SCHWAB INVESTMENTS, 485APOS, 1997-08-15

SCHWAB INVESTMENTS
485APOS, 1997-08-15

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<PAGE> 1
File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on August 15, 1997

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 17 [X]
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21 [X]
--------------
SCHWAB INVESTMENTS
(Exact Name of Registrant as Specified in Charter)

101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code:
(415) 627-7000

Timothy F. McCarthy, President
Schwab Investments
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)

Copies of communications to:

Martin E. Lybecker, Esq. Matthew M. O'Toole
Ropes & Gray Charles Schwab Investment
One Franklin Square Management, Inc.
1301 K Street, N.W., 101 Montgomery Street
Suite 800 East San Francisco, California 94104
Washington, D.C. 20005

It is proposed that this filing will become effective (check appropriate box):

/ / Immediately upon filing pursuant to paragraph (b)

/ / On [date] pursuant to paragraph (b)

/ / 60 days after filing pursuant to paragraph (a)(i)

/ X / On November 1, 1997, pursuant to paragraph (a)(i)

/ / 75 days after filing pursuant to paragraph (a)(ii)

/ / On [date], pursuant to paragraph (a)(ii) of Rule 485
<PAGE> 2
if appropriate, check appropriate box:

/ / This post-effective amendment designates a new effective date for
a previously filed post-effective amendment

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended,
Registrant has registered an indefinite number or amount of shares of beneficial
interest under the Securities Act of 1933, as amended. The Rule 24f-2 Notice for
Registrant's fiscal year ended August 31, 1997 will be filed on or about October
31, 1997.
<PAGE> 3
CROSS REFERENCE SHEET

SCHWAB INVESTMENTS:
SHORT-TERM BOND MARKET INDEX FUND
TOTAL BOND MARKET INDEX FUND
<TABLE>
<S> <C>
- --------------------------------------------------------------- --------------------------------------------------------------
Part A Item Prospectus Caption

- --------------------------------------------------------------- --------------------------------------------------------------
- --------------------------------------------------------------- --------------------------------------------------------------
Pending Legal Proceedings Inapplicable
- --------------------------------------------------------------- --------------------------------------------------------------
</TABLE>
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Key Features........................................................ 2
Expenses............................................................ 3
Financial Highlights................................................ 4
Performance......................................................... 5
Organization & Management........................................... 6
Investment Objectives, Policies & Risks ............................ 7
Investing in Shares................................................. 12
</TABLE>

The Prospectus provides concise information that you should know before
investing. Please retain it for future reference.

The Statement of Additional Information (SAI), dated November 1, 1997, contains
additional information and is incorporated by reference into the Prospectus. The
SAI has been filed with the Securities and Exchange Commission (SEC). The SEC
maintains a World Wide Web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference and other information. The SAI is available
without charge by calling 800-2 NO-LOAD (800-345-2550 for TDD users) or writing
to 101 Montgomery Street, San Francisco, California 94104.

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

SHORT-TERM BOND MARKET INDEX FUND

TOTAL BOND MARKET INDEX FUND

PROSPECTUS
NOVEMBER 1, 1997

SHORT-TERM BOND MARKET INDEX FUND (Short Bond Fund) seeks current income by
tracking the performance of the Lehman Brothers Mutual Fund Short (1-5)
Government/Corporate Index, an index covering bonds with maturities between 1
and 5 years.

TOTAL BOND MARKET INDEX FUND (Total Bond Fund) seeks current income by tracking
the performance of the Lehman Brothers Aggregate Bond Index, a broad-based
index covering bonds with maturities of over 1 year.
<PAGE> 5
KEY FEATURES

MATCHING A FUND TO YOUR INVESTMENT NEEDS: Unlike actively managed funds, each
Fund seeks to track the performance of an index, which attempts to represent a
particular market, or market sector. Because each Fund will invest in a large
number and broad range of bonds, each Fund could provide a diversified bond fund
investment for your asset allocation plan. Each Fund could be an excellent
choice for a variety of investment programs, including the core component of the
bond portion of an investment portfolio tailored to your specific investment
needs.

GOAL: Short Bond Fund seeks current income by tracking the performance of the
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index, an index
covering bonds with maturities between 1 and 5 years that includes U.S. Treasury
and agency securities and investment grade corporate and international
(dollar-denominated) bonds.

Total Bond Fund seeks current income by tracking the performance of the Lehman
Brothers Aggregate Bond Index, a broad-based index covering bonds with
maturities over 1 year that includes U.S. Treasury and agency securities,
corporate investment grade bonds, international (dollar-denominated) investment
grade bonds, and mortgage-backed securities.

There is no guarantee the Funds will achieve their goals.

STRATEGY: Each Fund intends to achieve its goal by following an indexing
investment strategy.

Each Fund intends to operate as a diversified mutual fund.

RISKS: While indexing strategies may reduce the risks associated with active
management, they do not ensure against interest rate risks and other risks
typically associated with fixed-income investing, such as income risk, credit
risk, and prepayment/call risks. Read the "Investment Objectives, Policies and
Risks" section for more details.

MANAGEMENT: Charles Schwab Investment Management, Inc. (the Investment Manager)
currently provides investment management services to the SchwabFunds(R), a
family of 30 mutual funds with over $xx billion in assets as of [date].

SHAREHOLDER SERVICE: Charles Schwab & Co., Inc. (Schwab) provides professional
representatives 24 hours a day at 800-2 NO-LOAD to service your accounts. Schwab
was established in 1971 and is one of America's largest discount brokers. Schwab
helps over [XX] million customers make investment decisions by offering them low
cost brokerage services and providing them with financial products and
information. Visit one of Schwab's [number] branch offices or Schwab's World
Wide Web site (http://www.schwab.com) for information on investment products and
services. Read the "Investing in Shares" section of the prospectus for
information on "How to Buy" and "How to Sell" shares of the Fund.

LOW COST INVESTING: The Investment Manager and Schwab have voluntarily
guaranteed that, through at least December 31, 1998, total operating expenses of
the Short Bond Fund and the Total Bond Fund will not exceed 0.38% and 0.30%,
respectively, of each Fund's daily net assets.

2
<PAGE> 6
EXPENSES

SHAREHOLDER TRANSACTION EXPENSES are charges you may pay when you buy, sell or
exchange shares of the Funds.

<TABLE>
<S> <C>
Maximum sales charge on purchases and reinvested dividends NONE
Deferred sales charge on redemptions NONE
Redemption fee for amounts less than $5,000) [$X.XX]*
Exchange fee (for amounts less than $5,000) [$X.XX]
Account maintenance fees NONE**
</TABLE>

* Read the "Investing in Shares" section of the prospectus for information
concerning wire redemption fees.

** Read the "Investing in Shares" section of the prospectus for information
concerning fees that may be charged if you do not maintain the required minimums
in the Fund or in your Schwab account.

ANNUAL OPERATING EXPENSES are paid by the Fund. These expenses include
management fees paid to the Investment Manager and other fees for services such
as maintaining shareholder records and furnishing shareholder statements and
financial reports. These expenses are factored into the price of a Fund's
shares and into the dividends paid to shareholders. As a shareholder, you are
not charged any of these fees directly.

The following figures are based on historical expenses (adjusted to reflect
current fees) and are stated as a percentage of average daily net assets of each
Fund.

SHORT BOND FUND
<TABLE>
<S> <C>
Management fee (after reduction) [X.XX%]
12b-1 fee NONE
Other expenses (after reduction) [X.XX%]
TOTAL OPERATING EXPENSES
(AFTER REDUCTION) [X.XX%]

TOTAL BOND FUND
Management fee (after reduction) [x.XX%]
12b-1 fee NONE
Other expenses (after reduction) [X.XX%]
TOTAL OPERATING EXPENSES
(AFTER REDUCTION) [X.XX%]
</TABLE>

EXAMPLE: If the Short Bond Fund and Total Bond Fund were to provide an annual
return of 5%, you would pay the following expenses on a $1,000 investment,
whether you redeem your shares at the end of each period or left your shares
invested.

