SchwabFunds(R) class or
series with sweep privileges as a "primary fund." (If a selection is not made,
the Schwab Money Market Fund will automatically become the investor's primary
fund.) An initial purchase of shares of the primary fund selected will be made
automatically pursuant to the procedures described below when the free credit
balance in the investor's Schwab brokerage account (including deposits, proceeds
of sales of securities, and miscellaneous cash dividends and interest, but not
amounts held by Schwab as collateral for margin obligations to Schwab) exceeds
$1,000 on the last Business Day of the week. Thereafter, free credit balances in
the investor's Schwab brokerage account which, in total, equal or exceed $100 on
the last Business Day of any week will be automatically invested in the primary
fund on the first Business Day of the following week. If an investor's free
credit balance is less than $100, it will not be invested in the primary fund,
but will remain a credit to the investor's Schwab brokerage account. In certain
limited circumstances, free credit balances in certain accounts may be
automatically invested at different times. Upon request, a free credit balance
in a Schwab brokerage account totalling $20,000 or more may be invested in the
appropriate primary fund on the Business Day following receipt by the Transfer
Agent of investor instructions.

An investor with an existing Schwab brokerage account may add the automatic
investment feature to his or her account by completing the appropriate section
of the Schwab brokerage account application available at any Schwab office. A
shareholder may change primary funds by calling or writing his or her local
Schwab office or writing Schwab at the above address. Note that the automatic
investment feature is not available for Value Advantage Shares of any Fund.
- --------------------------------------------------------------------------------
SHARES OF THE FUNDS MAY ALSO BE PURCHASED DIRECTLY.
- --------------------------------------------------------------------------------

DIRECT PURCHASE: A Schwab brokerage account holder may buy shares of a Fund (if
it is not his or her primary fund) by placing an order directly with a Schwab
registered representative. The minimum initial investment for such "secondary
fund" purchase is $1,000, and subsequent investments must be at least $100. The
minimum initial investment for the Value Advantage Shares of the Schwab Tax-
Exempt Money Fund is $25,000 and the minimum account balance for the Value
Advantage Shares is $20,000.
- --------------------------------------------------------------------------------
TWO DISTRIBUTION OPTIONS ARE AVAILABLE.
- --------------------------------------------------------------------------------

DISTRIBUTION OPTIONS. The brokerage account standing instructions that you
selected in your Schwab Brokerage Account Application will determine which of
the two distribution options listed below will

22
<PAGE> 47

apply to you. Fund distributions will be automatically reinvested, unless the
Transfer Agent has received instructions that distributions be mailed to you as
they are paid. Please contact your local Schwab office if you already have a
Schwab brokerage account and wish to change your brokerage account standing
instructions.

1. AUTOMATIC REINVESTMENT: For the Schwab Money Market Fund, Schwab Government
Money Fund and Schwab U.S. Treasury Fund, distributions will be reinvested in
additional full Shares of the applicable Fund at the net asset value next
determined after their payable date. For the Schwab Tax-Exempt Money
Fund--Sweep Shares, all distributions will be reinvested in additional full
Sweep Shares of the Fund at the net asset value next determined after their
payable date.

2. RECEIVE DIVIDENDS IN CASH: All distributions will be credited to your Schwab
account as of the payable date. If your account is coded to have dividends
mailed immediately, checks will normally be mailed the business day after
distributions are credited.

For information on how to wire funds from your Schwab brokerage account to your
bank, see "Other Important Information--Wire Transfers to Your Bank."

OTHER PURCHASE INFORMATION. The minimum amounts required for automatic
investment/direct purchase may be reduced or waived on certain occasions. (See
"Purchase and Redemption of Shares" in the Statement of Additional Information.)
Free credit balances in accounts of certain categories of investors, such as
holders of Schwab custodial accounts, may be invested automatically irrespective
of amount. Each Fund reserves the right, in its sole discretion and without
prior notice to shareholders, to withdraw or suspend all or any part of the
offering made by this Prospectus, to reject purchase orders or to change the
minimum investment requirements. All orders to purchase shares of a Fund are
subject to acceptance by the Fund and are not binding until confirmed or
accepted. Schwab will charge a $15 service fee against an investor's Schwab
brokerage account should his or her check be returned because of insufficient or
uncollected funds or a stop payment order.

HOW TO EXCHANGE SHARES
- --------------------------------------------------------------------------------
SHARES OF THE FUNDS MAY BE EXCHANGED FOR SHARES OF OTHER
FUNDS SPONSORED BY SCHWAB WITHOUT CHARGE.
- --------------------------------------------------------------------------------

The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state. Thus, you can conveniently modify your investments if your goals or
market conditions change. An exchange will involve the redemption of shares at
the net asset value next determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received your request,
if it was received by 4:00 p.m. (Eastern time) and on the next Business Day if
the request was received after that time) and the purchase of shares in another
fund at the net asset value of that fund next determined after sale of the
shares involved in the exchange (on the same day as the Transfer Agent received
your request, if it was received by 4:00 p.m. (Eastern time) and on the next
Business Day if the request was received after that time). An exchange of shares
will be treated as a sale of the shares for federal income tax purposes. Note
that you must meet the minimum investment requirements applicable to the shares

23
<PAGE> 48

you wish to receive in an exchange. Each Fund reserves the right on 60 days'
written notice to modify, limit or terminate the exchange privilege.

METHODS OF EXCHANGING SHARES.

BY PHONE:

To exchange between funds by telephone, please call your local Schwab office
during regular business hours or 800-2 NO-LOAD. Investors should be aware that
telephone exchanges may be difficult to implement during periods of drastic
economic or market changes.

To properly process your telephone exchange request, we will need the
following information:

- your Schwab brokerage account number;
- the name of the fund into which shares are to be exchanged; and
- the number of shares of the Fund to be exchanged.

BY MAIL:

You may also request an exchange by writing your local Schwab office or Schwab
at the address listed on the Prospectus cover page.

To properly process your mailed exchange request, we will need a letter from
you which:

- references your Schwab brokerage account number;
- specifies the Fund from which you would like to exchange shares;
- indicates the fund into which shares are to be exchanged;
- describes the number of shares to be exchanged; and
- is signed by at least one of the registered Schwab account holders, in
the exact form specified in the account.

IN PERSON AT A SCHWAB OFFICE:

You can also place your exchange request in person at your local Schwab
office.

HOW TO REDEEM SHARES

THE PRICE AT WHICH SHARES WILL BE REDEEMED. Shares will be redeemed at the net
asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions, as set forth below. Investors will receive
dividends declared for the day on which shares are redeemed.

24
<PAGE> 49

each Business Day, be automatically scanned for debits and pending securities
settlements, and, after application of any free credit balances in the account
to such debits, a sufficient number of shares of the primary fund and, to the
extent necessary, any other Schwab Money Fund(s) in the account, will be
redeemed the following Business Day to satisfy any remaining debits.

DIRECT REDEMPTION: Shareholders may also place redemption orders directly by
contacting their local Schwab office by telephone, mail or in person, or by
mailing written instructions to Schwab (at the address listed on the Prospectus
cover page). Investors should be aware that telephone redemption may be
difficult to implement during periods of drastic economic or market changes.
Shareholders who experience difficulties in redeeming by telephone can utilize
one of the above-noted alternatives to place their redemption orders.

Each Fund may suspend redemption rights or postpone payments at times when
trading on the New York Stock Exchange is restricted, the Exchange is closed for
any reason other than its customary weekend or holiday closings, emergency
circumstances as determined by the Securities and Exchange Commission exist, or
for such other circumstances as the Commission may permit.

OTHER IMPORTANT INFORMATION

MINIMUM BALANCE AND BROKERAGE ACCOUNT REQUIREMENTS. Due to the relatively high
cost of maintaining smaller holdings, each Fund reserves the right to redeem a
shareholder's shares if, as a result of redemptions, their aggregate value drops
below the $100 minimum balance requirement for the Schwab Money Market Fund,
Schwab Government Money Fund, Schwab U.S. Treasury Money Fund and the Sweep
Shares of the Schwab Tax-Exempt Money Fund. A Fund will notify shareholders in
writing 30 days before taking such action to allow them to increase their
holdings to at least the minimum level. Also note that, because they can only be
held in Schwab brokerage accounts, Fund shares will be automatically redeemed
should the Schwab brokerage account in which they are carried be closed.

CONSOLIDATED MAILINGS. In an effort to reduce the Funds' mailing costs, the
Funds consolidate shareholder mailings by household. This consolidation means
that a household having multiple accounts with the identical address of record
will receive a single package during each shareholder

25
<PAGE> 50

mailing. If you do not wish this consolidation to apply to your account(s),
please write to SchwabFunds(R) at 101 Montgomery Street, San Francisco, CA 94104
to that effect.

SCHWAB ONE(R) Account Features. Shareholders who hold shares of the Schwab
Tax-Exempt Money Fund in Schwab One accounts are entitled to redeem shares of
the Fund through debit cards and checks. Investors should contact Schwab if they
are interested in the benefits and requirements of a Schwab One account.

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

26
<PAGE> 51

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 52

PROSPECTUS JUNE 6, 1995

625-14 (6/95)
<PAGE> 53

SCHWAB CALIFORNIA TAX-EXEMPT MONEY FUND--SWEEP SHARES
- --------------------------------------------------------------------------------
PROSPECTUS June 6, 1995

TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD.

THE SCHWAB CALIFORNIA TAX-EXEMPT MONEY FUND (the "Fund") is designed for
investors who seek maximum current income that is exempt from federal income and
State of California personal income taxes to the extent consistent with
liquidity and stability of capital. The Fund is a non-diversified investment
portfolio of The Charles Schwab Family of Funds (the "Schwab Fund Family"), a
no-load, open-end, management investment company. Shares of the Fund are offered
to California residents and the residents of selected other states. This
Prospectus describes the Sweep Shares of the Fund, one of the two classes of
shares of the Fund (the "Sweep Shares") offered by Schwab. Prior to the date of
this Prospectus, the Fund was not offered in two classes of shares. The existing
Shares of the Fund are redesignated as Sweep Shares. For a prospectus describing
the other class of shares of the Fund (the "Value Advantage Shares"), call your
local Schwab office or 800-2 NO-LOAD.

TABLE OF CONTENTS

<TABLE>
<S> <C>
KEY FEATURES OF THE FUND............................................................... 2
SUMMARY OF EXPENSES.................................................................... 3
FINANCIAL HIGHLIGHTS................................................................... 4
MATCHING THE FUND TO YOUR INVESTMENT NEEDS............................................. 4
INVESTMENT OBJECTIVE AND POLICIES...................................................... 5
MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES......................................... 7
MANAGEMENT OF THE FUND................................................................. 10
DISTRIBUTIONS AND TAXES................................................................ 12
SHARE PRICE CALCULATION................................................................ 14
HOW THE FUND SHOWS PERFORMANCE......................................................... 15
GENERAL INFORMATION.................................................................... 16
SHAREHOLDER GUIDE...................................................................... 16
HOW TO PURCHASE SHARES............................................................... 17
HOW TO EXCHANGE SHARES............................................................... 19
HOW TO REDEEM SHARES................................................................. 20
OTHER IMPORTANT INFORMATION.......................................................... 21
</TABLE>

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

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

AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 54

KEY FEATURES OF THE FUND

MAXIMUM DOUBLE TAX-EXEMPT INCOME AND SAFETY. The Schwab California Tax-Exempt
Money Fund is designed for investors who seek maximum after-tax current income
consistent with liquidity and stability of capital. The Fund invests in high
quality, short-term debt securities the interest on which is exempt from federal
income and State of California personal income taxes. The Fund attempts to
maintain a stable net asset value of $1.00 per share. (See "Investment Objective
and Policies.")

AUTOMATIC INVESTMENT/REDEMPTION FEATURE. If you elect, free credit balances in
your Schwab brokerage account (including your Schwab One(R) account) will be
automatically invested or "swept" into the Fund, subject to the terms and
conditions of your brokerage account agreement. Shares will also be sold as
necessary to settle securities transactions, collateralize margin obligations or
cover debit balances. This feature keeps your money working and saves you the
time and trouble of withdrawing and redepositing funds. (See "How to Purchase
Shares" and "How to Redeem Shares.")

LIQUIDITY. You can conveniently place orders to redeem your investment in the
Fund at any time. (See "How to Redeem Shares.")

LOW COST INVESTING. The Fund imposes no sales or transaction fees on purchases
or redemptions of shares of the Fund. (See "Summary of Expenses.") In addition,
the total fund operating expenses of the Sweep Shares of the Fund will not
exceed 0.65% through at least August 31, 1995, as guaranteed by Charles Schwab
Investment Management, Inc. (See "Matching the Fund to Your Investment Needs,"
and "Management of the Fund.")

CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity on one report.

SPECIAL RISK CONSIDERATIONS. An investment in the Fund is subject to certain
risks arising out of the Fund's investments in California Municipal Securities,
municipal leases, participation interests and certain other securities. (See
"Municipal Securities and Investment Techniques.")

NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders.

2
<PAGE> 55

SUMMARY OF EXPENSES--SWEEP SHARES

SHAREHOLDER TRANSACTION EXPENSES: NONE

<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee reduction)(1)............................................ 0.19%
12b-1 Fees........................................................................ None
Other Expenses (after expense reimbursement)(2)..................................... 0.46%
TOTAL FUND OPERATING EXPENSES(2,3,4).................................................. 0.65%
</TABLE>

(1) This amount reflects a reduction by the Investment Manager, which is
guaranteed through at least August 31, 1995. If there were no such reduction,
the maximum management fee for the Fund would have been 0.45% for the fiscal
year ended December 31, 1994. (See Management of the Fund--Fees and Expenses.)