SHORT BOND FUND

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------

TOTAL BOND MARKET FUND

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------

THE EXPENSE TABLES AND EXAMPLES ABOVE ARE SUPPOSED TO HELP YOU UNDERSTAND THE
COSTS OF OWNING SHARES IN THE FUNDS. ACTUAL EXPENSES MAY BE GREATER OR LESSER
THAN THOSE SHOWN.

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<PAGE> 7
The Investment Manager and Schwab have voluntarily agreed to guarantee, at least
through December 31, 1998, that total operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) of the Short Bond Fund
and the Total Bond Fund will not exceed 0.38% and 0.30%, respectively, of each
Fund's average daily net assets. The expense information for the Short Bond
Fund has been restated to reflect the current fee guarantees. If these
guarantees were not in effect the management fee, other expenses and total
operating expenses for the Short Bond Fund and Total Bond Fund would have been
[0.xx%], [0.xx %]and [0.xx%] and [0.xx%], [0.xx%] and [0.xx%], respectively, of
each Fund's average daily net assets. Read the "Organization and Management"
section of this prospectus for more information on expenses.

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<PAGE> 8
FINANCIAL HIGHLIGHTS

The following information has been audited by _____________, independent
accountants for the Funds. Their Report is included in the Annual Report for the
Funds, which is a separate report that contains additional financial
information.

The report, financial highlights and financial statements are incorporated by
reference into the SAI. For free copies of the Annual Report and/or the SAI,
call 1-800-2 NO-LOAD.

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<PAGE> 9
PERFORMANCE

Typically, mutual funds report performance in terms of total return or yield.

TOTAL RETURN is the actual annual return of an investment assuming both the
reinvestment of any income earned and any change in share price. A cumulative
total return is the actual total return of an investment over a stated period of
time, while an average annual total return is a hypothetical rate of return,
which, if achieved annually would have produced the same cumulative total
return. An average annual total return will smooth out the actual year-to-year
fluctuations of an investment's return.

YIELD is the actual income earned on an investment over a stated period of time
and annualized (assumed to be generated over a year). For example, a thirty-day
yield measures the income earned on an investment over thirty days, annualizes
it and expresses that income as a percentage of the original investment.

An effective yield is calculated similarly, but income earned is assumed to be
reinvested. Because of this compounding effect, effective yields are generally
higher.

The Funds did not follow indexing strategies prior to [date]. As a result each
Fund's performance should not be expected to track the performance of its Index
prior to that date.

Fund strategies, performance and holdings are detailed in financial reports
which are sent to shareholders twice a year. For a free copy of the most recent
financial report, call 1-800-2 NO-LOAD.

6
<PAGE> 10
ORGANIZATION & MANAGEMENT

EACH FUND IS A DIVERSIFIED MUTUAL FUND. Each Fund is a series of Schwab
Investments (the Trust).

THE FUNDS ARE OVERSEEN BY A BOARD OF TRUSTEES. The Board of Trustees meets
regularly to review each Fund's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of each Fund's shareholders.

THE FUNDS MAY HOLD SPECIAL MEETINGS. These meetings may be called for purposes
such as electing Trustees, changing fundamental policies and amending management
contracts. Shareholders are entitled to one vote for each share owned and may
vote by proxy or in person. Proxy materials will be mailed to shareholders prior
to any meetings, and will include a voting card and information explaining the
matters to be voted upon.

THE FUNDS ARE MANAGED BY THE INVESTMENT MANAGER. The Investment Manager is
responsible for managing each Fund's day-to-day business affairs, including
picking each Fund's investments; although the Investment Manager is subject to
the overall authority of the Board of Trustees.

Stephen B. Ward is the Trust's Senior Vice President and Chief Investment
Officer. He has overall day-to-day responsibility for the management of the
Funds' portfolios. Steve joined the Investment Manager as Vice President and
Portfolio Manager in April 1991 and was promoted to his current position in
August 1993. Prior to joining the Investment Manager, Steve was Vice President
and Portfolio Manager at Federated Investors. He graduated with a Masters of
Business Administration from the Wharton School and a Bachelor of Arts in
Economics from Virginia Tech and has been a Chartered Financial Analyst since
1985.

For the services performed under its contract with each Fund, the Investment
Manager is entitled to receive a graduated annual fee, payable monthly from each
Fund.

For the fiscal year ended August 31, 1997, the Short Bond Fund and the Total
Bond Fund paid the Investment Manager investment management fees of 0.xx% and
0.xx%, respectively, of each Fund's daily net assets.

SCHWAB IS THE FUNDS' SHAREHOLDER SERVICES AND TRANSFER AGENT. Schwab provides
Fund information to shareholders, including calculating share price, reporting
shareholder ownership and account activities and distributing the Fund's
prospectuses, financial reports and other informational literature about the
Funds. Schwab also maintains the office space, equipment and

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<PAGE> 11
personnel necessary to provide these services. Schwab also distributes and
markets SchwabFunds and services.

For the services performed as transfer agent under its contract with each Fund,
Schwab is entitled to receive annual fees from the Funds. The fees are payable
monthly in the amount of 0.05% of each Fund's average daily net assets. For the
services performed as shareholder services agent under its contract with the
funds, Schwab is entitled to receive annual fees from the Funds. The fees are
payable monthly in the amount of 0.20% of the average daily net assets of the
Funds.

For the fiscal year ended August 31, 1997, the Short Bond Fund and Total Bond
Fund, respectively, paid total operating expenses in the amounts of [0.xx%] and
[0.xx%] of each Fund's average daily net assets.

The Charles Schwab Corporation is the parent company of the Investment Manager
and Schwab. Charles R. Schwab is the founder, Chairman, Chief Executive Officer
and Director of The Charles Schwab Corporation. As a result of his ownership of
and interests in The Charles Schwab Corporation, Mr. Schwab may be deemed to be
a controlling person of the Investment Manager and Schwab.

8
<PAGE> 12
INVESTMENT OBJECTIVES, POLICIES & RISKS

INVESTMENT OBJECTIVES
Each Fund's investment objective is to attempt to provide a high level of
current income consistent with preservation of capital by seeking to track the
investment results of a particular bond index through the use of an indexing
strategy.

Each Fund's investment objective is fundamental, which means that it may be
changed only by vote of a majority of a Fund's shareholders. Unless otherwise
noted, policies and limitations are non-fundamental and may be changed without
shareholder approval.

INVESTMENT STRATEGIES
Each Fund intends to achieve its objective by following an indexing investment
strategy. Each Fund normally will invest at least 80% of its total assets in the
securities making up its Index.

THE INDEXES are the Lehman Brothers Mutual Fund Short (1-5)
Government/Corporate Index (the Short-Term Index) for the Short Bond Fund and
the Lehman Brothers Aggregate Bond Index (the Aggregate Bond Index) for the
Total Bond Fund. The Short-Term Index is a market-weighted index of
investment-grade debt securities with maturities between one and five years
representing [xxxx] securities as of August 31, 1997. The Aggregate Bond Index
is a market-weighted index of investment-grade debt securities with maturities
of greater than one year representing [xxxx] securities as of August 31, 1997.
The securities in each Index also are required to be publicly issued and have a
par amount outstanding of at least $100 million and a fixed interest rate.

The table below provides a snap-shot of what each Index looked like on August
31, 1997:

<TABLE>
<CAPTION>
SHORT -TERM AGGREGATE BOND
INDEX INDEX
<S> <C> <C>
U.S. GOVERNMENT SECURITIES % %
MORTGAGE-BACKED SECURITIES* % %
CORPORATE BONDS % %
INTERNATIONAL BONDS % %
ASSET-BACKED SECURITIES % %
DOLLAR-WEIGHTED AVERAGE MATURITY Years Years
(DWAM)
</TABLE>

*The Index includes only agency mortgage-backed securities.

THE INDEXING STRATEGY is a method of investment management that relies on an
index to determine the investments of a fund, rather than the judgment of a
portfolio manager. Of course, the portfolio manager of an index fund still uses
his/her judgment, but not in the traditional sense of investment management. By
following indexing strategies, each Fund seeks to match the investment
performance of its Index.

Each Fund will invest in a group of debt securities selected from its respective
index which, when taken together, are expected to perform similarly to its Index
as a whole. This technique is expected to enable each Fund to track the dividend
income and price movements of its index, while minimizing brokerage, custodial
and accounting costs.

Each Fund will seek a correlation between its performance, as measured by its
net asset value per share, including the value of its dividend and capital gain
distributions, and that of its Index of 0.9 or better. A perfect correlation of
1.0 is unlikely as the Funds incur operating expenses unlike the Indexes. The
Investment Manager will monitor the performance of each Fund against its index
and if a tracking error occurs, the Fund will be rebalanced to help bring it in
line with its index. In the event a correlation of 0.9 or better is not
achieved, the Board of Trustees will consider alternative arrangements.

The Funds' transition from an "actively managed" strategy to an "indexing
strategy" is expected to be relatively short. In order to employ the indexing
strategy, the Investment Manager expects that the funds may initially
experience a higher than normal portfolio turnover rate and certain transition
costs (e.g., taxable capital gains/losses and transaction costs.)

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<PAGE> 13
THE RISKS for each Fund are basically those risks associated with investing in
debt securities. Generally speaking, there are four types of risk attendant to
investing in debt securities:

INTEREST RATE RISK is the potential for fluctuations in bond prices due to
changing interest rates. A Fund's or Index's DWAM is an important factor to
consider when determining interest rate risk. This is because DWAM is a measure
of the Fund's or Index's maturity and maturity determines a Fund's or Index's
sensitivity to change interest rates.

INCOME RISK is the potential for a decline in income due to falling interest
rates.

CREDIT RISK is the possibility that a bond issuer will fail to make timely
payments of either interest or principal.

PREPAYMENT RISK or CALL RISK is the likelihood that, during periods of falling
interest rates, bonds will be prepaid (or "called") prior to maturity, requiring
the proceeds to be invested at a generally lower interest rate.

The amount of each type of risk each Fund will be subject to will depend on its
portfolio of investments. Because the Funds intend to track their Indexes, their
risk profiles are expected to be similar to that of their Indexes. For example,
the Short-Term Index does not include mortgage-backed securities (which are
subject to prepayment risk). The Short Bond Fund does not anticipate investing
in mortgage-backed securities (although it has the flexibility to do so). As a
result, the Short Bond Fund is expected to have low prepayment risk (as
compared to the Total Bond Fund).

Here is how the Investment Manager believes the risk profiles for the Funds will
compare:

<TABLE>
<CAPTION>
RISK SHORT BOND TOTAL BOND
TYPE FUND FUND
<S> <C> <C>
Interest Rate Low Medium
Income High Medium
Credit Low Low
Prepayment/Call Low Medium
</TABLE>

PRINCIPAL SECURITIES AND INVESTMENT TECHNIQUES

THE DIFFERENT TYPES OF SECURITIES comprising each index and other securities in
which the Funds may invest are described below:

DEBT SECURITIES are obligations, issued by various entities, including
governments and corporations, in order to raise money. They are basically
"IOUs," but are commonly referred to as bonds. Bonds normally require the issuer
to pay a fixed, variable or floating rate of interest on the amount of money
borrowed (the "principal") until it is paid back (at "maturity"). Upon maturity,
the principal must be repaid.

Debt securities experience price changes when interest rates change. As a rule,
when interest rates rise, bond prices decline or "fall", and when interest rates
fall bond prices rise. Typically, longer-maturity bonds react to interest rate
changes more severely than shorter-term bonds (all else being equal) but
generally offer a greater rate of interest. Debt securities also are subject to
the risk that their issuer will fail to meet its obligation to pay interest
and/or

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principal, and their prices also may be affected by the credit quality of their
issuer.

Investment-grade debt securities are medium- and high-quality securities,
although some still possess varying degrees of speculative characteristics and
risk.

U.S. GOVERNMENT SECURITIES are debt securities issued by the U.S. Treasury or
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities. U.S. Treasury securities are backed by the full faith and
credit of the United States. Not all U.S. Government securities are backed by
the full faith and credit of the United States. Some U.S. Government securities
are supported by a line of credit the issuing entity has with the U.S. Treasury.
Others are supported solely by the credit of the issuing agency or
instrumentality. Of course U.S. Government securities are among the safest
securities, but they are still subject to interest rate risk.

MORTGAGE-BACKED SECURITIES represent an interest in an underlying pool of
mortgages. Issuers of these securities include agencies and instrumentalities of
the U.S. Government, such as the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association, and private entities, such as banks. The
income paid on mortgage-backed securities depends upon the income received from
the underlying pool of mortgages. Mortgage-backed securities include
collateralized mortgage obligations, mortgage-backed bonds and stripped
mortgage-backed securities. These securities are subject to interest rate risk,
like other debt securities, in addition to prepayment risk.

CORPORATE BONDS are debt securities issued by corporations. Although a higher
return is expected from corporate bonds, these securities, while subject to the
same general risks as U.S. Government securities, are subject to greater credit
risks than U.S. Government securities.

INTERNATIONAL BONDS involve additional risks because they are issued by foreign
entities, including foreign governments, banks and corporations. Credit and
liquidity supports also may be provided by foreign entities. Foreign entities
may not be subject to the same regulatory and reporting requirements as domestic
entities. In addition, foreign economic, political and legal developments could
have more dramatic effects on the value of a foreign security, including
international bonds, or its payment of interest and repayment of principal.
While these factors could make international bonds more volatile, the Funds
would not be exposed to any currency risks typically associated with foreign
securities because the Funds may only invest in U.S. dollar-denominated
international bonds.

ASSET-BACKED SECURITIES are securities that are backed by the loans or account
receivables of an entity, such as a bank or credit card company. These
securities are obligations which the issuer intends to repay using the assets
backing them (once collected). Therefore, repayment may depend largely on the
cash-flows generated by the assets backing the securities. Sometimes the credit
support for these securities is limited to the underlying assets, but, in other
cases, may be provided by a third party via a letter of credit or insurance
guarantee. Asset-backed securities are subject to credit and pre-payment risks.

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<PAGE> 15
BOND SUBSTITUTION STRATEGY is a strategy whereby each Fund may, from time to
time, substitute one type of investment grade bond for another. This means that,
as an example, a Fund may hold more corporate bonds and fewer U.S. Treasury
securities than in its Index in order to increase income. This particular bond
substitution - a corporate bond substitution -- may increase the Fund's credit
risk, although this may be softened through increased diversification in the
corporate sector of the bond market.

Restriction: Each Fund will restrict its corporate bond substitutions to issues
with less than 4 years remaining to maturity, and in the aggregate no more than
15% of its net assets.

CREDIT AND LIQUIDITY SUPPORTS may be employed by issuers to reduce the credit
risk of their securities. Credit supports include letters of credit, insurance
and guarantees. Liquidity supports include puts and demand features. These
arrangements move the credit risk of an investment from the issuer of the
security to the support provider.

STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately from each other. While the risks associated with
stripped securities are similar to other securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.

WHEN-ISSUED SECURITIES AND DELAYED DELIVERY SECURITIES are securities that are
purchased but are to be delivered to the buyer at a later than customary date,
price and yield. Generally, the purchaser does not pay for these securities or
earn interest on them until they are delivered, but their value could change
prior to delivery.

ILLIQUID AND RESTRICTED SECURITIES are securities which are not actively traded
or are subject to legal restrictions and, therefore, may be difficult to sell
quickly or without losses.