(2) See "Management of the Fund--Fees and Expenses" for information regarding
the
the differing expenses for the multiple classes of shares of the Fund.

(4) This amount reflects the Investment Manager's guarantee that, through at
least August 31, 1995, the total fund operating expenses of the Sweep Shares
of the Fund will not exceed 0.65%. Without a similar guarantee, which was in
effect during the fiscal year ended December 31, 1994, total fund operating
expenses for the Sweep Shares of the Fund would have been 0.94%.

EXAMPLE. You would pay the following expenses on a $1,000 investment in the
Sweep Shares of the Fund, assuming (1) a 5% annual return and (2) redemption at
the end of each period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$7 $21 $36 $ 81
</TABLE>

The purpose of the preceding table is to assist investors in understanding the
various cost and expenses that an investor in the Sweep Shares of the Fund will
bear directly or indirectly. This example reflects the Investment Manager's
guarantee that, through at least August 31, 1995, the total fund operating
expenses for the Sweep Shares of the Fund will not exceed 0.65%. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of
return pursuant to requirements of the Securities and Exchange Commission. THIS
HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR
FUTURE PERFORMANCE.

3
<PAGE> 56

FINANCIAL HIGHLIGHTS

The following information with respect to per share data and ratios has been
audited by Price Waterhouse LLP, independent accountants, whose unqualified
report covering each of the periods presented is incorporated by reference
herein. This information should be read in conjunction with the financial
statements and accompanying notes which are also incorporated by reference to
the Statement of Additional Information.
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------ ------------------------
NET DIVIDENDS
REALIZED & TOTAL FROM NET
NET ASSET NET UNREALIZED FROM DIVIDENDS REALIZED ASSET
PERIOD VALUE INVEST- GAINS INVEST- FROM NET GAIN ON VALUE
ENDED BEGINNING MENT (LOSSES) ON MENT INVESTMENT INVEST- TOTAL END OF
DEC. 31 OF YEAR INCOME INVESTMENT OPERATION INCOME MENT DISTRIBUTIONS YEAR
- ------- --------- ------ ----------- --------- ---------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 $1.00 $0.02 -- $0.02 $(0.02) -- $ (0.02) $ 1.00
1993 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1992 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1991 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
19901 1.00 0.01 -- 0.01 (0.01) -- (0.01) 1.00

RATIOS/SUPPLEMENTAL DATA RATIO OF
------------------------------------------- NET
RATIO OF INVESTMENT
EXPENSES INCOME
PERIOD TOTAL NET ASSETS TO AVERAGE TO AVERAGE
ENDED RETURN END OF YEAR NET ASSETS NET ASSETS
DEC. 31 (%) (000'S) (%) (%)
- ------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1994 2.26 $ 1,293,883 0.64 2.25
1993 1.91 1,062,042 0.63 1.89
1992 2.35 691,176 0.63 2.31
1991 3.77 494,214 0.61 3.70
19901 0.77 339,292 0.28* 5.06*
</TABLE>

(1) For the period from November 6, 1990 (commencement of operations) to
December 31, 1990.

The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses of the Fund. 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, 1992, 1991 and 1990 would have been
0.94%, 0.96%, 0.97%, 0.98% and 1.17%*, respectively, and the ratio of net
investment income to average net assets would have been 1.95%, 1.56%, 1.97%,
3.33% and 4.17%*, respectively.

Prior to June 6, 1995, the Fund did not offer multiple classes of shares of
beneficial interest. The information contained in this table relates to shares
which were redesignated as Sweep Shares as of June 6, 1995.

MATCHING THE FUND TO YOUR INVESTMENT NEEDS

The Fund may be appropriate for a variety of investment programs which can be
long-term or short-term in nature. While the Fund is not a substitute for
building an investment portfolio tailored to an individual's investment needs
and risk tolerance, it can be used as a high quality, conveniently liquid money
market investment for your brokerage account cash when it is not fully invested
in other securities. The Fund would not be an appropriate investment for
retirement plans such as IRAs and Keogh plans.
- --------------------------------------------------------------------------------
THE FUND MAY BE ESPECIALLY SUITABLE FOR SHORT-TERM INVESTORS.
- --------------------------------------------------------------------------------

* Annualized

4
<PAGE> 57

- --------------------------------------------------------------------------------
THE FUND MAY ALSO BE APPROPRIATE FOR LONG-TERM INVESTORS.
- --------------------------------------------------------------------------------

The Fund may also be appropriate for long-term investors seeking a low-risk
investment alternative which is designed to provide double tax-free income.

For information regarding Value Advantage Shares, call your local Schwab office
or 800-2 NO-LOAD. You may also obtain information about Value Advantage Shares
from your Schwab broker.

INVESTMENT OBJECTIVE AND POLICIES
- -------------------------------------------------------------------------------
THE FUND SEEKS MAXIMUM CURRENT INCOME CONSISTENT WITH
STABILITY OF CAPITAL THAT IS EXEMPT FROM FEDERAL INCOME
AND STATE OF CALIFORNIA PERSONAL INCOME TAXES.
- -------------------------------------------------------------------------------

The investment objective of the Fund is maximum current income that is exempt
from federal income and State of California personal income taxes, to the extent
consistent with stability of capital. This investment objective is fundamental,
and cannot be changed without approval by holders of a majority of the Fund's
outstanding voting shares, as defined in the Investment Company Act of 1940 (the
"1940 Act"). The Fund pursues its objective primarily by investing in short-term
high quality municipal obligations, the income from which is exempt from federal
income and California personal income taxes.

Under normal market conditions, the Fund attempts to invest 100%, and will
invest at least 80%, of its total assets in debt obligations issued by or on
behalf of California and other states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities that generate interest which, in the opinion of bond
counsel, is exempt from federal income tax ("Municipal Securities") and will
invest at least 65% of its total assets in such obligations which also generate
interest which, in the opinion of bond counsel, is exempt from State of
California personal income tax ("California Municipal Securities").

Dividends paid to California residents to the extent of interest income received
on California Municipal Securities will be exempt from State of California
personal income taxes provided that at the end of each quarter of its taxable
year at least 50% of the Fund's total assets are invested in California
Municipal Securities and obligations of the U.S. Government, its agencies and
instrumentalities which are by federal law exempt from local income taxes.

5
<PAGE> 58

- ----------------------------------------------------------------------
THE FUND WILL ONLY INVEST IN HIGH QUALITY SECURITIES.
- ----------------------------------------------------------------------

The Fund will invest only in Municipal Securities which at the time of purchase:
(a) are rated in one of the two highest rating categories for municipal
commercial paper or short-term municipal securities assigned by Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or any
other nationally recognized statistical rating organization ("NRSRO"); (b) are
guaranteed or insured by the U.S. Government as to the payment of principal and
interest; (c) are fully collateralized by an escrow of U.S. Government
securities acceptable to the Investment Manager; or (d) are unrated by any
NRSRO, if they are determined by the Investment Manager, using guidelines
approved by the Board of Trustees, to be at least equal in quality to one or
more of the above referenced securities. (For a description of the ratings, see
"Appendix--Ratings of Investment Securities" in the Statement of Additional
Information.)

With the exception of securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, the Fund may not:

1. Purchase the securities of any issuer if as a result more than 5% of the
value of the Fund's total assets would be invested in the securities of that
issuer. However, provided no more than 25% of the value of the Fund's total
assets are invested in the securities of any one issuer, up to 50% of the
value of the Fund's total assets may be invested without regard to this 5%
limitation. For purposes of this limitation, a security is considered to be
issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to an industrial revenue bond that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a security
may also be considered to be an issuer in connection with such guarantee.

From time to time, as a defensive measure or under abnormal market conditions,
the Fund may invest any or all of its assets in taxable "temporary investments"
which include: obligations of the U.S. Government, its agencies or
instrumentalities; debt securities (other than Municipal Securities) rated in
one of the two highest categories by any NRSRO; commercial paper (other than
Municipal Securities) rated in one of the two highest grades by any NRSRO;
certificates of deposit of domestic banks having capital, surplus, and undivided
profits in excess of $100 million; and any of the foregoing temporary
investments subject to repurchase agreements. While purchases by the Fund of
certain temporary investments could cause it to generate dividends taxable to
shareholders as ordinary

6
<PAGE> 59

income (see "Distributions And Taxes"), it is the Fund's primary intention to
produce dividends which are not subject to federal income or State of California
personal income taxes.

MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES

Municipal Securities purchased by the Fund may include variable rate demand
instruments issued by industrial development authorities and other government
entities. In the event variable rate demand instruments which the Fund can
purchase are not rated by credit rating agencies, such instruments must be
determined by the Investment Manager, using guidelines approved by the Board of
Trustees, to be of comparable quality at the time of purchase to rated
instruments which the Fund can purchase. In some cases, the Fund may require
that the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Although there may be no active secondary market with respect to a particular
variable rate demand instrument purchased by the Fund, the Fund may (at any time
or during specified periods not exceeding one year, depending upon the
instrument involved) demand payment in full of the principal of the instrument
and may resell the instrument to a third party. The absence of such an active
secondary market, however, could make it difficult for the Fund to dispose of a
variable rate demand instrument in the event the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights, and the Fund could, for this or other reasons, suffer a loss with
respect to such instruments. To the extent that the absence of an active
secondary market for such securities causes them to be "illiquid," such
securities will be subject to the Fund's restrictions on acquiring and holding
illiquid securities.

7
<PAGE> 60

These securities may include tender option bond trust receipts, in which a
fixed-rate municipal bond (or group of bonds) is placed into a trust from which
two classes of trust receipts are issued, which represent proportionate
interests in the underlying bond(s). Interest payments are made on the bond(s)
based upon a predetermined rate. Under certain circumstances, the holder of a
trust receipt may also participate in any gain or loss on the sale of such
bond(s). Tender option bond trust receipts are considered to be Municipal
Securities for purposes of the Fund's policy to invest at least 80% of its total
assets in Municipal Securities. Tender option bond trust receipts generally are
structured as private placements and, accordingly, may be deemed to be
restricted securities for purposes of the Fund's investment limitations.

The Fund will limit its investments in tender option bond trust receipts and
other synthetic floating rate municipal securities to no more than 25% of its
total assets.

8
<PAGE> 61

Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from federal income tax (and, with respect to California
Municipal Securities, to the exemption of interest thereon from State of
California personal income taxes) are rendered by bond counsel to the respective
issuers at the time of issuance. The Fund and the Investment Manager will not
review the proceedings relating to the issuance of Municipal Securities or the
bases for such opinions.

SPECIAL RISK CONSIDERATIONS. The Fund intends to follow the diversification
standards set forth in the 1940 Act, except to the extent that, in the
Investment Manager's judgment, non-diversification is appropriate to maximize
the percentage of the Fund's assets that are California Municipal Securities.
The investment return on a non-diversified portfolio typically is dependent upon
the performance of a smaller number of issuers relative to the number of issuers
held in a diversified portfolio. In the event of changes in the financial
condition or in the market's assessment of certain issuers, the Fund's policy of
acquiring large positions in the obligations of a relatively small number of
issuers may affect the value of the Fund's portfolio to a greater extent than
that of a diversified portfolio.

<PAGE> 62

Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could result in adverse
consequences affecting California Municipal Securities. For example, in recent
years "Proposition 13" and similar California constitutional and statutory
amendments and initiatives have restricted the ability of California taxing
entities to increase real property tax revenues. Other initiative measures
approved by California voters, through limiting various other taxes, have
resulted in a substantial reduction in state revenues. Decreased state revenues
may result in reductions in allocations of state revenues to local governments.
It is not possible to determine the impact of these initiatives on the ability
of California issuers to pay interest or repay principal on their obligations.
There is no assurance that any California issuer will make full or timely
payments of principal and interest or remain solvent. For example, in December
1994, Orange County filed for bankruptcy. In addition, from time to time,
federal legislative proposals have threatened the tax-exempt status or use of
municipal securities. (An expanded discussion of the risks associated with
municipal securities and California issuers is contained in the Statement of
Additional Information.)

For more information, see the section of this Prospectus entitled "Share Price
Calculation."

MANAGEMENT OF THE FUND

Responsibility for overall management of the Fund rests with the trustees and
officers of the Schwab Fund Family. Professional investment management for the
Fund is provided by the Investment Manager, Charles Schwab Investment
Management, Inc., 101 Montgomery Street, San Francisco, CA 94104. The Investment
Manager provides a continuous investment program, including general investment
and economic advice regarding the Fund's investment strategies, manages the
Fund's investment portfolio and performs expense management, accounting and
recordkeeping, and other services necessary to the operation of the Fund and the
Schwab Fund Family. The Investment Manager, formed in 1989, is a wholly owned
subsidiary of The Charles Schwab Corporation and is the investment adviser and
administrator of the SchwabFunds(R) mutual funds. As of June 3, 1995, the Schwab
Funds had aggregate net assets in excess of $26 billion.

10
<PAGE> 63

Charles Schwab & Co., Inc. ("Schwab" or the "Transfer Agent"), 101 Montgomery
Street, San Francisco, CA 94104, serves as shareholder services agent and
transfer agent for the Fund. Schwab provides information and services to
shareholders, which include reporting share ownership, sales and dividend
activity (and associated tax consequences), responding to daily inquiries,
effecting the transfer of Fund shares and facilitating effective cash management
of shareholders' Schwab account balances. It furnishes such office space and
equipment, telephone facilities, personnel and informational literature
distribution as is necessary or appropriate in providing shareholder and
transfer agency information and services. Schwab is also the Fund's distributor,
but receives no compensation for its services as such.

Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 2.5 million active customer accounts and has over 200 offices. Schwab
also offers convenient access to financial information services and provides
products and services that help investors make investment decisions. Schwab is a
wholly-owned subsidiary of The Charles Schwab Corporation. Charles R. Schwab is
the founder, Chairman and Chief Executive Officer and a director of The Charles
Schwab Corporation and, as of March 10, 1995, the beneficial owner of
approximately 23.3% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.

FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Schwab Fund Family, the Investment Manager receives from the
Fund a graduated annual fee, payable monthly, of 0.46% of the Fund's average
daily net assets not in excess of $1 billion, 0.41% of such net assets over $1
billion but not in excess of $2 billion and 0.40% of such net assets over $2
billion. The Investment Manager may reduce its management fee from time to time
in the future. Fee reductions lower the Fund's expenses and thus increase the
total return it provides shareholders. At least through August 31, 1995, the
Investment Manager guarantees that the management fee will not exceed 0.19% of
the Fund's average daily net assets and total fund operating expenses will not
exceed 0.65% of the average daily net assets of the Sweep Shares of the Fund.
The effect of this guarantee is to maintain or lower the expenses of the Sweep
Shares of the Fund and thus maintain or increase total return to shareholders.
For the fiscal year ended December 31, 1994, the Fund paid investment management
fees of 0.18% of its average daily net assets and paid total expenses of 0.64%
of its average daily net assets.

For the transfer agency services provided, the Transfer Agent receives an annual
fee, payable monthly, of 0.25% of the average daily net assets of the Sweep
Shares of the Fund. In addition, for shareholder services provided, Schwab
receives an annual fee, payable monthly, of 0.20% of the average daily net
assets of the Sweep Shares of the Fund. For the Value Advantage Shares, the
Transfer Agent receives an annual fee of 0.05% of the average daily net assets
of that class' shares of beneficial interest. PNC Bank is the Fund's Custodian.

11
<PAGE> 64

Series are charged to that Series or class, respectively. The differing expenses
applicable to the Sweep Shares and the Value Advantage Shares will cause the
performance of the two classes of shares of the Fund to differ.

TAX INFORMATION. The Fund has elected to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"),
qualified as such, and intends to continue to so qualify. In order to so
qualify, the Fund will distribute on a current basis substantially all of its
investment company taxable income, its net exempt-interest income and its
capital gain net income (if any), and will meet certain other requirements. Such
qualification relieves the Fund of liability for federal and California income
taxes to the extent the Fund's earnings are distributed. In addition, if the
Fund does not distribute 98% of its taxable investment income and capital gains,
it will be subject to a non-deductible 4% excise tax on such undistributed
amounts.

FEDERAL INCOME TAXES: Dividends derived from exempt-interest on state and local
obligations (known as "exempt-interest dividends") may be treated by the Fund's
shareholders as items of interest excludable from their federal gross income. A
shareholder should consult his or her own tax adviser with respect to whether
exempt-interest dividends would be excludable from gross income if the
shareholder were treated as a "substantial user" of facilities financed by an
obligation held by the Fund or a "related person" to such user under the Code.
Any loss on the sale or exchange of any share held for six months or less will
be disallowed to the extent of the amount of the exempt-interest dividend
received with respect to such share. The U.S. Treasury Department is authorized
to issue regulations reducing the period to not less than 31 days for certain
regulated investment companies, but no such regulations have been issued as of
the date of this Prospectus. To the extent dividends paid to shareholders are
derived from taxable interest or short-term or long-term capital gains, such
dividends will be subject to federal income tax whether paid in the form of cash
or additional shares. Fund dividends derived from interest on U.S. Treasury and
agency obligations are subject to federal income tax.

12
<PAGE> 65

CALIFORNIA INCOME TAXES: Dividends paid by the Fund to non-corporate
shareholders and derived from interest on California Municipal Securities or
federal obligations are also exempt from State of California personal income
tax. For this purpose, federal obligations are obligations the interest on which
is excludable from gross income for state income tax purposes under the
Constitution or laws of the United States. However, dividends paid to
shareholders that are corporations subject to California franchise tax or
corporate income tax will be taxed as ordinary income to such shareholders,
notwithstanding that all or a portion of such dividends are exempt from State of
California personal income tax. Moreover, to the extent that the Fund's
dividends are derived from interest on debt obligations other than California
Municipal Securities or federal obligations, such dividends will be subject to
State of California personal income tax, even though such dividends may be
exempt for federal income tax purposes.

Except as noted with respect to State of California personal income tax,
distributions of net investment income may be taxable to investors under state
or local law as dividend income even though all or a portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes. In addition, to the
extent, if any, that dividends paid to shareholders are derived from taxable
interest or from long-term or short-term capital gains, such dividends will not
be exempt from State of California personal income tax whether received in cash
or reinvested in shares.

Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' regular Schwab brokerage statements. The Fund will
notify shareholders at least annually as to the federal income and State of
California personal income tax consequences of distributions made each year.

13
<PAGE> 66

The foregoing is only a brief summary of some of the federal and State of
California income tax considerations affecting the Fund and its shareholders.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situations.

SHARE PRICE CALCULATION
- ------------------------------------------------------------------
THERE ARE NO SALES CHARGES OR TRANSACTION FEES TO
PURCHASE OR REDEEM SHARES OF THE FUND.
- ------------------------------------------------------------------

The price of a Sweep Share of the Fund on any given day is its "net asset value"
or "NAV." This figure is computed by dividing total Fund assets allocable to
that class, less any liabilities allocable to the class, by the number of shares
of the class outstanding. The net asset value per share of the Sweep Shares of
the Fund is determined on each day both the Federal Reserve Bank of New York and
the Exchange are open for business, first at 10:00 a.m. (Eastern time), then
again as of the close of normal trading on the Exchange (generally 4:00 p.m.
Eastern time).

The Fund values its portfolio securities 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 using the amortized cost method
with market values. Except as described below, market valuations are obtained by
using actual quotations provided by third-party pricing services, 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. If a deviation of 1/2 of
1% or more were to occur between the net asset value per share of the Sweep
Shares of the Fund calculated by reference to market values and the $1.00 per
share amortized cost value of the Sweep Shares of the Fund, or if there were any
other deviation which the Board of Trustees 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. While the Fund attempts to
maintain a net asset value at a constant $1.00 per share, Fund shares are not
insured against a reduction in net asset value.

The Fund has entered into a transaction with Bank of America National Trust and
Savings Association ("Bank of America") pursuant to which the Fund is a
beneficiary of an irrevocable Letter of Credit (the "Letter of Credit") issued
by Bank of America. The Letter of Credit provides a degree of credit support for
certain securities held by the Fund, currently including certain obligations of
Orange County, California and issuers that participated in the investment pool
maintained by Orange County (each a "Covered Security"). Orange County and the
investment pool maintained by the County have filed for protection under Chapter
9 of the federal Bankruptcy Code. Pursuant to the Letter of Credit, Bank of
America will make certain payments to the Fund (each a "Payment") upon
presentation of a certificate as required under the Letter of Credit in the
event that (i) the issuer of a Covered Security defaults on a repayment to the
Fund of the principal amount of the Covered Security, or (ii) the proceeds
received by the Fund in the disposition of a Covered Security are less than a
specified percentage of the Covered Security's par amount. The Fund has no
obligation to reimburse Bank of America for any amount drawn under the Letter of
Credit. The Letter of Credit,

14
<PAGE> 67

however, does not ensure that the Fund will receive Payments equal to the
aggregate amount of all Covered Securities. Accordingly, although the Board of
Trustees has determined that the Covered Securities subject to the Letter of
Credit currently present minimal credit risks, the Fund could incur losses as a
result of its holdings of Covered Securities.

The Letter of Credit will continue in effect until the earlier of (i) the date
on which Bank of America has made Payments to the Fund equaling the total amount
available under the Letter of Credit, or (ii) August 1, 1995, after each Covered
Security is scheduled to mature.

The Board of Trustees has approved the payment of fees by the Fund for the
availability of the Letter of Credit, as well as revised pricing procedures that
take into account the effect of the Letter of Credit on the value of the Covered
Securities (the "Pricing Procedures"). Pursuant to the Pricing Procedures, the
value of a Covered Security may be determined in good faith after consideration
of the credit support provided by the Letter of Credit in order to cause the
calculation of the Fund's market-based net asset value per share to accurately
reflect the actual value of all of its assets.

HOW THE FUND SHOWS PERFORMANCE

The yield of the Sweep Shares of the Fund refers to the income generated by a
hypothetical investment in the Sweep Shares of the Fund over a specific 7-day
period. This income is then annualized, which means that the income generated
during the 7-day period is assumed to be generated each week over an annual
period and is shown as a percentage of the hypothetical investment.

Tax-equivalent yield is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) the Sweep Share's yield for
an investor in stated federal income and State of California tax brackets
(normally assumed to be the applicable maximum tax rate). Tax-equivalent yield
is based upon, and will be higher than, the portion of the Sweep Share's yield
that is tax-exempt. (See "Yield" in the Statement of Additional Information.)

The tax-equivalent effective yield is computed in the same manner as is the
tax-equivalent yield, except that the effective yield is substituted for yield
in the calculation.

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<PAGE> 68

Because the Sweep Shares of the Fund are subject to different expenses than the
Value Advantage Shares of the Fund, the performance of the two classes of shares
will differ.

GENERAL INFORMATION

The Schwab Fund Family was organized as a business trust under the laws of
Massachusetts on October 20, 1989 and may issue an unlimited number of shares of
beneficial interest or classes of shares in one or more Series. Currently, the
Schwab Fund Family offers shares of nine Series which may be organized into one
or more classes of shares of beneficial interest. The Board of Trustees may
authorize the issuance of shares of additional Series or classes if it deems it
desirable to do so. Shares of each Series have equal, noncumulative voting
rights, and equal rights as to dividends, assets, and liquidation of such
Series, except to the extent such voting rights or rights as to dividends,
assets and liquidation vary among classes of a Series. The Schwab California
Tax-Exempt Money Fund was formerly known as the Schwab California Tax-Free Money
Fund.

SHAREHOLDER GUIDE
- -----------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE
SHAREHOLDER SERVICE AND INFORMATION.
- -----------------------------------------------------------

16
<PAGE> 69

HOW TO PURCHASE SHARES
- -------------------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND ONLY THROUGH A
SCHWAB ACCOUNT.
- -------------------------------------------------------------------------

Shares of the Fund are designed for sale to California residents only.

You may purchase shares of the Fund exclusively through an account maintained
with Schwab, and payment for shares must be made directly to Schwab. Schwab
brokerage accounts are free of maintenance fees. (See "Summary of Expenses.")
The Securities Investor Protection Corporation ("SIPC") will provide account
protection, in an amount up to $500,000, for securities, including Fund shares,
which you hold in a Schwab brokerage account. Of course, SIPC account protection
does not protect shareholders from principal fluctuations.

If you already have a Schwab brokerage account, you may purchase shares in the
Fund as described below and need not open a new account.

Orders to purchase shares will be executed at the next determined net asset
value after receipt by Schwab's Mutual Fund Transfer Agency Department. (See
"Share Price Calculation.")
- ---------------------------------------------------------------------------
THE FUND MAY BE USED TO "SWEEP" FREE CREDIT BALANCES
IN YOUR SCHWAB BROKERAGE ACCOUNT.
- ---------------------------------------------------------------------------

17
<PAGE> 70

of the following week. If an investor's free credit balance is less than $100,
it will not be invested in the primary fund, but will remain a credit to the
investor's Schwab brokerage account. In certain limited circumstances, free
credit balances in certain accounts may be automatically invested at different
times. Upon request, a free credit balance in a Schwab brokerage account
totalling $20,000 or more may be invested in the appropriate primary fund on the
Business Day following receipt by the Transfer Agent of investor instructions.

An investor with an existing Schwab brokerage account may add the automatic
investment feature to his or her account by completing the appropriate section
of the Schwab brokerage account application available at any Schwab office. A
shareholder may change primary funds by calling or writing his or her local
Schwab office or writing Schwab at the above address. Note that the automatic
investment feature is not available for Value Advantage Shares of any Fund.
- ----------------------------------------------------------------------
SHARES OF THE FUND MAY ALSO BE PURCHASED DIRECTLY.
- ----------------------------------------------------------------------

DIRECT PURCHASE: A Schwab brokerage account holder may buy shares of the Fund
(if it is not his or her primary fund) by placing an order directly with a
Schwab registered representative. The minimum initial investment for such
"secondary fund" purchase is $1,000, and subsequent investments must be at least
$100. The minimum initial investment for the Value Advantage Shares is $25,000
and the minimum account balance for the Value Advantage Shares is $20,000.
- -----------------------------------------------------------------------
TWO DISTRIBUTION OPTIONS ARE AVAILABLE.
- -----------------------------------------------------------------------

1. AUTOMATIC REINVESTMENT: All distributions will be reinvested in additional
full Sweep Shares of the Fund at the net asset value next determined after
their payable date.

For information on how to wire funds from your Schwab brokerage account to your
bank, see "Other Important Information--Wire Transfers to Your Bank."

18
<PAGE> 71

purchase orders or to change the minimum investment requirements. All orders to
purchase shares of the Fund are subject to acceptance by the Fund and are not
binding until confirmed or accepted. Schwab will charge a $15 service fee
against an investor's Schwab brokerage account should his or her check be
returned because of insufficient or uncollected funds or a stop payment order.