Restriction: Each Fund will not purchase illiquid securities if, as a result,
more than 15% of its net assets (5% for restricted securities) would be invested
in illiquid securities.

REPURCHASE AGREEMENTS involve a Fund buying securities (usually U.S. Government
securities) from a seller and simultaneously agreeing to sell them back at an
agreed-upon price (usually higher) and time. There are risks that losses will
result if the seller does not perform as agreed.

FUTURES CONTRACTS AND OPTIONS may be entered into by the Funds. A futures
contract requires a Fund to buy or sell a specific dollar amount of a security
at a certain price on a specified future date. There is risk that the securities
will increase or decrease in value prior to that date and cause losses to the
Fund. An option gives a Fund the right to buy or sell a security for an
agreed-upon price during a specified period of time. There is

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<PAGE> 16
risk of loss to a Fund if the option is exercised, as well as the loss of the
cost of the option if it is not exercised.

The risk of loss as to futures contracts and options can be substantial due to
both the low margin deposits required and the degree of leverage that can be
involved. In order to minimize risks, each Fund will segregate appropriate
assets in the amount of the underlying obligation.

Restriction: Each Fund may not enter into a futures contract or option if, as a
result, the required aggregate deposits for such contracts and/or options
exceeds 5% of its total assets or the total amount of the obligations under such
contracts and/or options exceeds 20% of its total assets.

SWAP AGREEMENTS are an exchange of one security or asset for another. A swap may
be entered into in order to change the maturity of a Fund's portfolio or to
protect a Fund's value from changes in interest rates. By entering into a swap
agreement, a Fund is exposed to the risk that the counter party will not fulfill
its obligations.

MONEY MARKET SECURITIES are high-quality, short-term securities that may be
issued by entities such as the U.S. Government, corporations and financial
institutions (like banks.

SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by a Fund. These
investments will cause a Fund to bear duplicative fees for certain services. The
Investment Manager, however, will not charge management fees attributable to
Fund assets that are invested in other investment companies.

The Funds also employ the policies described below:

DIVERSIFICATION involves investing in a wide range of securities and, thereby,
spreading and reducing the risks of investment.

Restriction: As a fundamental policy, with respect to 75% of its assets, each
Fund may not purchase the securities of any issuer if, as a result, more than 5%
of its total assets would be invested in the securities of that issuer. This
limitation does not apply to U.S. Government securities.

BORROWING money may be construed as a form of leveraging if the Fund continues
to make investments while borrowings remain outstanding. Borrowing subjects the
Fund to interest received on the securities purchased with the borrowed funds.

Restriction: Each Fund may borrow up to 33 1/3% of its total assets for
temporary or emergency purposes; provided that neither Fund will purchase
securities while borrowings represent more than 5% of its total assets.

LENDING securities may earn income for a Fund, but could result in losses to the
Fund, and possibly affect share price.

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INVESTING IN SHARES

BUSINESS DAYS

The Funds are open each day the New York Stock Exchange (NYSE) is open (business
days).

NET ASSET VALUE

The price of the shares of each Fund is its NAV. NAV is determined each business
day at the close of the NYSE, generally 4:00 p.m. Eastern time. NAV is
calculated by adding the value of each Fund's assets, subtracting its
liabilities and dividing the result by the number of outstanding shares. Each
Fund's NAV will fluctuate and neither Fund is insured against loss in its NAV.
Each Fund values its portfolio securities based on market quotes if they are
readily available. If market quotes are not readily available, portfolio
securities are assigned fair market values pursuant to guidelines adopted by the
Board of Trustees.

MINIMUM INVESTMENTS

<TABLE>
<S> <C>
INITIAL INVESTMENT: $1,000
for IRAs and other retirement plans: $500
MINIMUM SUBSEQUENT INVESTMENT: $100
</TABLE>

These minimums may not be applicable to certain customers of Schwab
Institutional Services for Investment Managers or Schwab's Retirement Plan
Services.

HOW TO BUY SHARES

Shares may be purchased through a Schwab account or through an account with any
other entity designated by Schwab. Shares are purchased at the NAV next
determined after your purchase order has been received and accepted. Purchase
orders received and accepted by Schwab prior to 4:00 p.m. Eastern time will be
executed that day. Shares begin to earn dividends on the next business day.

BY TELEPHONE. Call 1-800-2 NO-LOAD, 24 hours a day (1-800-345-2550 for TDD
users).

BY MAIL. Write to the Funds at 101 Montgomery Street, San Francisco, CA 94104.

ELECTRONICALLY. Visit Schwab's World Wide Website for more information about
StreetSmart(R), The Equalizer(R) and Telebroker(R), call 1-800-2 NO-LOAD.

TO PURCHASE SHARES OF THE FUNDS. Please provide the following information:

- - your name and Schwab account number;

- - the name of your Fund and class, if applicable, and the dollar amount you
would like to purchase; and

- - for initial purchases only, one of the two distribution choices below:

- - AUTOMATIC REINVESTMENT. Dividends will be reinvested in shares of your Fund.
If you do not choose an option, this option will be assigned to you; or

- - CASH OPTION. Dividends will be paid to your Schwab account and, if
requested, mailed to you the next business day.

HOW TO SELL OR EXCHANGE SHARES

Shares are sold or exchanged at the NAV next determined after your sale or
exchange order has been received and accepted. Sale and exchange orders received
and accepted by Schwab prior to 4:00 p.m. Eastern time will be executed that
day. Shares sold or exchanged earn dividends on that day.

14
<PAGE> 18
BY TELEPHONE. Call 1-800-2 NO-LOAD, 24 hours a day (1-800-345-2550 for TDD
users).

BY MAIL. Write to either Fund at 101 Montgomery Street, San Francisco, CA 94104.

ELECTRONICALLY. Visit Schwab's World Wide Website for more information about
StreetSmart(R), The Equalizer(R) and Telebroker(R), call 1-800-2 NO-LOAD.

TO SELL OR EXCHANGE SHARES OF THE FUNDS. Please provide the following
information:

- - your name and Schwab account number;

- - the name of your Fund you would like to sell or exchange from and the number
of shares;

- - for exchanges only, the name of your Fund and class, if applicable, into
which you would like to exchange and a distribution choice; and

- - if selling or exchanging by mail, a signature of at least one of the persons
named on your Schwab account.

Once mailed, redemption and exchange requests are irrevocable and may not be
modified or canceled.

Contact Schwab for instructions and any applicable fees if you would like to
wire money from your Schwab account.

PLEASE NOTE THE FOLLOWING WHEN SELLING OR EXCHANGING SHARES OF THE FUNDS:

- - a check for your shares will be issued on the business day following receipt
and acceptance of your sale order, and will be mailed to you upon request;

- - if you bought your shares by check, a check will be issued as soon as your
check clears your bank, which may take up to 15 days;

- - depending on the type of Schwab account you have, your money may earn
interest during any holding period;

- - you may exchange your shares for shares of any other Schwab Fund, provided
you meet its minimum investment and any other requirements;

- - the Funds and Schwab reserve the right to modify, limit or terminate the
exchange privilege upon 60 days' written notification; and

- - the Funds may suspend the right to sell shares or postpone payment for a
sale of shares when trading on the NYSE is restricted, the NYSE is closed
for any reason other than its customary weekend and holiday closings,
emergency circumstances exist as determined by the SEC or as otherwise
permitted by the SEC.

OPENING A SCHWAB ACCOUNT

Investors may open a Schwab account by simply completing an application,
although institutional investors should contact Schwab to find out if any
additional forms need to be completed.

Using a Schwab account, investors have access to investments other than just
mutual funds, such as stocks and bonds. The Securities Investor Protection
Corporation (SIPC) provides insurance protection of up to $500,000 for the
securities held in a Schwab account, including shares of the Funds. It is
important to remember that SIPC insurance does not protect against losses due to
market or economic conditions. Schwab accounts require a $1,000 minimum
investment and account balance ($500 for custodial accounts). A fee of $7.50
will be charged to Schwab accounts that fall below this minimum for three
consecutive months in a quarter. The fee, if applicable, will be charged at the
end of each quarter, but will be waived if there has been at least one
commissionable trade within the previous six months, or if the investor's
combined Schwab accounts equal $10,000 or more.