HOW TO EXCHANGE SHARES
- ----------------------------------------------------------------------
SHARES OF THE FUND MAY BE EXCHANGED FOR SHARES OF
OTHER FUNDS SPONSORED BY SCHWAB WITHOUT CHARGE.
- ----------------------------------------------------------------------

The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state. Thus, you can conveniently modify your investments if your goals or
market conditions change. An exchange will involve the redemption of shares at
the net asset value next determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received the request, if
it was received by 4:00 p.m. (Eastern time) and on the next Business Day if the
request was received after that time) and the purchase of shares at their net
asset value next determined after sale of the shares involved in the exchange
(on the same day as the Transfer Agent received the request, if it was received
by 4:00 p.m. (Eastern time) and on the next Business Day if the request was
received after that time). An exchange of shares will be treated as a sale of
the shares for federal income tax purposes. Note that you must meet the minimum
initial or subsequent investment requirements applicable to the shares you wish
to receive in an exchange. The Fund reserves the right on 60 days' written
notice to modify, limit or terminate the exchange privilege.

METHODS OF EXCHANGING SHARES.

BY PHONE:

To properly process your telephone exchange request, we will need the
following information:

- your Schwab brokerage account number;
- the name of the fund into which shares are to be exchanged; and
- the number of shares of the Fund to be exchanged.

BY MAIL:

You may also request an exchange by writing your local Schwab office or Schwab
at the address listed on the Prospectus cover page.

To properly process your mailed exchange request, we will need a letter from
you which:

- references your Schwab brokerage account number;
- specifies that you would like to exchange shares from the Fund;
- indicates the fund into which shares are to be exchanged;

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<PAGE> 72

- describes the number of shares of the Fund to be exchanged; and
- is signed by at least one of the registered Schwab account holders, in
the exact form specified in the account.

IN PERSON AT A SCHWAB OFFICE:

You can also place your exchange request in person at your local Schwab
office.

HOW TO REDEEM SHARES

AUTOMATIC REDEMPTION: Redemptions will be automatically effected by the Transfer
Agent to satisfy debit balances in an investor's Schwab brokerage account or to
provide necessary cash collateral for an investor's margin obligation to Schwab.
Redemptions will also be automatically effected to settle securities
transactions with Schwab if an investor's free credit balance on the day before
settlement is insufficient to settle the transactions. Each Schwab brokerage
account will, as of the close of business each Business Day, be automatically
scanned for debits and pending securities settlements, and, after application of
any free credit balances in the account to such debits, a sufficient number of
shares of the primary fund and, to the extent necessary, any other Schwab Money
Fund(s) in the account, will be redeemed the following Business Day to satisfy
any remaining debits.

The Fund may suspend redemption rights or postpone payments at times when
trading on the Exchange is restricted, the Exchange is closed for any reason
other than its customary weekend or

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<PAGE> 73

holiday closings, emergency circumstances as determined by the Securities and
Exchange Commission exist, or for such other circumstances as the Commission may
permit.

OTHER IMPORTANT INFORMATION

SCHWAB ONE(R) ACCOUNT FEATURES. Shareholders who hold shares of the Fund in
Schwab One accounts are entitled to redeem Fund shares through debit cards and
checks. Investors should contact Schwab if they are interested in the benefits
and requirements of a Schwab One account.

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

21
<PAGE> 74

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 75

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 76

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 77

PROSPECTUS JUNE 6, 1995
725-5 (6/95)

22
<PAGE> 78

SCHWAB TAX-EXEMPT MONEY FUND -- VALUE ADVANTAGE SHARES
SCHWAB CALIFORNIA TAX-EXEMPT MONEY FUND -- VALUE ADVANTAGE SHARES
SCHWAB NEW YORK TAX-EXEMPT MONEY FUND -- VALUE ADVANTAGE SHARES
- --------------------------------------------------------------------------------

PROSPECTUS June 6, 1995

TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office, or call 800-2 NO-LOAD.

THE SCHWAB TAX-EXEMPT MONEY FUND (THE "TAX-EXEMPT FUND"), SCHWAB CALIFORNIA
TAX-EXEMPT MONEY FUND (THE "CALIFORNIA FUND"), AND SCHWAB NEW YORK TAX-EXEMPT
MONEY FUND (THE "NEW YORK FUND") (the "Funds") are designed to provide you with
the highest possible current income consistent with each Fund's investment
objective while seeking to preserve your investment and provide you with
liquidity. As a matter of fundamental policy, the Tax-Exempt Fund is a
diversified investment portfolio, and the New York Fund and California Fund are
non-diversified investment portfolios, of The Charles Schwab Family of Funds
(the "Trust"), a no-load, open-end management investment company. Shares of the
California Fund are offered to California residents and the residents of
selected other states. Shares of the New York Fund are offered to New York
residents and the residents of selected other states. This Prospectus relates to
the Value Advantage Shares of each Fund. For a prospectus describing the other
class of shares of the Fund (the "Sweep Shares"), call your local Schwab office
or 800-2 NO-LOAD.

ABOUT THIS PROSPECTUS: THIS PROSPECTUS PROVIDES YOU WITH CONCISE INFORMATION
THAT YOU SHOULD KNOW BEFORE YOU DECIDE IF THE FUNDS PROVIDE THE INVESTMENT
OPPORTUNITY YOU WANT. READ IT CAREFULLY, AND RETAIN IT FOR FUTURE REFERENCE.
This Prospectus may be available via electronic mail. For a free paper copy call
800-2 NO-LOAD. You can find more detailed information in the Statement of
Additional Information, dated June 6, 1995. The Statement has been filed with
the SEC and is incorporated in this Prospectus by reference (which means that it
is legally considered part of this Prospectus even though it is not printed
here). You can get your own free copy of the Statement of Additional Information
by calling Schwab at 800-2 NO-LOAD, or by writing the Funds at 101 Montgomery
Street, San Francisco, California 94104.

ATTENTION OHIO INVESTORS. THE OHIO ADMINISTRATIVE CODE REQUIRES US TO MAKE THE
FOLLOWING DISCLOSURE. UNLIKE OTHER MUTUAL FUNDS WHICH MAY INVEST NO MORE THAN
15% OF THEIR TOTAL ASSETS IN THE SECURITIES OF ISSUERS WHICH TOGETHER WITH ANY
PREDECESSORS HAVE A RECORD OF LESS THAN THREE YEARS CONTINUOUS OPERATIONS OR
SECURITIES OF ISSUERS WHICH ARE RESTRICTED AS TO DISPOSITION, THE TAX-EXEMPT
FUND AND THE NEW YORK FUND MAY EACH INVEST UP TO 50% OF THEIR TOTAL ASSETS IN
SUCH SECURITIES.
TABLE OF CONTENTS

<TABLE>
<S> <C>
KEY FEATURES OF THE FUNDS................................................................... 2
SUMMARY OF EXPENSES......................................................................... 3
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS................................................. 4
INVESTMENT OBJECTIVES AND POLICIES.......................................................... 6
SPECIAL RISK CONSIDERATIONS................................................................. 12
ORGANIZATION AND MANAGEMENT OF THE FUNDS.................................................... 13
MANAGEMENT FUNCTIONS AND RESPONSIBILITIES................................................. 13
OPERATING FEES AND EXPENSES............................................................... 13
OTHER INFORMATION......................................................................... 14
INVESTING IN VALUE ADVANTAGE SHARES OF THE FUNDS............................................ 15
HOW TO BUY SHARES........................................................................... 15
YOU CAN BUY SHARES........................................................................ 16
HOW TO EXCHANGE VALUE ADVANTAGE SHARES...................................................... 16
HOW TO SELL YOUR SHARES..................................................................... 18
IMPORTANT INFORMATION ABOUT YOUR INVESTMENT................................................. 19
DIVIDENDS AND OTHER DISTRIBUTIONS........................................................... 19
INCOME TAX INFORMATION...................................................................... 19
HOW WE DETERMINE THE PRICE OF YOUR VALUE ADVANTAGE SHARES................................. 21
HOW THE FUNDS REPORT PERFORMANCE............................................................ 22
GLOSSARY OF IMPORTANT TERMS................................................................. 24
</TABLE>

- --------------------------------------------------------------------------------
AN INVESTMENT IN EACH FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT ANY OF THE FUNDS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.

KEY FEATURES OF THE FUNDS

MAXIMUM CURRENT INCOME AND SAFETY. Our goal is to provide you with the highest
possible current income consistent with the investment objectives of each Fund
while preserving your investment and providing you with quick access to your
money. To achieve this goal, the Funds invest in high-quality, short-term debt
securities. The Tax-Exempt Fund seeks to provide you with current income that is
exempt from Federal income taxes. The California Fund seeks to provide you with
current income that is exempt from Federal income taxes and California personal
income taxes. The New York Fund seeks to provide you with current income that is
exempt from Federal income taxes and personal income taxes imposed by New York
State and New York municipalities. (See "Investment Objectives and Policies.")

PRESERVATION OF INVESTMENT. Each Fund seeks to maintain a stable net asset value
(known as the Fund's "NAV") of $1.00 per share.

READY ACCESS TO YOUR CASH. You can conveniently sell your shares of any Fund at
any time. Generally, your redemption check will be available the next Business
Day at your local Schwab office, or it can be mailed directly to you.

LOW COST INVESTING. The Value Advantage Shares of the Funds were designed with
operating expenses well below the industry average. (See "Matching the Funds to
Your Investment Needs.") Additionally, you pay no sales fee when you buy shares
of the Funds. Fees may be charged for balances and transactions under the
required minimums.

PROFESSIONAL MANAGEMENT OF THE FUNDS. Charles Schwab Investment Management, Inc.
(referred to in this Prospectus as the "Investment Manager") currently manages
the mutual funds in the SchwabFunds Family(TM), a family of 19 mutual funds with
over $26 billion in assets as of June 3, 1995. (See "Organization and Management
of the Funds--The Investment Manager.")

SHAREHOLDER SERVICES. Schwab's professional representatives are available
toll-free 24 hours a day at 800-2 NO-LOAD to service your account, or you can
call your local Schwab office during regular business hours. (See "Investing in
the Funds.")

CONVENIENT REPORTING. You receive one consolidated account statement for all of
your account activity that combines all of your mutual fund activity into one
report.

READING THIS PROSPECTUS. For your ease of reading, we have italicized certain
terms which have been included in the glossary at the end of this Prospectus. If
you are unsure of the meaning of any italicized term, check the glossary.
References to "you" and "your" in this Prospectus refer to prospective investors
and/or current shareholders, while references to "us", "our", or "our Funds"
refer to the Value Advantage Shares or to the three Funds generally.

SPECIAL RISK CONSIDERATIONS. An investment in any of the Funds is subject to
certain risks arising out of each such Fund's investments in Municipal
Securities issued by a single state, municipal leases, participation interests
and certain other securities, as discussed in this Prospectus. (See "Investment
Techniques Used by the Funds" and "Special Risk Considerations" for more
information.)

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<PAGE> 80

SUMMARY OF EXPENSES

ANNUAL OPERATING EXPENSES

Each class of our Funds pays its own annual operating expenses. These expenses
include management fees paid to the Investment Manager, transfer agency fees,
and other expenses. These expenses cover, for example, services such as
investment research and management of the portfolios, and maintaining
shareholder records. Because these fees are paid from the income and assets of
the Value Advantage Shares of each Fund, they are factored into the price of
each Fund's Value Advantage Shares and into the annual dividends paid to holders
of Value Advantage Shares. As a shareholder, you are not charged any of these
fees directly.

YOUR FEES FOR BUYING AND SELLING SHARES

You pay no sales fee when you buy shares of our Funds. Because the Value
Advantage Shares of the Funds are designed for individuals who maintain high
balances in their Schwab accounts, the Transfer Agent charges a $5
administrative fee if you sell or exchange shares worth less than $5,000. The
Transfer Agent charges a $5 fee each month that your Fund account balance falls
below the required $20,000 minimum. The Transfer Agent will notify you in
writing 15 days before this fee is assessed in order to give you time to bring
your account balance up to the minimum amount.

The following fees (except the administrative fee) are stated as a percentage of
how much the Value Advantage Shares of each Fund are worth on an average day.

<TABLE>
<CAPTION>
NEW YORK CALIFORNIA TAX-EXEMPT
FUND FUND FUND
-------- ----------- -----------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Administrative Fee1...................................... $ 5.00 $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fee (after fee reduction)2.................... 0.20% 0.19% 0.20%
12b-1 Fees............................................... None None None
Other Expenses (after expense reimbursement3............. 0.25% 0.26% 0.25%
TOTAL FUND OPERATING EXPENSES4,5.............................. 0.45% 0.45% 0.45%
</TABLE>

1 If you sell or exchange shares in an amount less than $5,000, you will be
subject to a $5 administrative fee.

2 This amount reflects a reduction by the Investment Manager, which is
guaranteed through at least August 31, 1995. If there were no such reduction,
the maximum management fee would be 0.46% of each Fund's average daily net
assets.

3 "Other Expenses" are based on estimated amounts for the current fiscal year
for each Fund. See "Matching the Fund to Your Investment Needs" for information
regarding the differing Transfer Agency fees for the multiple classes of shares
of the Funds.

3
<PAGE> 81

4 This amount reflects the guarantee by Schwab and our Investment Manager that,
through at least August 31, 1995, the total operating expenses of the Value
Advantage Shares of each Fund will not exceed 0.45% of average daily net assets
of the Value Advantage Shares of each Fund. If there were no such reduction, the
estimated maximum total operating expenses would be 0.70% of the average daily
net assets of the Value Advantage Shares of each Fund.