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<PAGE> 19
Schwab One(R) accounts require a $5,000 minimum investment and account balance.
A monthly fee of $5.00 will be charged to Schwab One accounts that fall below
this minimum, unless there have been at least two commissionable trades within
the previous twelve months.

Deposits may be made to Schwab accounts by check, wire and other forms of
electronic funds transfer. Securities also may be deposited. All checks should
be made out to Charles Schwab & Co., Inc. Schwab will charge a $15 service fee
for any checks returned as a result of insufficient or uncollected funds or a
stop order. Monies received by Schwab before 4:00 p.m. Eastern time will be
available for investment in the Fund that day. Monies received by Schwab after
4:00 p.m. Eastern time will be available for investment in the Fund the next
business day.

Contact Schwab for instructions and any applicable fees if you would like to
wire money from your Schwab account.

SPECIAL CONSIDERATIONS FOR SCHWAB ACCOUNTS

If your Schwab account contains no cash or margin credits, Schwab will redeem
shares of the Fund without prior notification to you to cover the following
items.

- - negative balances in your Schwab account as a result of any securities
transactions;

- - payment of any Schwab One checks you have written;

- - payment of any charges you have made using your Visa(R) debit card;

- - purchases you have made under an Automatic Investment Plan;

- - negative balances in your Schwab account as a result of any electronic funds
transactions.

Schwab may charge you a fee each time it must redeem shares of a Fund under any
of these circumstances. However, you will not be charged transaction fees for
redemptions in amounts less than the required minimum, if any, if such
redemptions are made under any of these circumstances.

If you own shares of a Value Advantage Investments(R) Fund, these shares will be
redeemed first (starting with the Fund with the highest balance) unless the sum
of your investments in these funds will not satisfy the total amount due; in
which case, none of your shares in these Funds will be redeemed.

TAX-ADVANTAGED RETIREMENT

Retirement plans offer excellent tax advantage and the Funds may be especially
suitable investments for them. 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 IRA accounts with balances of $10,000 or more by September 15, 1998 will
not be charged Schwab's $29 annual IRA account fee for the life of the account.

SCHWAB KEOGH. A tax-advantaged plan for self-employed individuals and their
employees that permit the employer to make annual tax-deductible contributions
of up to $30,000. Schwab Keogh Plans are currently charged an annual fee of $45.

SCHWAB CORPORATE RETIREMENT ACCOUNT. A well-designed retirement program can help
a company attract and retain valuable employees. Call 800-2 NO-LOAD for more
information.

SCHWAB AUTOMATIC INVESTMENT PLAN

Schwab's Automatic Investment Plan ("AIP") allows you to make periodic
investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. You can make automatic
investments in any amount, from $100 to $50,000, once you meet a Fund's
investment minimum. Automatic investments are made from your Schwab account, and
you may select from the following methods to make automatic investments: using
the uninvested cash in your Schwab account; using the proceeds of

16
<PAGE> 20
redemption of shares of the Schwab money fund linked to your Schwab account; or
using the Schwab MoneyLink(R) Transfer Service. As long as you are purchasing a
Fund's shares through AIP, all dividends and distributions paid to you by the
Fund must be reinvested in additional shares of that Fund. For more detailed
information about this service, or to establish your AIP, call 800-2 NO-LOAD, 24
hours a day.

DIVIDENDS & TAXES

Each business day each Fund's net investment income is determined by subtracting
its expenses from the income earned on its investments that day. Dividends are
declared each business day based on the net investment income determined and are
paid on the 25th of each month, if it is a business day, except in December when
dividends are paid on the last business day of the month. If the 25th is not a
business day, dividends are paid on the next business day.

The following is only a brief summary of some of the federal and state income
tax consequences that may affect each Fund and its shareholders. Unless your
investment in a Fund is through a retirement account, you should consider the
tax implications of investing, and consult with your own tax adviser.

Each Fund will distribute its net investment income and capital gains, if any,
to shareholders each year. All distributions received by shareholders are
subject to federal income tax, and may be subject to state and/or local taxes.
Distributions are taxable when paid, whether they are received in cash or
reinvested, although distributions declared in December, but paid in January,
are taxable as if they were paid on December 31.

Shareholders receive a record of all distributions by the Fund, as well as
purchases and sales they have made, via their monthly Schwab account statement.
Each year, the Fund notifies shareholders of all distributions made by the Fund
that year.

Most states grant tax-exempt status to distributions paid to shareholders from
interest income derived from U.S Government securities. Each year, the Funds
will provide shareholders with the percentage of dividends paid which may
qualify for such tax-exempt status.

GENERAL INFORMATION

As long as either Fund or Schwab follows reasonable procedures to confirm that
your telephone order is genuine, they will not be liable for any losses an
investor may experience. These procedures may include:

- - requiring a form of personal identification before acting upon any

- - telephone order; providing written confirmation of telephone orders; and

- - tape recording all telephone orders.

It may be difficult to place orders by telephone during periods of drastic
economic or market changes because Schwab's phone lines may become very busy
with calls from other investors. Consider other methods for placing an order,
such as writing to the Funds.

Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
Twice a year, financial reports will be mailed to shareholders describing each
Fund's performance and investment holdings. In order to reduce these mailing
costs, each household will receive one consolidated mailing. If you do not want
to receive consolidated mailings, you may write to your Fund and request that
your mailings not be consolidated.

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<PAGE> 21
- --------------------------------------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS AND
IN OFFICIAL SALES MATERIALS. IF ANYONE GIVES ANY OTHER INFORMATION OR MAKES ANY
OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION OR REPRESENTATIONS.
- --------------------------------------------------------------------------------

THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
BE MADE.

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<PAGE> 22
CROSS REFERENCE SHEET

SCHWAB INVESTMENTS:
SHORT-TERM BOND INDEX FUND
TOTAL BOND MARKET INDEX FUND

------------------------------------------------------------------ -----------------------------------------------------------
Part B Item Statement of Additional Information Caption

SCHWAB INVESTMENTS
Short-Term Bond Market Index Fund
Total Bond Market Index Fund
101 Montgomery Street, San Francisco, CA 94104

NOVEMBER 1, 1997

This Statement of Additional Information ("SAI) is not a prospectus. It
should be read in conjunction with the Prospectus, which may be amended from
time to time, dated November 1, 1997, for Short Term Bond Market Index Fund
("Short Bond Fund") and Total Bond Market Index Fund ("Total Bond Fund") (each a
"Fund" and, collectively, the "Funds") of Schwab Investments (the "Trust").
Prior to November 1, 1997 the Short Bond Fund was known as the Schwab
Short/Intermediate Government Bond Fund, and the Total Bond Fund was known as
the Schwab Long-Term Government Bond Fund.

To obtain a copy of any of these Prospectuses, please contact Charles
Schwab & Co., Inc. ("Schwab") at 800-2 NO-LOAD, 24 hours a day or 101 Montgomery
Street, San Francisco, California 94104. TDD users may contact Schwab at
800-345-2550, 24 hours a day. These Prospectuses are also available
electronically by using our World Wide Web address:
http://www.schwab.com/funds.