5 Schwab currently imposes no fees for opening a standard brokerage account,
including a Schwab One(R) account with a minimum of $5,000 account equity.
Schwab One(R) accounts of less than $5,000 account equity are subject to a fee
of $5 per month if there have been fewer than two commissionable trades within
the last twelve months. See "How To Buy Shares" for information regarding the
differing minimum balance and minimum investment requirements of the multiple
classes of shares of the Funds.

EXAMPLE. You would pay the following expenses on a $1,000 investment in the
Value Advantage Shares of each Fund assuming (1) 5% annual return; and (2)
redemption at the end of each period.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Tax-Exempt Fund....................................... $5 $14 $25 $ 57
California Fund....................................... $5 $14 $25 $ 57
New York Fund......................................... $5 $14 $25 $ 57
</TABLE>

THE PRECEDING TABLE IS AN EXAMPLE ONLY, AND DOES NOT REPRESENT PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE
EXAMPLE. This example reflects the guarantee by Schwab and the Investment
Manager that, through at least August 31, 1995, total operating expenses for the
Value Advantage Shares of each Fund will not exceed 0.45% of the class' average
daily net assets. Also, this example does not include the $5 administrative fee
on sales or exchanges of Fund shares equal to or less than $5,000. Nor does this
example include the $5 monthly fee charged on balances that fall below $20,000.
Please remember, that while this example assumes a 5% annual return on
investment, the actual return for the Value Advantage Shares of each Fund may be
more or less than the 5% annual return used in this example.

The purpose of the preceding table is to help you understand the various costs
and expenses you will bear directly or indirectly when you invest in the Value
Advantage Shares of the Funds. (See "Organization and Management of the
Funds--Operating Fees and Expenses.")

MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS

Because the Value Advantage Shares of the Funds are designed for Schwab accounts
with larger balances and less frequent shareholder transactions, we can keep the
operating expenses lower than the industry average, which helps provide more
competitive yields. The table below shows the

4
<PAGE> 82

anticipated total operating expenses of the Value Advantage Shares of each Fund
compared to the industry average for similar type funds.

<TABLE>
<CAPTION>
VALUE ADVANTAGE SHARES INDUSTRY AVERAGES*
- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Fund................... 0.45% Tax-Exempt Money Market Funds..... 0.70%
California Tax-Exempt
California Fund................... 0.45% Money Market Funds................ 0.53%
New York Tax-Exempt
New York Fund..................... 0.45% Money Market Funds................ 0.58%
</TABLE>

Note: These amounts represent total operating expenses after fee waivers for
first tier money market funds, not including institutional money funds.

* Fourth quarter industry averages as reported by IBC/Donoghue Quarterly Report
on Money Fund Performance, 4th Quarter, 1994.

Our Funds invest in high-quality money market instruments and are designed for
high current yields. Because shares of our Funds are held in your Schwab
account, the proceeds from redemptions you make are available for other
investment purchases you make in your account. Keep in mind, however, that
because the Value Advantage Shares of the Funds are intended for larger balance
accounts, you may be charged a fee for redemptions or exchanges under the
required minimum or if your balance falls below the required minimum. These fees
are designed to keep shareholder transactions to a minimum which contributes to
the Value Advantage Shares lower operating expense ratio.

Schwab also offers an additional class of shares of each of the Funds ("Sweep
Shares") which automatically invest the uninvested cash balances in your Schwab
account in a Schwab money fund which you select. Sweep Shares may be more
suitable for providing income on fluctuating cash balances in your account in
between other investments. The Funds may be appropriate for a variety of
investment programs. Unlike the Sweep Shares, however, the Value Advantage
Shares have been designed for cash reserves which may be held for longer periods
of time and may not require frequent investor access. The Funds should not be a
substitute for building an investment portfolio tailored to your individual
investment needs and risk tolerance. Additionally, the Funds are not suitable
for tax-advantaged plans such as Individual Retirement Plans and Keogh plans.

Schwab offers these multiple classes of shares pursuant to a multiple class plan
(the "Plan") adopted by the Board of Trustees of the Trust. Pursuant to the
Plan, Value Advantage Shares of each Fund are subject to lower transfer agency
expenses than the Sweep Shares, as the Sweep Shares offer the "sweep" services
described above not available to investors in Value Advantage Shares. In
addition, the minimum initial investment and Sweep Shares, and minimum account
balance requirements are higher for the Value Advantage Shares than for the
Sweep Shares. See "Organization and Management of the Funds--Operating Fees and
Expenses" and "How to Buy Shares." For more information regarding the Sweep
Shares of the Funds, call your local Schwab office or 800-2 NO-LOAD. You may
also obtain information about Sweep Shares from your Schwab broker.

5
<PAGE> 83

INVESTMENT OBJECTIVES AND POLICIES

THE TAX-EXEMPT FUND

The investment objective of the Tax-Exempt Fund is to provide you with maximum
current income that is exempt from federal income taxes consistent with
stability of capital. Because any investment involves risk, we cannot guarantee
achieving this objective.

To achieve our investment objective, we normally will attempt to invest 100%,
and will invest at least 80%, of our total assets in short-term, high-quality
debt obligations issued by or on behalf of states, territories and possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities that generate interest, which in
the opinion of bond counsel, is exempt from federal income taxes and not treated
as a tax preference item for purposes of the federal alternative minimum tax
("Municipal Securities").

The investment objective and policies stated above are fundamental to the
Tax-Exempt Fund.

Provided that we meet certain minimum conditions (described in the Statement of
Additional Information under "Investment Restrictions"), dividends that
represent interest income received on Municipal Securities will be exempt from
federal income taxes when paid to you. However, such dividend income may be
subject to state and local taxes. See "Important Information About Your
Investment--Income Tax Information" and the Statement of Additional Information.

THE CALIFORNIA FUND

The investment objective of the California Fund is to provide you with maximum
current income that is exempt from federal income and State of California
personal income taxes, to the extent consistent with stability of capital.
Because any investment involves risk, we cannot guarantee achieving this
objective.

To achieve our objective, we normally will attempt to invest 100%, and will
invest at least 80%, of our total assets in Municipal Securities.

Absent unusual market conditions, we will invest at least 65% of our total
assets in such obligations which also generate interest which, in the opinion of
bond counsel, is exempt from State of California personal income taxes
("California Municipal Securities").

The investment objective and policies stated above are fundamental to the
California Fund.

Provided that we meet certain minimum conditions (described in the Statement of
Additional Information under "Investment Restrictions"), dividends that
represent interest income received on California Municipal Securities will be
exempt from State of California personal income taxes when paid to California
residents. See "Important Information About Your Investment--Income Tax
Information" and the Statement of Additional Information.

THE NEW YORK FUND

The investment objective of the New York Fund is to provide you with maximum
current income that is exempt from federal income taxes and personal income
taxes imposed by New York State and

6
<PAGE> 84

New York municipalities, to the extent consistent with liquidity and stability
of capital. Because any investment involves risk, we cannot guarantee achieving
this objective.

To achieve our objective, we normally will attempt to invest 100%, and will
invest at least 80%, of our total assets in Municipal Securities.

Absent unusual market conditions, we will invest at least 65% of our total
assets in such obligations which also generate interest which, in the opinion of
bond counsel, is exempt from State of New York and New York municipalities
personal income taxes ("New York Municipal Securities").

The investment objective and policies stated above are fundamental to the New
York Fund.

Provided that we meet certain minimum conditions (described in the Statement of
Additional Information under "Investment Restrictions"), dividends that
represent interest income received on New York Municipal Securities will be
exempt from State of New York and New York municipalities personal income taxes
when paid to New York residents. See "Important Information About Your
Investment--Income Tax Information" and the Statement of Additional Information.

MUNICIPAL SECURITIES. Our Funds will invest only in Municipal Securities which
at the time of purchase: (a) are rated within the two highest rating categories
for municipal commercial paper or short-term municipal securities assigned by
any nationally recognized statistical rating organization (NRSRO); (b) are
guaranteed or insured by the U.S. Government as to the payment of principal and
interest; (c) are fully collateralized by an escrow of U.S. Government
securities acceptable to our Investment Manager; or (d) are unrated by any
NRSRO, if they are determined by our Investment Manager, using guidelines
approved by the Board of Trustees, to be at least equal in quality to one or
more of the securities mentioned above. (See "Appendix--Ratings of Investment
Securities" in the Statement of Additional Information.)

We may purchase a security that, after being purchased by a Fund, ceases to have
a rating, or is downgraded, causing its rating to fall below that required for
purchase by the Fund. Neither event would necessarily require the Fund to sell
the security. However, we will keep such a security in its portfolio only if the
Board of Trustees determines that keeping the security is in the best interests
of that Fund.

Municipal Securities in which we may invest are generally classified in one of
two categories: "general obligation" securities and "revenue" securities.

General obligation securities are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of principal and interest.

Revenue securities are secured only by the revenues derived from a particular
facility or class of facilities, or from a specific revenue source such as a
special excise tax or from the user of the facility being financed.

Revenue securities may include private activity bonds and industrial development
bonds. Such bonds may be issued by or on behalf of public authorities to finance
various privately operated facilities, and they are not payable from the
unrestricted revenues of the issuer. As a result, the credit quality of

7
<PAGE> 85

private activity bonds is frequently related directly to the credit standing of
private corporations or other entities. From time to time, each of our Funds may
invest more than 25% of its total assets in industrial development and private
activity bonds.

We may also invest in "moral obligation" securities, which are normally issued
by special purpose public authorities. If the issuer of moral obligation
securities is unable to meet its debt service obligations from current revenues,
it may draw on a reserve fund. The state or municipality which created the
issuer has a moral commitment but not a legal obligation to restore the reserve
fund.

Our Funds may also invest up to 25% of their total assets in municipal leases,
no more than 10% of which may be in illiquid leases. Municipal leases are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. These obligations may take the form of
a lease, an installment purchase contract, a conditional sales contract, or a
participation interest in any of the above. Some investments in municipal leases
may be considered to be illiquid. Municipal leases are subject to
"nonappropriation risk," which is the risk that the municipality may terminate
the lease in the event that the municipality's appropriating body does not
allocate the funds necessary to make lease payments. In such circumstances, the
lessor is typically entitled to repossess the property. The private sector value
of the property is, however, generally less than value of the property to the
municipality. The Investment Manager, pursuant to guidelines established by the
Board of Trustees, is responsible for continuously determining the credit
quality of unrated municipal leases, including an assessment of the likelihood
that the lease will not be terminated.

Our Funds may also invest up to 25% of their assets in synthetic floating-rate
municipal securities. These securities generally comprise the following elements
in a trust: (i) a fixed-rate municipal bond (of any duration); (ii) a right to
put the bond at par value on seven days notice, or after a specific interval of
time, depending on the terms of the synthetic security; and (iii) a contractual
agreement pursuant to which the investing Fund and the issuer determine the
lowest rate that would permit the bond to be remarketed at par, taking into
account the put right. The trustee of the trust is generally a bank trust
department.

These synthetic floating-rate municipal securities may include tender option
bond trust receipts, in which a fixed-rate municipal bond (or group of bonds) is
placed into a trust from which two classes of trust receipts are issued, which
represent proportionate interests in the underlying bond(s). Interest payments
are made on the bond(s) based upon a predetermined rate. Under certain
circumstances, the holder of a trust receipt may also participate in any gain or
loss on the sale of such bond(s). Tender option bond trust receipts are
considered to be Municipal Securities for purposes of each Fund's policy to
invest at least 80% of its total assets in Municipal Securities. Tender option
bond trust receipts generally are structured as private placements and,
accordingly, may be deemed to be restricted securities for purposes of the
Funds' investment limitations.

Each Fund will limit its investments in tender option bond trust receipts and
other synthetic floating-rate municipal securities to no more than 25% of its
total assets.

We may invest in variable rate demand instruments issued by industrial
development authorities and other government entities. In the event that a
variable rate demand instrument to be purchased by a

8
<PAGE> 86

Fund is not rated by credit rating agencies, our Investment Manager, using
guidelines approved by the Board of Trustees, must determine that such
instrument is of comparable quality at the time of purchase to a rated
instrument that would be eligible for purchase by the Fund. In some cases, the
Fund may require that the issuer's obligation to pay the principal of the note
be backed by an unconditional bank letter, line of credit, guarantee, or
commitment to lend.

Although there may be no active secondary market for a particular variable rate
demand instrument purchased by the Fund, each Fund may, at any time or during
specified periods not exceeding one year (depending upon the instrument
involved), demand payment in full of the principal of the instrument and may
resell the instrument to a third party.

We could suffer a loss from a variable rate demand instrument because of the
absence of an active secondary market, because it may be difficult for the Fund
to dispose of the instrument in the event an issuer defaults on its payment
obligation, because the Fund is only entitled to exercise its demand rights at
certain times, or for other reasons.

Variable rate demand instruments will be subject to each Fund's restrictions on
acquiring and holding illiquid securities to the extent that the absence of an
active secondary market for such securities causes them to be illiquid.

We may purchase from financial institutions participation interests in Municipal
Securities with fixed, floating, or variable rates of interest. The buyer of a
participation interest receives an undivided interest in the securities
underlying the instrument.

We will purchase a participation interest only if: (a) the instrument subject to
the participation interest matures in one year or less, or the instrument
includes a right to demand payment, usually within seven days, from the seller;
(b) the instrument meets our previously described quality standards for
Municipal Securities; and (c) the instrument is issued with an opinion of
counsel or is the subject of a ruling of the Internal Revenue Service stating
that the interest earned on the participation interest is exempt from federal
income tax.

We may also acquire "stand-by commitments" for Municipal Securities held in our
portfolios. Under a stand-by commitment, a dealer agrees to purchase at our
option specified Municipal Securities at a price equal to their amortized cost
value plus accrued interest. We will acquire stand-by commitments solely to
improve portfolio liquidity. We do not intend to exercise our stand-by rights
solely for trading purposes.

VARIABLE RATE SECURITIES. We may invest in instruments which have interest rates
that are adjusted periodically, or which "float" continuously according to
formulas intended to minimize any fluctuation in the values of the instruments
("Variable Rate Securities"). The interest rate of Variable Rate Securities is
ordinarily determined by reference to, or is a percentage of, an objective
standard such as a bank's prime rate, the 90-day U.S. Treasury bill rate, or the
rate of return on commercial paper or bank certificates of deposit.

9
<PAGE> 87

Generally, changes in the interest rate on Variable Rate Securities reduce the
fluctuation of their market value. Accordingly, as interest rates decrease (or
increase), Variable Rate Securities experience less capital appreciation (or
depreciation) than fixed-rate obligations.

Some Variable Rate Securities ("Variable Rate Demand Securities") allow the
purchaser to resell the securities at an amount approximately equal to amortized
cost, or to the principal amount plus accrued interest. Like other Variable Rate
Securities, the interest rate on Variable Rate Demand Securities varies
according to some objective standard that is intended to minimize fluctuations
in the values of the securities. We determine the maturity of Variable Rate
Securities in accordance with SEC rules.

ILLIQUID SECURITIES. We may purchase illiquid securities, including repurchase
agreements maturing in more than seven days, provided that no more than 10% of a
Fund's net assets valued at the time of the transaction are invested in such
securities.

GOVERNMENT SECURITIES. We may invest in government securities, including U.S.
Treasury notes, bills, and bonds, which are backed by the full faith and credit
of the U.S. Government. Some securities issued by U.S. Government agencies or
instrumentalities are supported by the credit of the agency or instrumentality,
for example, those issued by the Federal Home Loan Bank, while others, such as
those issued by the Federal National Mortgage Association, Farm Credit System,
and Student Loan Marketing Association have an additional line of credit with
the U.S. Treasury. However, there is no guarantee that the U.S. Government will
provide support to such agencies or instrumentalities. Accordingly, such
securities may involve risk of loss of principal and interest.

INVESTMENT TECHNIQUES USED BY THE FUNDS

MATURITY. We will purchase only securities that mature in 397 days or less, or
securities which have a variable rate of interest that is readjusted no less
frequently than every 397 days.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. We may purchase securities on a
"when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, we will not pay for such securities or start earning interest
on them until we receive them. Securities purchased on a when-issued or delayed
delivery basis are recorded as an asset. The value of such securities may change
as the general level of interest rates changes.

Each Fund will not invest more than 25% of its assets in when-issued or delayed
delivery securities. We will not purchase such securities for speculative
purposes, and will expect to actually acquire the securities when we purchase
them. However, we reserve the right to sell any such securities before their
settlement dates, if our Investment Manager deems such a sale advisable.

REPURCHASE AGREEMENTS. Each of our Funds may engage in repurchase agreements. By
entering into a repurchase agreement, a Fund acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price. The repurchase price is higher than the
purchase price, thereby determining the yield during the Fund's holding period.

10
<PAGE> 88

Repurchase agreements with broker-dealer firms will be limited to obligations of
the U.S. government, its agencies or instrumentalities. Maturity of the
securities subject to repurchase may exceed one year.

TEMPORARY INVESTMENTS. Each Fund may, from time to time, as a defensive measure
under abnormal market conditions, invest any or all of its assets in taxable
"temporary investments," which include: obligations of the U.S. Government, its
agencies, or instrumentalities; debt securities (other than "Municipal
Securities") rated within the two highest rating categories by any NRSRO;
commercial paper (other than "Municipal Securities") rated in the two highest
rating categories by any NRSRO; certificates of deposit of domestic banks having
capital, surplus, and undivided profits in excess of $100 million; and any of
the foregoing temporary investments subject to repurchase agreements. While a
temporary investment could cause a Fund to generate dividends taxable to
shareholders as ordinary income, it is the Funds' primary intention to produce
dividends which are not subject to federal income taxes, or state personal
income taxes, in the case of the California Fund and the New York Fund. (See
"Important Information about Your Investment--Income Tax Information.")

BORROWING POLICY. We may not borrow money except for temporary purposes to meet
redemption requests that could not otherwise be met without immediately selling
portfolio securities. A Fund may borrow an amount up to one-third of the value
of its total assets and may pledge up to 10% of its net assets to secure such
borrowings. No Fund may borrow for leverage purposes. This borrowing policy is
fundamental to each Fund.

LIMITATIONS ON INVESTMENTS. We are subject to the following limitations, which
apply to all investments by our Funds other than securities issued or guaranteed
by the U.S. Government, its agencies, and instrumentalities:

1. DIVERSIFICATION. Except as provided in this paragraph, no Fund may invest
more than 5% of the value of its total assets in the securities of one issuer.
The California Fund and the New York Fund, which are non-diversified portfolios,
may each invest up to 50% of the value of their total assets without regard to
this 5% limitation, provided no more than 25% of the value of each Fund's total
assets is invested in the securities of any one issuer. The Tax-Exempt Fund,
which is a diversified portfolio, may invest up to 25% of the value of its
assets without regard to this 5% limitation.

For purposes of this limitation with respect to each Fund, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security. An industrial revenue bond that is backed only
by the assets and revenues of a non-governmental user is considered to be issued
by the non-governmental user. In certain circumstances, the guarantor of a
security may also be considered to be an issuer in connection with such a
guarantee.

2. CONCENTRATION. As a matter of fundamental policy, no Fund will invest 25% or
more of the value of its total assets in the securities of issuers conducting
their principal business activities in the same industry. However, this
limitation shall not apply to Municipal Securities issued by governmental
entities.

LEGAL OPINIONS. Bond counsel will render opinions on the validity of Municipal
Securities. Bond counsel will also render opinions on whether the interest paid
on Municipal Securities is exempt from federal income tax, and whether the
interest paid on California or New York Municipal Securities is

11
<PAGE> 89

exempt from California State or New York State and New York municipalities
personal income taxes. Bond counsel will render such opinions to the issuers of
Municipal Securities at the time the securities are issued. The Funds and the
Investment Manager will not review the proceedings on the issuance of Municipal
Securities or the bases for such opinions.

SPECIAL RISK CONSIDERATIONS

The California Fund and the New York Fund are non-diversified portfolios of the
Trust. The investment return on a non-diversified portfolio typically is
dependent on the performance of a smaller number of issuers, while a diversified
portfolio is dependent on a larger number of issuers. If financial conditions
change, or if the market's assessment of certain issuers changes, a Fund's
policy of acquiring large positions in the obligations of a relatively small
number of issuers may affect the value of that Fund's portfolio to a greater
extent than that of a diversified portfolio.

Each Fund may invest more than 25% of its assets in Municipal Securities that
produce interest that is paid solely from revenues on similar projects. However,
we do not presently intend to invest in such securities on a regular basis, but
will do so if deemed necessary or appropriate by our Investment Manager. To the
extent that each Fund's assets are invested in Municipal Securities payable from
revenues on similar projects, that Fund will be subject to the particular risks
presented by such projects to a greater extent than it would be if that Fund's
assets were not so invested.

Certain California or New York constitutional amendments, legislative measures,
executive orders, administrative regulations, and voter initiatives could result
in adverse consequences affecting California or New York Municipal Securities.
For example, in recent years "Proposition 13" and similar California
constitutional and statutory amendments and initiatives have restricted the
ability of California taxing entities to increase real property tax revenues.
Other initiative measures approved by California voters, through limiting
various other taxes, have resulted in a substantial reductions in state
revenues. Decreased state revenues may result in reductions in allocations of
state revenues to local governments. It is not possible to determine the impact
of these initiatives on the ability of California issuers to pay interest or
repay principal on their obligations. There is no assurance that any California
issuer will make full or timely payments of principal and interest or remain
solvent. For example, in December 1994, Orange County, California filed for
bankruptcy. In addition, from time to time, federal legislative proposals have
threatened the tax-exempt status or use of Municipal Securities. (An expanded
discussion of the risks associated with Municipal Securities and California and
New York issuers is contained in the Statement of Additional Information.)

We may purchase participation interests in Municipal Securities and other
derivative securities that involve special risks, including the risk that the
Internal Revenue Service may characterize some or all of the interest paid on
such securities as taxable. There is also an increased risk, most typically
associated with "municipal lease" obligations, that a municipality will not
appropriate the funds necessary to make the scheduled payments on the lease that
supports the security owned by the Funds, or it may seek to cancel or otherwise
avoid its obligations under the lease. (See "Important Information about Your
Investment--How We Determine the Price of Your Value Advantage Shares.")

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<PAGE> 90

ORGANIZATION AND MANAGEMENT OF THE FUNDS

MANAGEMENT FUNCTIONS AND RESPONSIBILITIES

GENERAL OVERSIGHT. Our Board of Trustees and officers meet regularly to review
our investments, performance, expenses and other business affairs.

THE INVESTMENT MANAGER. Our Investment Manager, Charles Schwab Investment
Management, Inc., manages our Funds, subject to the authority of the trustees
and officers of the Trust. Our Investment Manager, founded in 1989, is a wholly
owned subsidiary of The Charles Schwab Corporation and is the investment adviser
and administrator of the SchwabFunds(R) mutual funds. As of June 3, 1995, the
SchwabFunds had aggregate net assets in excess of $26 billion.

Through a professional staff of portfolio managers and securities analysts, our
Investment Manager provides us with a continuous investment program, including
general investment and economic advice regarding our investment strategies,
manages our investment portfolio, performs expense management, accounting, and
record keeping, and provides other services necessary to our operation.

TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as our Transfer Agent and
Shareholder Services Agent. Schwab provides information to our shareholders,
reports share ownership and all account activities, and responds to all
inquiries from shareholders. Schwab also distributes informational literature,
and furnishes the office space and equipment, telephone facilities, and
personnel that is necessary in providing shareholders services.

Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab provides low-cost securities brokerage and related financial services to
over 2.5 million active customer accounts and has over 200 branch offices.
Schwab also offers convenient access to financial information services and
provides products and services that help investors make investment decisions.
Schwab is a wholly owned subsidiary of The Charles Schwab Corporation. Charles
R. Schwab is the founder, Chairman and Chief Executive Officer, and a Director
of The Charles Schwab Corporation and, as of March 10, 1995, was the beneficial
owner of approximately 23.3% of the outstanding shares of that corporation. Mr.
Schwab may be deemed to be a controlling person of Schwab and our Investment
Manager.

ACCOUNTANTS. Price Waterhouse LLP is our independent accountant. Their address
is 555 California Street, San Francisco, California 94104.

OPERATING FEES AND EXPENSES

For investment management services, under the terms of its Investment Advisory
and Administration Agreement with the Trust, our Funds pay a graduated annual
fee to the Investment Manager. This fee is based on the value of the average
daily net assets of each Fund, and is payable monthly by each Fund in the amount
of 0.46% of each Fund's average daily net assets not in excess of $1 billion,
0.41% of such net assets over $1 billion, but not more than $2 billion, and
0.40% of such net assets over $2 billion.

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Our Investment Manager guarantees that, through at least August 31, 1995, our
management fee will not exceed 0.20%, 0.19%, and 0.20% of the average daily net
assets of the New York Fund, the California Fund, and the Tax-Exempt Fund,
respectively, and total operating expenses will not exceed 0.45% of average
daily net assets of the Value Advantage Shares of each Fund. The effect of this
voluntary expense limitation is to maintain or increase each Fund's total return
to shareholders. The following expenses are not included as "operating expenses"
for purposes of this guarantee: interest expenses, taxes and capital items such
as costs of purchase or sale of portfolio securities, including brokerage fees
or commissions.

For its services as Transfer Agent, Schwab receives an annual fee of 0.05% of
the average daily net assets of each Fund's Value Advantage Shares. For transfer
agency services to each Fund's Sweep Shares, Schwab receives an annual fee of
0.25% of the average daily net assets of each Fund's Sweep Shares. In addition,
for shareholder services provided, Schwab receives an annual fee of 0.20% of the
average daily net assets of each Fund's Value Advantage Shares.

Schwab serves as our Funds' distributor but receives no compensation for this
service. PNC Bank, N.A. is our Funds' custodian.

OTHER EXPENSES. The Trust pays the expenses of our Funds' operations, including
the fees and expenses for independent auditors, legal counsel, custodians, the
cost of maintaining books and records of account, taxes, registration fees, and
the fees and expenses of qualifying the Trust and its shares for distribution
under federal and state securities laws, and industry association membership
dues.

The Trust generally allocates these expenses among the individual investment
portfolios ("Series"). This allocation is based on the relative net assets of
the Series at the time the expenses are incurred. However, expenses directly
attributable to a particular Series or class of a Series are charged to that
Series or class, respectively. The differing expenses applicable to the Value
Advantage Shares and Sweep Shares of the Funds will cause the performance of the
two classes to differ.

OTHER INFORMATION

The Trust was organized as a business trust under the laws of Massachusetts on
October 20, 1989 and may issue an unlimited number of shares of beneficial
interest or classes of shares in one or more Series. Currently the Trust offers
shares of nine Series, which may be organized into one or more classes of shares
of beneficial interest. The Tax-Exempt Fund was formerly known as the Schwab
Tax-Exempt Fund. The California Fund was formerly known as the Schwab California
Tax-Free Money Fund.