SCHWABFunds(R)
800-2 NO-LOAD

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----

<S> <C>
INVESTMENT SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . 9
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . 12
PORTFOLIO TRANSACTIONS AND TURNOVER. . . . . . . . . . . . . . . . . 17
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SHARE PRICE CALCULATION. . . . . . . . . . . . . . . . . . . . . . . 20
TOTAL RETURN AND YIELD. . . . . . . . . . . . . . . . . . . . . 20
SCHWABFUNDS INVESTMENT STRATEGIES. . . . . . . . . . . . . . . . . . 21
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 22
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . 25
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 25
APPENDIX - RATINGS OF INVESTMENT SECURITIES. . . . . . . . . . . . . 27
</TABLE>

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<PAGE> 24
INVESTMENT SECURITIES

U.S. GOVERNMENT SECURITIES

Direct obligations of the U.S. Government are supported by the full
faith and credit of the U.S. Treasury. While obligations of certain U.S.
Government agencies and instrumentalities are similarly backed, those of others,
such as the Federal National Mortgage Association and the Student Loan Marketing
Association, are only supported by the right of the issuer to borrow from the
U.S. Treasury, the discretionary authority of the U.S. Government to purchase
the agency's obligations or the credit of the issuing agency or instrumentality.
There can be no assurance that the U.S. Government would provide financial
support to U.S. Government sponsored agencies or instrumentalities if it were
not obligated to do so by law. A Fund will invest in U.S. Government securities
not backed by the full faith and credit of the U.S. Treasury only when Charles
Schwab Investment Management, Inc. (the "Investment Manager") is satisfied that
the credit risk with respect to their issuer is minimal.

GOVERNMENT "MORTGAGE BACKED" SECURITIES

Government "mortgage-backed" (or government guaranteed
mortgage-related) securities are among the U.S. Government securities in which
the Funds may invest. Mortgages backing the securities purchased by certain
Funds include, among others, conventional 30-year fixed rate mortgages,
graduated payment mortgages, 15-year mortgages and adjustable rate mortgages.
All of these mortgages can be used to create pass-through securities. A
pass-through security is formed when mortgages are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgages is
passed through to the holders of the securities in the form of periodic payments
of interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an individual mortgage prepays the remaining principal before
the mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity indicates. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium (i.e., a price in excess of principal
amount) and may involve additional risk of loss of principal because the premium
may not be fully amortized at the time the obligation is repaid. The opposite is
true for pass-throughs purchased at a discount. Certain Funds may purchase
mortgage-related securities at a premium or at a discount. Principal and
interest payments on the mortgage-related securities are guaranteed by the
government to the extent described below. Such guarantees do not extend to the
value or yield of the mortgage-related securities themselves or of a Fund's
shares.

GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.

The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing

2
<PAGE> 25
Administration ("FHA") or guaranteed by the Veterans Administration ("VA"). The
GNMA guarantee is backed by the full faith and credit of the U.S. Government.
The GNMA is also empowered to borrow without limitation from the U.S. Treasury
if necessary to make any payments required under its guarantee.

The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.

FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"): mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble
GNMA Certificates in that each PC represents a pro rata share of all interest
and principal payments made and owed on the underlying pool. The FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal.

GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately 10 years. The FHLMC guarantee is not backed by the
full faith and credit of the U.S.
Government.

FNMA Securities. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages the FHA insures.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FNMA guarantees timely payment of interest and principal
on FNMA Certificates. The FNMA guarantee is not backed by the full faith and
credit of the U.S. Government.

ASSET-BACKED SECURITIES

Certain Funds may invest a portion of its assets in debt obligations
known as "Asset-Backed Securities" that are rated in one of the four highest
rating categories by a nationally recognized statistical rating organization
(e.g., Standard & Poor's Corporation or Moody's Investors Service, Inc.) or, if
not so rated, deemed to be of equivalent quality by the Investment Manager
pursuant to guidelines adopted by the Board of Trustees. The credit quality of
most Asset-Backed Securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator (or any other affiliated
entities) and the amount and quality of any credit support provided to the
securities. The rate of principal payments on Asset-Backed Securities generally
depends on the rate of principal payments received on the underlying assets,
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any Asset-Backed Security is difficult to predict with
precision, and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset-Backed Securities may be classified as "Pass-Through
Certificates" or "Collateralized Obligations."

3
<PAGE> 26
"Pass-Through Certificates" are Asset-Backed Securities that represent
undivided fractional ownership interests in the underlying pool of assets.
Pass-Through Certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
Pass-Through Certificates represent ownership interests in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support.

Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such Asset-Backed Securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
Asset-Backed Securities and any credit support provided. As a result, although
payments on such Asset-Backed Securities are obligations of the issuers, in the
event of default on the underlying assets not covered by any credit support, the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related Asset-Backed Securities.

Repayment of these securities is intended to be obtained from an
identified pool of assets, typically receivables related to a particular
industry, such as asset-backed securities related to credit card receivables,
automobile receivables, trade receivables or diversified financial assets. Based
on the primary characteristics of the various types of asset-backed securities,
for purposes of each Fund's concentration policy, each of the Funds has selected
the following asset-backed securities industries: Credit card receivables,
automobile receivables, trade receivables and diversified assets, and each Fund
will limit its investments in each such industry to less than 25% of its total
assets.

METHODS OF ALLOCATING CASH FLOWS

While many Asset-Backed Securities are issued with only one class of
security, many others are issued in more than one class, each with different
payment terms. Multiple class Asset-Backed Securities are issued for two main
reasons. First, multiple classes may be used as a method of providing credit
support. This is typically accomplished by creating one or more classes with a
right to payments on the Asset-Backed Security that is subordinate to that of
the remaining class or classes. Second, multiple classes may permit the issuance
of securities with payment terms, interest rates or other characteristics that
differ both from those of each other and from those of the underlying assets.
Examples include so-called "multi-tranche CMOs" (collateralized mortgage
obligations) with serial maturities such that all principal payments received on
the mortgages underlying the securities are first paid to the class with the
earliest stated maturity, and then sequentially to the class with the next
stated maturity, "Strips" (Asset-Backed Securities that entitle the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security) and securities with a class or
classes having characteristics that mimic the characteristics of
non-Asset-Backed Securities, such as floating interest rates (i.e., interest
rates that adjust as a specified benchmark changes) or scheduled amortization of
principal.

TYPES OF CREDIT SUPPORT

Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two classes: liquidity protection and protection against ultimate default
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity

4
<PAGE> 27
administering the pool of assets, to ensure that scheduled payments on the
underlying pool are made timely. Protection against ultimate default ensures
payment on at least a portion of the assets in the pool. Such protection may be
provided through guarantees, insurance policies or letters of credit obtained
from third parties, through various means of structuring the transaction, or
through a combination of such approaches. Examples of Asset-Backed Securities
with credit support that arises out of the structure of the transaction include
"senior-subordinated securities" (multiple class Asset-Backed Securities with
certain classes subordinate to other classes as to the payment of principal
thereon, so that defaults on the underlying assets are borne first by the
holders of the subordinated class) and Asset-Backed Securities that have
"reserve funds" (cash or investments, sometimes funded from a portion of the
initial payments on the underlying assets, are held in reserve against future
losses) or that have been "overcollateralized" (the scheduled payments on, or
the principal amount of, the underlying assets substantially exceed that
required to make payment on the Asset-Backed Securities and pay any servicing or
other fees). The degree of credit support provided on each issue is generally
based on historical information respecting the level of credit risk associated
with such payments. Delinquency or loss in excess of that anticipated could
adversely affect the return on an investment in an Asset-Backed Security.

CREDIT CARD RECEIVABLE SECURITIES

Certain Funds may invest in Asset-Backed Securities backed by
receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Most of the Credit Card Receivable Securities issued publicly to
date have been Pass-Through Certificates. In order to lengthen the maturity of
Credit Card Receivable Securities, most such securities provide for a fixed
period during which only interest payments on the underlying accounts are passed
through to the security holder and principal payments received on such accounts
are used to fund the transfer of additional credit card charges made on an
account to the pool of assets supporting the related Credit Card Receivable
Securities. The initial fixed period may usually be shortened upon the
occurrence of specified events that signal a potential deterioration in the
quality of the assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of an issue of
Credit Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during the initial
period and the non-occurrence of specified events. Competitive and general
economic factors could adversely affect the rate at which new receivables are
created in an account and conveyed to an issuer, shortening the expected
weighted average life of the related Credit Card Receivable Security, and
reducing its yield. An acceleration in cardholders' payment rates or any other
event that shortens the period during which additional credit card charges on an
account may be transferred to the pool of assets supporting the related Credit
Card Receivable Security could have a similar effect on the weighted average
life and yield.

Credit card holders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holders the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on accounts. In addition, unlike most other Asset-Backed
Securities, accounts are unsecured obligations of the cardholder.

CALL RIGHTS ATTRIBUTABLE TO SINKING FUNDS FOR CORPORATE BONDS AND ASSET-BACKED
SECURITIES

Bonds typically carry a contract that describes the rights of a
bondholder until the bond's maturity. Within the contract an issuer may include
a provision describing the issuer's

5
<PAGE> 28
establishment of a sinking fund. A sinking fund is the issuer's commitment to
set aside a certain amount of money in a sinking fund to cover timely repayment
of a bondholder's principal raised by a bond issuance. By creating a sinking
fund, the issuer is able to spread repayment of principal to numerous
bondholders while reducing reliance on its then current cash flows. A sinking
fund also may allow the issuer to annually repurchase certain of its outstanding
bonds from the open market or repurchase certain of its bonds at a call price
named in a sinking fund provision. This call provision will allow bonds to be
prepaid or called prior to a bond's maturity. The likelihood of such to occur is
during periods of falling interest rates.

CERTIFICATES OF DEPOSIT AND BANKER'S ACCEPTANCES

Certificates of deposit are certificates issued against funds deposited
in a banking institution for a specified period of time at a specified interest
rate. Bankers' acceptances are credit instruments evidencing a bank's obligation
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. Certain Funds will invest only in certificates of
deposit and bankers' acceptances of banks that have capital, surplus and
undivided profits in excess of $100 million.

COMMERCIAL PAPER

Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs. The Funds will only invest in
commercial paper that at the time of purchase is rated Prime-1 or Prime-2 by
Moody's, A-1 or A-2 by S&P, "Duff 2" or higher by Duff & Phelps Credit Rating
Co. ("Duff"), or "F2" or higher by Fitch or if unrated by Moody's, S&P, Duff or
Fitch, is 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
ratings.

REPURCHASE AGREEMENTS

Repurchase agreements are instruments under which a buyer acquires
ownership of a security from a seller 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 buyer's holding period. Under
the Investment Company Act of 1940, as amended (the "1940 Act"), a repurchase
agreement is deemed to be a Fund's loan of money to the seller, collateralized
by the underlying security. The interest rate is effective for the period of
time in which the Funds are invested in the agreement and is not related to the
coupon rate on the underlying security. Any repurchase agreements a Fund enters
into will involve the Fund as the buyer and banks or broker-dealers as sellers
(repurchase agreements with broker-dealers will be limited to obligations of the
U.S. Government or its agencies or instrumentalities). The period of these
repurchase agreements will be usually short--from overnight to one week--and at
no time will the Funds invest in repurchase agreements for more than one year.
However, securities subject to repurchase agreements may have maturity dates in
excess of one year from the effective date of the repurchase agreements. The
transaction requires the initial collateralization of the seller's obligation
with securities having a market value, including accrued interest, equal to at
least 102% of the dollar amount the Funds invest with the value marked-to-market
daily to maintain 100% coverage. A default by the seller might cause the Funds
to experience a loss or delay in the liquidation of the collateral securing the
repurchase agreement. The Funds might also incur disposition costs in
liquidating the collateral. The Funds will make payment for such securities only
upon physical delivery or evidence of book entry transfer to the account of its
custodian bank. The Funds may not enter into a repurchase agreement of more than
seven days duration if, as a result, the market value

6
<PAGE> 29
of the Funds' net assets, together with investments in other securities deemed
to be not readily marketable, would be invested in excess of the Funds' policy
on investments in illiquid securities.

In the event of a bankruptcy or other default of a repurchase
agreement's seller, a Fund might incur expenses in enforcing its rights, and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Each Fund will not invest more than 15% of its
net assets at the time of purchase in repurchase agreements maturing in more
than seven days and other illiquid securities.

PORTFOLIO MATURITY

From time to time, the Funds may compare their average portfolio
maturities with the average portfolio maturities of other mutual funds having
similar investment objectives.

PORTFOLIO SECURITIES LENDING

Loans of portfolio securities made by any Fund will be fully
collateralized and will be marked to market daily.

FUTURES AND OPTIONS CONTRACTS AND INDEX PARTICIPATION CONTRACTS

The Funds may buy and sell futures contracts on securities and any
index comprised of securities in which the Funds may invest, option contracts on
securities, indexes and futures contracts, and index participation contracts.

In a securities futures contract, one party agrees to make, and the
other agrees to take, delivery of a specific amount of a specific security at a
specified time and price. Under a securities index futures contract, the parties
agree to make or take delivery of an amount of cash equal to a specific dollar
amount times the difference between the value of an agreed-upon securities index
at the end of the contract period and its value at the time the agreement was
originally made. Futures contracts are commonly "closed out" prior to the end of
the contract period by entering into an offsetting transaction in a
corresponding futures contract.

Options on indexes are similar to options on securities except that,
rather than representing the right to take or make delivery of a security at a
specified exercise price, an option on a securities index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the securities index upon which the option is based is "in the money."
This amount of cash is equal to the difference between the closing level of the
index and the exercise price of the option, expressed in dollars times a
specified multiple. Unlike securities options, all settlements are in cash, and
gain or loss depends on price movements in the group of securities comprising
the index rather than price movements of individual securities.

Index participations and index participation contracts provide the
equivalent of a position in the securities comprising an index, with each
security's representation equaling its index weighting. Moreover, their holders
are entitled to payments equal to the dividends paid by the underlying index
securities. Generally, the value of an index participation or index
participation contract will rise and fall along with the value of the related
index. A Fund will invest in index participation contracts only if a liquid
market for them appears to exist.

7
<PAGE> 30
When buying or selling futures contracts, a Fund must deposit an amount
of cash, cash equivalents or liquid, high quality debt instruments with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract, which will be returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," will be
made at least daily as the price of the futures contract fluctuates, and the
Fund's position in the contract becomes more or less valuable. This process is
known as "marking-to-market."

Regulations of the Commodities Futures Trading Commission ("CFTC")
applicable to the Funds generally require that all of their futures transactions
constitute "bona fide" hedging transactions. As a result, a Fund will normally
sell futures contracts to protect against a decrease in the price of securities
it owns but intends to sell or purchase futures contracts to protect against an
increase in the price of securities it intends to purchase. In addition, the
Funds may purchase and sell futures contracts and options as a substitute for a
comparable market position in the underlying securities. Futures transactions
need not constitute "bona fide" hedging under CFTC regulations if the aggregate
initial margin and premiums required to establish such positions do not exceed
5% of each Fund's net assets.

Risks Involved in Futures and Options Transactions. Futures and options
transactions involve risks, which in some strategies can be substantial due to
the low margin deposits required and the extremely high degree of leverage
involved in futures and options trading. However, to the extent the Funds'
futures and options practices are limited to use in tracking the performance of
a Fund's index, the Investment Manager does not believe that the Funds are
subject to the degree of risk frequently associated with futures and options
transactions. To the extent the Funds engage in the use of futures and options
on futures other than for performance tracking purposes, the Funds may be
subject to additional risk.

Three principal areas of risk are present when futures and options
contracts are used in a performance tracking context. First, there may not
always be a liquid secondary market for a futures or option contract at the time
when a Fund seeks to "close out" its position. If a Fund is unable to "close
out" a futures or option position, and prices move adversely, the Fund would
have to continue to make daily cash payments to maintain its required margin,
and if the Fund has insufficient cash to meet this requirement, it may have to
sell portfolio securities at a disadvantageous time. In addition, the Fund might
be required to deliver the securities underlying futures or options contracts it
holds. Each Fund will seek to reduce the risk that it will be unable to "close
out" contracts by entering into only futures or options contracts that are
traded on national exchanges and for which there appears to be a liquid
secondary market.