The Board of Trustees may authorize the issuance of shares of additional Series
or classes, if it deems it to be desirable to do so. Shares of each Series have
equal, noncumulative voting rights and equal rights as to dividends, assets and
liquidation of such Series except to the extent such voting rights or rights as
to dividends, assets and liquidation vary among classes of a Series.

ANNUAL SHAREHOLDER MEETINGS. The Trust is not required to hold annual meetings
and does not intend to do so except in connection with certain matters, such as
a change in a Fund's fundamental policies, election of Trustees or approval of a
new investment advisory agreement. In addition, a Trustee may

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be elected or removed by shareholders at a special meeting called upon written
request of shareholders owning in the aggregate at least 10% of the outstanding
shares of the Trust.

YOUR VOTING RIGHTS. If we were to make changes to a Fund's management or
fundamental policies, you would be asked to vote as a shareholder because
shareholders have voting rights on these matters. If a meeting is held and you
cannot attend, you may vote by proxy. Before the meeting, we will send you proxy
materials that explain the issues to be decided and include a voting card for
you to mail back. You are entitled to one vote for each share owned. Unless
permitted by the 1940 Act, shareholders vote by Series and not in the aggregate.
For example, when voting to approve an investment advisory agreement for a
Series, only shareholders of that Series may vote; when voting to elect
Trustees, shareholders of all the Series vote in the aggregate. In addition,
holders of Value Advantage Shares will vote exclusively as a class on any matter
relating solely to their arrangement as a class, and on any matter in which the
interests of the Value Advantage Shares of a Fund differ from the interests of
any other class of the Fund.

INVESTING IN VALUE ADVANTAGE SHARES OF THE FUNDS

HOW TO BUY SHARES

OPENING A SCHWAB ACCOUNT. You may buy our shares only through a Schwab account.
You can open a Schwab account by completing the appropriate account application.
(Corporations and other organizations should contact a Schwab office to find out
the additional forms that must be completed to open an account.)

Within your Schwab account, you have access to other investments available at
Schwab such as stocks, bonds and other mutual funds. Additionally, the
Securities Investor Protection Corporation (known as "SIPC") will provide
account protection up to $500,000 for your securities, including shares in the
Funds, which you hold in a Schwab brokerage account. However, SIPC account
protection does not protect you from any loss of principal due to market or
economic conditions.

SCHWAB ACCOUNT MINIMUMS AND ASSOCIATED FEES. Schwab reserves the right to
require a $1,000 initial deposit and account balance minimum to maintain a
Schwab standard brokerage account. Schwab may charge a fee if your balance is
under this minimum or if trading requirements are not met.

Schwab currently imposes no fee for opening a standard brokerage account or a
Schwab One(R) account with a minimum of $5,000 account equity. Schwab One(R)
accounts containing less than $5,000 account equity are subject to a fee of $5
per month imposed by Schwab if there have been fewer than two commissionable
trades within the last twelve months. Note that, in addition to these Schwab
One(R) account minimums, there are higher minimum investment and other
requirements applicable to the Value Advantage Shares of the Funds, which are
described below.

DEPOSITING FUNDS AND MEETING THE FUNDS' INVESTMENT MINIMUMS. Once you have
opened your account or if you already have a Schwab account, you can deposit
funds by check or wire. Your check should be made payable to Charles Schwab &
Co., Inc. Contact your Schwab representative for instructions on how to deposit
funds by wire.

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The minimum initial investment in the Value Advantage Shares of each Fund is
$25,000. After you have bought the minimum amount of Value Advantage Shares for
your initial investment, you can buy additional Value Advantage Shares in
amounts of at least $5,000. The Transfer Agent imposes a $5 fee for each month
your Fund account balance falls below the required $20,000 minimum. The minimum
initial investment to purchase Sweep Shares of each Fund is $1,000, and
subsequent investments in Sweep Shares must be at least $100. The Transfer Agent
reserves the right to waive these minimums from time to time for clients of
Schwab Institutional, a division of Schwab, and for certain other investors. See
the Statement of Additional Information for more details.

We, in our sole discretion and without prior notice to you, reserve the right to
reject orders to buy shares, to change the minimum investment requirements, and
to withdraw or suspend any part of the offering made by this Prospectus. In
particular, if you engage in excessive exchange or redemption activity, we
reserve the right to refuse your future orders to buy shares in order to
minimize the costs to the Funds associated with these practices. All orders to
buy shares must be accepted by us, and orders are not binding until we confirm
or accept them in writing. Schwab will charge your Schwab brokerage account a
$15 service fee for any check returned because of insufficient or uncollected
funds, or because of a stop payment order.

WHEN YOU CAN BUY SHARES. You must have funds in your Schwab account in order to
buy our shares. Funds received by Schwab before 4:00 p.m. (Eastern time) can be
used to buy our shares on that day. Funds that arrive after that time can be
used to buy shares the next Business Day. Schwab's Mutual Fund Transfer Agency
Department will execute an order to buy shares upon receipt of the order.

DISTRIBUTION OPTIONS. When you first buy our shares, you may choose one of the
two following distribution options:

AUTOMATIC REINVESTMENT: All distributions will be reinvested in
additional full and fractional Value Advantage Shares of the Fund at the
net asset value next determined on their payable date; or

RECEIVE YOUR DIVIDENDS IN CASH: All distributions will be credited to
your Schwab account on the date distributions are payable. If you choose
to have your dividends mailed, a check will be mailed to you the
Business Day after distributions are credited to your account.

To change the distribution option you have selected, call your local Schwab
office or 800-2 NO-LOAD.

You can request that your Schwab office wire funds from your Schwab account to
your bank account. There is a $15 fee for each wire transfer of funds.

HOW TO EXCHANGE VALUE ADVANTAGE SHARES

You can exchange your SchwabFunds(R) shares for shares of other SchwabFunds(R)
classes or series available in your state provided you meet the minimum
investment and any other requirements relating to the class of shares you wish
to purchase.

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To exchange your Value Advantage Shares:

- The shares you seek to buy must be available in your state.
- After the Transfer Agent receives your exchange request, the Transfer
Agent will sell your shares at the net asset value next determined (on
the same day as the Transfer Agent received your request, if it was
received by 4:00 p.m. (Eastern time) and on the next Business Day if
your request was received after that time).
- The Transfer Agent will buy shares in the fund you have selected at
the net asset value of that fund's shares next determined after the
sale of the Fund shares you are exchanging (on the same day as the
Transfer Agent received your request, if it was received by 4:00 p.m.
(Eastern time) and on the next Business Day if your request was
received after that time).
- The Transfer Agent will charge you a $5 administrative fee if you are
exchanging less than $5,000 of Value Advantage Shares.
- You must meet the minimum investment requirements of the fund or class
whose shares you are buying in the exchange.

We reserve the right to modify, limit, or terminate the exchange privilege upon
60 days' written notice. For federal income tax purposes, an exchange of shares
is treated as a sale of shares.

EXCHANGING SHARES BY TELEPHONE. You can exchange shares by telephone by calling
your local Schwab office during regular business hours, or by calling 800-2
NO-LOAD. The right to initiate transactions by telephone is automatically
available through your Schwab account.

We will follow reasonable procedures to confirm that your telephone instructions
are genuine. If we follow telephone orders that we reasonably believe to be
genuine, we will not be liable for any losses you may experience. If we do not
follow reasonable procedures to confirm that your telephone order is genuine, we
may be liable for any losses you may suffer from unauthorized or fraudulent
orders. These procedures may include:

- requiring a form of personal identification before we act upon any
instructions received by telephone;
- providing written confirmation of your telephone instructions; and
- tape recording all telephone transactions.

We need the following information in order to process your telephone exchange
request:

- your Schwab brokerage account number;
- the name of the fund into which you want to exchange shares; and
- the number of our shares you want to exchange.

You should remember that it may be difficult to reach us by telephone to
exchange shares during periods of drastic economic or market changes, when our
phone lines become very busy with calls from other investors. If you want to
exchange your shares but have trouble reaching us by telephone, you may want to
use one of the other ways we offer for exchanging your shares, even though these
procedures may mean the exchange of your shares may take longer.

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EXCHANGING SHARES BY MAIL. You can also exchange shares by writing to your local
Schwab office or to the address on the cover of this Prospectus.

We need the following information in a letter from you in order to process your
mail exchange request:
- your Schwab brokerage account number;
- a statement that you want to exchange our shares;
- the name of the fund into which you want to exchange shares;
- the number of our shares you want to exchange; and
- the signature of at least one of the registered Schwab brokerage
account holders of your account in the exact form specified in the
account.

HOW TO SELL YOUR SHARES

You can sell our shares at any time, in person, by telephone, or by mail,
subject to the following terms and conditions:

- the selling price of your shares will be the net asset value per share
next determined after the Schwab's Mutual Fund Transfer Agency
Department has received proper instructions from you;
- the Transfer Agent may sell additional shares from your account to pay
the administrative fee;
- if you bought your shares by check, we will send you your money as
soon as your check clears your bank, which may take up to 15 days;
- depending on the type of Schwab brokerage account you have, your money
may earn interest during any holding period;
- you will receive the dividends declared for the day on which you sell
your shares;
- we will have a check for your shares at your local Schwab office on
the Business Day after the Transfer Agent receives proper instructions
to sell your shares;
- a check will be mailed to you on the Business Day following the sale
of your shares if you specifically request that it be mailed; and
- we may suspend the right to sell shares or postpone payment for a sale
of shares when trading on the New York Stock Exchange (the "Exchange")
is restricted, the Exchange is closed for any reason other than its
normal weekend or holiday closings, emergency circumstances as
determined by the SEC, or for any other circumstances as the SEC may
permit.

The Transfer Agent will charge you a $5 administrative fee if you sell Value
Advantage Shares equal to or less than $5,000.

The Transfer Agent will waive this minimum for certain clients of Schwab
Institutional, a division of Schwab, and for certain other investors. See the
Statement of Additional Information for more details.

SELLING YOUR SHARES BY TELEPHONE. You can sell your shares by telephone by
calling your local Schwab office during regular business hours, or by calling
800-2 NO-LOAD.

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Schwab's Mutual Fund Transfer Agency Department must receive and verify your
telephone order before 4:00 p.m. (Eastern time) on a Business Day. Schwab's
Mutual Fund Transfer Agency Department will consider all other telephone orders
as received on the following Business Day.

We need the following information in order to process your telephone sale
request:

- your Schwab brokerage account number; and
- the number of shares you want to sell.

You should remember that it may be difficult to reach us by telephone to sell
shares during periods of drastic economic or market changes, when our phone
lines may become very busy with calls from other investors. If you want to sell
your shares but have trouble reaching us by telephone, you may want to use one
of the other ways we offer for selling your shares, even though these procedures
may mean that the sale of your shares may take longer.

IMPORTANT INFORMATION ABOUT YOUR INVESTMENT

DIVIDENDS AND OTHER DISTRIBUTIONS

Each Business Day we determine our net investment income, which we compute by
subtracting the expenses of the Value Advantage Shares of a Fund for that day
from the amount the Fund earned on its investments on that day. We declare
dividends from this net investment income each Business Day for those who were
shareholders of record at the previous net asset value calculation. We pay, or
reinvest, dividends on the 15th day of each month if it is a Business Day. If
the 15th is not a Business Day, we pay dividends on the next Business Day.

INCOME TAX INFORMATION

The following is only a very brief summary of some of the federal, California
and New York income tax consequences that affect us and our shareholders.
Therefore, it is important that you consult with advisers about your own tax
situation.

We have qualified as a regulated investment company under the Code. In order to
continue to qualify, we will distribute to our shareholders on a current basis
substantially all of our investment company taxable income, its net
exempt-interest income, and its capital gain net income (if any), and we will
meet certain other requirements. As a regulated investment company, we will pay
no federal income taxes (or California State or New York State or municipal
income taxes, in the case of the California

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Fund and the New York Fund, respectively) to the extent that we distribute our
earnings to our shareholders. In addition, if a Fund does not distribute 98% of
its taxable investment income and capital gains, it will be subject to a
non-deductible 4% excise tax on the undistributed amount.

THE TAX-EXEMPT FUND. Dividends representing net interest income received by the
Tax-Exempt Fund on Municipal Securities will generally be exempt from federal
income tax when distributed to you. However, such dividends may be subject to
the federal alternative minimum tax. Such dividend income may also be taxable to
you under state and local law as dividend income even though all or a portion of
such distributions may be derived from interest on tax-exempt obligations which,
if received directly by you, would be exempt from such income taxes.

THE CALIFORNIA FUND. Dividends representing net interest income received by the
California Fund on Municipal Securities will generally be exempt from federal
income tax when distributed to you. However, such dividends may be subject to
the federal alternative minimum tax. Dividends paid to California residents to
the extent of interest income received on California Municipal Securities will
also be exempt from California personal income taxes provided that at the end of
each quarter of its taxable year, at least 50% of the Fund's total assets are
invested in California Municipal Securities and obligations of the U.S.
Government, its agencies and instrumentalities which are by federal law exempt
from local income taxes. Fund dividends derived from interest on U.S. Treasury
and agency obligations, if any, are subject to federal income tax. Dividends
paid to shareholders that are corporations subject to California franchise tax
or corporate income tax will be taxed as ordinary income to such shareholders
for California State tax purposes.

THE NEW YORK FUND. Dividends representing net interest income received by the
New York Fund on Municipal Securities will generally be exempt from federal
income tax when distributed to you. However, such dividends may be subject to
the federal alternative minimum tax. Dividends paid to New York residents to the
extent of interest income received on New York Municipal Securities will also be
exempt from State of New York and New York municipalities personal income taxes.
Fund dividends derived from interest on U.S. Treasury and agency obligations, if
any, are subject to federal income tax. Dividends paid to shareholders that are
corporations subject to New York franchise tax or corporate income tax will be
taxed as ordinary income to such shareholders for New York State tax purposes.

ADDITIONAL INFORMATION. Further, if you receive Social Security or railroad
retirement benefits, an investment in any of the Funds may affect the taxation
of your benefits.

Each Fund may at times purchase Municipal Securities, California Municipal
Securities, or New York Municipal Securities, as the case may be, at a discount
from the original issue price. For federal income tax purposes, some or all of
this "market discount" will be included in the Fund's ordinary income and will
be taxable to you as this ordinary income is distributed.

To the extent dividends are attributable to taxable interest or short-term or
long-term capital gains, such dividends will be taxable to you whether you
receive them as cash or as additional Value Advantage Shares.

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We will provide you with a record of all dividends, distributions, purchases,
and sales on your regular Schwab brokerage account statement. At least once a
year we will notify you of the federal (and California and New York) income tax
consequences of all distributions made that year to your account. The Funds do
not expect to realize any net long-term capital gains and, therefore, do not
foresee paying any capital gains dividends.

HOW WE DETERMINE THE PRICE OF YOUR VALUE ADVANTAGE SHARES

The price of a Value Advantage Share is its net asset value, which we determine
each Business Day at the close of trading on the Exchange, generally at 4:00
p.m., Eastern time. We determine the price of a Value Advantage Share by taking
the total assets of each Fund allocable to the Value Advantage Shares,
subtracting any liabilities allocable to the Value Advantage Shares of the Fund,
and then dividing the resulting number by the number of each Fund's Value
Advantage Shares outstanding. While we try to maintain our net asset value at a
constant $1 per share, we cannot guarantee this value.

We do not price the securities in our portfolios at market value. Instead, we
value our portfolio securities at the price we paid when we bought them,
adjusting this price to reflect amortization of premium or any discount. After
using this amortized cost method to determine the value of our investments, we
then compare this value with the market value of our investments.

We calculate the market value of our investments using one of the following
three methods: (1) we may use actual quotations provided by third-party pricing
services or market makers; (2) we may estimate the market value of the
instruments; or (3) we may use a value obtained from the yield data (published
by reputable sources) of money market instruments that are comparable to the
securities we are valuing, using the mean between the bid and asked prices for
the instruments as the value of the instruments.

If deviation of 1/2 of 1% or more between our net asset value per share as
calculated by market values and our $1 per share amortized cost value, or if
there is any other deviation which the Board of Trustees believes would result
in a material dilution to shareholders or purchasers, the Board of Trustees will
promptly consider what action, if any, should be taken.

The Schwab Tax-Exempt Money Fund and the Schwab California Tax-Exempt Money Fund
have entered into transactions with Bank of America National Trust and Savings
Association ("Bank of America") pursuant to which each such Fund is a
beneficiary of an irrevocable Letter of Credit (each a "Letter of Credit")
issued by Bank of America. The Letters of Credit provide a degree of credit
support for certain securities held by each such Fund, currently including
certain obligations of Orange County, California and issuers that participated
in the investment pool maintained by Orange County (each a "Covered Security").
Orange County and the investment pool maintained by Orange County have filed for
protection under Chapter 9 of the federal Bankruptcy Code. Pursuant to each
Letter of Credit, Bank of America will make certain payments to each of the
above-referenced Funds (each a "Payment") upon presentation of a certificate as
required under each Letter of Credit in the

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event that (i) the issuer of a Covered Security defaults on a repayment of the
principal amount of the Covered Security, or (ii) the proceeds received in the
disposition of a Covered Security are less than a specified percentage of the
Covered Security's par amount. Neither Fund is obligated to reimburse Bank of
America for any amount drawn under the Letters of Credit. The Letters of Credit,
however, do not ensure that each such Fund will receive Payments equal to the
aggregate amount of each Fund's Covered Securities. Accordingly, although the
Board of Trustees has determined that the Covered Securities subject to the
Letters of Credit currently present minimal credit risks, each Fund could incur
losses as a result of its holdings of Covered Securities.

HOW THE FUNDS REPORT PERFORMANCE

From time to time, we may advertise the yield and effective yield of our Value
Advantage Shares. Our actual performance will, of course, vary from year to
year, and past performance in no way represents or guarantees future
performance. How we perform in any given year will depend on the type and
quality of securities in which we invest, the market, and the operating expenses
of each Fund's Value Advantage Shares. Because the Value Advantage Shares are
subject to different expenses than Sweep Shares, the performance of the two
classes of each Fund will differ.

YIELD. When we calculate the yield of the Value Advantage Shares, we make some
hypothetical assumptions about how the Fund will do for one year. Using the
income generated over one 7-day period by a hypothetical investment, we assume
that this amount of income is generated each week for one year. This income for
the year is then shown as a percentage of our hypothetical investment. (See the
section entitled "Yield" in the Statement of Additional Information for more
information.)

EFFECTIVE YIELD. We calculate effective yield the same way, but we assume that
the income generated by our hypothetical investment is compounded weekly over
our hypothetical year. Because of the effect of compounding, the effective yield
will be slightly higher than the yield.

TAXABLE EQUIVALENT YIELD. The taxable equivalent yield is the yield that a
taxable investment must generate in order to equal (after applicable taxes are
deducted, assuming the investor is in the highest federal income tax bracket)
the yield for a tax-free investment. The taxable equivalent yield may be
reported for the Value Advantage Shares of our Funds and will be based on, and
will be higher than, the yield for the Sweep Shares of our Funds.

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COMPARING THE PERFORMANCE OF THE VALUE ADVANTAGE SHARES OF THE FUNDS WITH OTHER
FUNDS. We may compare the performance of the Value Advantage Shares of our Funds
with the performance of other mutual funds by comparing the ratings of mutual
fund rating services, various indices of investment performance, United States
government obligations, bank certificates of deposit, the consumer price index,
and other investments for which reliable data is available.

ANNUAL REPORT AND SEMI-ANNUAL REPORT MAILINGS. Twice a year, we will provide a
report to all shareholders describing the performance of the Value Advantage
Shares of the Funds and outlining the investments held in the portfolios. In
order to reduce mailing costs, we consolidate these shareholder mailings by
household. If a household has multiple accounts and the same address of record
for all the accounts, we will send mailings for all accounts at that address in
a single package. If you do not want this consolidation of mailings to apply to
your account, please write to SchwabFunds(R) at the address on the front of this
Prospectus. To request a free copy of our Annual Report (or SemiAnnual Report)
to Shareholders, call your local Schwab office or call 800-2 NO-LOAD.

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GLOSSARY OF IMPORTANT TERMS

AMORTIZED COST METHOD: the method of calculating a money market mutual fund's
net asset value whereby portfolio securities are valued at the fund's
acquisition cost, as adjusted for amortization or premium or accretion of
discount, rather than at their value based on current market factors.

ANNUALIZED: calculated to represent a year; a statement produced by calculating
financial results covering less than a year to show what might happen when the
results are hypothetically extended to cover an entire year.

BOND: a debt obligation that requires the issuer to pay a fixed sum of money
each year (the interest payments) until maturity, the date on which the bond
comes due and the principal (the amount borrowed) must be paid. Floating or
variable rate bonds have an interest rate that rises or falls if general
interest rates or some other security (such as Treasury bills) rises or falls.

BUSINESS DAY: any day both the Federal Reserve Bank of New York and the New York
Stock Exchange are open for business. A Business Day normally begins at 9 a.m.
(Eastern time) when the Exchange opens, and usually ends at 4 p.m. (Eastern
time) when the Exchange closes.

CAPITAL GAIN OR LOSS: the increase or decrease in the value of a security over
the original purchase price. A gain is realized when the security that has
increased in value is sold. An unrealized gain or loss occurs when the value of
a security increases or decreases but the security is not sold. If a security is
held for more than 12 months and then sold at a profit, that profit is a
realized long-term capital gain. If it is sold at a profit after being held for
less than 12 months, that profit is a realized short-term capital gain.

CODE: The Internal Revenue Code of 1986, as amended.

COMMERCIAL PAPER: unsecured debt obligations issued by businesses and sold at a
discount but redeemed at par within 2 to 270 days.

DISTRIBUTION: payment a fund makes to shareholders. There are two kinds of
distributions: dividends, or the profits (after expenses) from a fund's
investments, and capital gains distributions.

DIVERSIFIED: Under the 1940 Act, a diversified money market fund generally may
not invest more than 5% of its assets in the securities of any one issuer, and
may not hold more than 10% of the voting shares of any one issuer. Certain minor
exceptions apply to this policy, which are described under "INVESTMENT
TECHNIQUES USED BY THE FUND--Limitations on Investments--Diversification."

DUFF: Duff & Phelps Credit Rating Co., an NRSRO.

FIRST-TIER: The highest ratings category assigned by an NRSRO. A first-tier
money market fund invests only in securities that are rated first-tier.

FITCH: Fitch Investor Services, Inc., an NRSRO.

FUNDAMENTAL: a policy which can not be changed without the approval of a
majority (as defined in the 1940 Act) of the shareholders of a fund.

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HIGH-QUALITY: rated in one of the two highest ratings categories assigned by any
NRSRO.

INVESTMENT MANAGER: Charles Schwab Investment Management, Inc.

LIQUIDITY: ability to convert assets into cash or cash equivalents within seven
days at a fair value.

MATURITY: the date on which the principal of a debt obligation such as a bond
comes due and must be repaid.

MONEY MARKET INSTRUMENT: short-term, liquid debt such as Treasury bills and
commercial paper, which is sold at a discount but redeemed at par. See
Commercial Paper.

MOODY'S: Moody's Investors Service, an NRSRO.

MUTUAL FUND: See definition of "Open-End Fund" below.

NET ASSET VALUE (NAV): on a per share basis, the value of one share of a class
of a fund. This value is determined by adding the total fund assets, subtracting
all liabilities applicable to the class, and then dividing the resulting number
by the number of shares of the class outstanding.

1940 ACT: the Investment Company Act of 1940, as amended.

NONCUMULATIVE VOTING RIGHTS: the right of a shareholder to vote only the number
of shares owned at the time of voting.

NONDIVERSIFIED: under the 1940 Act no fund may invest more than 5% of the value
of its total assets in the securities of one issuer except that, a
non-diversified money market fund may invest up to 50% of the value of its total
asset without regard to the 5% limitation, provided no more than 25% of the
Fund's total assets are invested in the securities of any one issuer.

NRSRO: a Nationally Recognized Statistical Rating Organization, such as Moody's,
S&P, Duff or Fitch.

OPEN-END FUND: also called a mutual fund; an investment company in which people
invest by buying its shares, thereby pooling their money and allowing the fund
to invest in a number of securities. The fund distributes the profits from these
investments, after expenses, to the fund's shareholders. Although shares in the
fund are sold publicly, they are not traded on an open exchange because the fund
will buy and sell shares to meet investor demand. Since the company is not
limited as to the number of shares it can issue, the company's capitalization is
not fixed but open.

PAR: for a stock, par is the value assigned to the stock at the time it is
issued. It does not reflect either the intrinsic value of the security nor its
market value. For a bond, par is the price at which the bond will be redeemed at
its date of maturity, and the value on which the calculation interest payments
is based.

PORTFOLIO: the total stocks, bonds, and other securities held by an individual
investor, a mutual fund, or a financial institution.

PRINCIPAL: capital; the original value of an investment or a debt; the face
value of a bond.

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PRIVATE PLACEMENT: the sale of stocks or bonds directly to an investor without
the services of an underwriter or without registering them with the SEC.

PUT: an option that allows the holder to sell the stated amount of a specified
stock or commodity for a specific amount within a certain time period.

RESTRICTED SECURITY: securities that cannot be sold publicly without prior
agreement with the issuer to register the securities under the Securities Act of
1933, which permits only limited sale under specified conditions.

RISK: the possibility of losing all or part of an investment, that the value of
the investment will decrease, or that the investor will receive little or no
return on the investment.

S&P: Standard & Poor's Corporation, an NRSRO.

SCHWAB: Charles Schwab & Co., Inc. 101 Montgomery Street, San Francisco, CA
94104.

SECURITIES AND EXCHANGE COMMISSION (SEC): established by Congress to administer
the Securities Act of 1933 and other securities-related laws.

SECURITIES INVESTOR PROTECTION CORPORATION (SIPC): a government sponsored
private corporation that insures securities accounts held in brokerages for up
to $500,000 in the event of the bankruptcy or financial failure of the
brokerage. The insurance does not cover loss due to financial risk.

SHORT-TERM: with respect to a fund's portfolio investments, maturing in 397 days
or less.

SYNTHETIC: an investment instrument (such as a fixed rate municipal bond) and an
option contract (such as a put) combined to create a security with desired
maturity or risk/return characteristics that may not be achievable through other
available investments.

TRANSFER AGENT: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.

TRUST: The Charles Schwab Family of Funds.

YIELD: the dividend or interest paid by a security. The yield is calculated as a
percentage of the security's current market price. A stock selling for $80 per
share and paying dividends of $6.40 is yielding 8 percent ($6.40 / $80 = .08).
Likewise, a bond with a par or face value of $1,000 and a 9 percent interest
rate selling for $600 is yielding 15 percent ($90 / $600 = .15). Interest on a
bond is always based on the par or face value of the bond, while the yield or
return is based on the market price.

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================================================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH AN OFFER MAY NOT BE LAWFULLY
MADE.
================================================================================

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Prospectus June 6, 1995

2400 (6/95)