It is also possible that changes in the prices of futures or options
contracts might correlate imperfectly, or not at all, with changes in the market
values of the securities being hedged. This situation could result from price
distortions in the futures or options markets due to, among other things, active
trading by speculators and use of offsetting "closing" transactions by other
investors seeking to avoid meeting additional margin deposit requirements. In
the event of significant market distortions, it is possible that a Fund could
lose money on futures or options contracts and experience appreciation in the
value of its portfolio securities, or vice versa. The risk of imperfect
correlation will be minimized by investing only in those contracts whose
behavior is expected to resemble that of a Fund's underlying securities.

8
<PAGE> 31
Finally, adverse market movements could cause a Fund to lose up to its
full investment in an options contract and/or to experience substantial losses
on an investment in a futures contract. However, barring such significant market
distortions, a similar result could be expected were the Fund to invest directly
in the securities being hedged. There is also the risk of loss by a Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or option.

The extent to which each Fund may purchase and sell futures, options,
equity index participations and index participation contracts may be limited by
each Fund's intention to meet the Internal Revenue Code of 1986, as amended (the
"Code"), requirements for qualification as a regulated investment company. See
"Taxes - Federal Income Tax."

INVESTMENT RESTRICTIONS

The Following investment policies and restrictions are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act). All other investment
policies and restrictions contained in the SAI are non-fundamental and may be
changed without shareholder approval or prior notice.

EACH FUND MAY:

1) lend or borrow money to the extent permitted by the Investment
Company Act of 1940 or rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.

2) pledge, mortgage or hypothecate any of its assets to the extent
permitted by the Investment Company Act of 1940 or the rules or
regulations thereunder, as such statute, rules or regulations may
be amended from time to time.

3) not concentrate investments in a particular industry or group of
industries, or within one state (except with respect to the Total
Bond Market Index Fund and the Short Term Bond Market Index Fund,
to the extent that the index which each Fund seeks to track is also
so concentrated) as concentration is defined under the Investment
Company Act of 1940 or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.

4) underwrite securities to the extent permitted by the Investment
Company Act of 1940 or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.

5) not, as to 75% of the Fund's assets, purchase securities of any
issuer (other than obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities) if, as a result more
than 5% of the value of its total assets would be invested in the
securities of such issuer.

6) not invest for the purpose of exercising control or management of
another issuer.

7) not purchase securities of other investment companies, except as
permitted by the Investment Company Act of 1940.

9
<PAGE> 32
8) issue senior securities to the extent permitted by the
Investment Company Act of 1940 or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.

9) Purchase or sell commodities, commodities contracts, futures
contracts, or real estate to the extent permitted by the Investment
Company Act of 1940 or rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.

The following description of the 1940 Act may assist investors in
understanding some of the above fundamental policies and restrictions. The
following descriptions are not themselves fundamental.

BORROWING. The 1940 Act presently restricts the Funds from borrowing
(including pledging, mortgaging or hypothecating assets) in excess of 331/3% of
their total assets (not including temporary borrowings not in excess of 5% of
total assets).

LENDING. Under the 1940 Act, a Fund may only make loans if expressly
permitted by its investment policies; and may not make loans to persons who
control or are under common control with the Fund.

CONCENTRATION. The 1940 Act presently defines concentration as
investing more than 25% of Fund's total assets in an industry or group of
industries with certain exceptions.

UNDERWRITING. The 1940 Act presently limits a Fund's ability to
underwrite securities if, as a result, its underwriting commitments would exceed
25% of its total assets.

The following investment policies and restrictions are non-fundamental
and may be changed by the Trust's Board of Trustees.

EACH FUND MAY NOT:

1) purchase more than 10% of any class of securities of any issuer if,
as a result of such purchase, it would own more than 10% of such
issuer's outstanding voting securities.

2) invest more than 5% of its total assets in securities of issuers
(other than obligations of, or guaranteed by the U.S. Government,
its agencies or instrumentalities) that with their predecessors
have a record of less than three years continuous operation.

3) purchase securities that would cause more than 5% of its net assets
to be invested in restricted securities, excluding restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid under
procedures adopted by the Trust's Board of Trustees based upon the
trading markets for the securities.

4) invest more than 5% of its net assets in warrants, valued at the
lower of cost or market, and no more than 40% of this 5% may be
invested in warrants that are not listed on the New York Stock
Exchange or the American Stock Exchange, provided, however, that
for purposes of this restriction, warrants acquired by a Fund in
units or attached to other securities are deemed to be without
value.

10
<PAGE> 33
5) purchase puts, calls, straddles, spreads or any combination thereof
if by reason of such purchase the value of its aggregate investment
in such securities would exceed 5% of the Fund's total assets.

6) make short sales, except for short sales against the box.

7) purchase or sell interests in oil, gas or other mineral development
programs or leases, although it may invest in companies that own or
invest in such interests or leases.

8) purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of
securities.

9) lend money to any person, except that each Fund may (i) purchase a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are publicly
distributed or customarily purchased by institutional investors,
and (ii) lend its portfolio securities.

10) borrow money, except from banks for temporary purposes to satisfy
redemption requests or for extraordinary or emergency purposes and
then only in an amount not to exceed one-third of the value of its
total assets (including the amount borrowed), provided that the
Fund will not purchase securities while borrowings represent more
that 5% of its total assets.

11) pledge, mortgage of hypothecate any of its assets except that to
secure allowable borrowing, each Fund may do so with respect to no
more than one-third of the value of its total assets.

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

13) purchase securities of any other issuer (other than U.S. Government
securities ) if, as a result , more than 25% of its total assets
would be invested in the securities if an issuer from a single
industry or group of industries.

14) purchase the securities of any issuer if, as a result more than 15%
of its net assets would be invested in illiquid securities.

15) may purchase or sell commodities or real estate, including
interests in real estate limited partnerships, provided that each
Fund may (i) purchase securities of companies that deal in real
estate or interests therein, and (ii) purchase or sell futures
contracts, options contracts, equity index participations and index
participations contracts.

MANAGEMENT OF THE TRUST

11
<PAGE> 34
OFFICERS AND TRUSTEES. The Officers and Trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Schwab and the Investment Manager, are as
follows:

<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION

<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief Executive Officer and Director, The Charles
July 29, 1937 Schwab Corporation; Chairman and Director, Charles Schwab &
Co., Inc. and Charles Schwab Investment Management, Inc.;
Chairman and Director, The Charles Schwab Trust Company;
Chairman and Director (current board positions), and Chairman
(officer position) until December 1995, Mayer & Schweitzer,
Inc. (a securities brokerage subsidiary of The Charles Schwab
Corporation); Director, The Gap, Inc. (a clothing retailer),
Transamerica Corporation (a financial services organization),
AirTouch Communications (a telecommunications company) and
Siebel Systems (a software company).

TIMOTHY F. McCARTHY** President and Trustee Executive Vice President and President - Financial Products
September 19, 1951 and International Group, Charles Schwab & Co., Inc.;
Executive Vice President - President, Financial Products and
International Group, the Charles Schwab Corporation; Chief
Executive Officer, Charles Schwab Investment Management,
Inc.; Vice Chairman and Chief Operating Officer, Charles
Schwab Limited; Director, Mayer & Schweitzer. From 1994 to
1995, Mr. McCarthy was Chief Executive Officer, Jardine
Fleming Unit Trusts Ltd.; Executive Director, Jardine Fleming
Holdings Ltd., Chairman, Jardine Fleming Taiwan Securities
Ltd., and Director of JF India and Fleming Flagship, Europe.
Prior to 1994, he was President of Fidelity Investments
Advisor Group, a division of Fidelity Investments in Boston.
</TABLE>

*Messrs. Schwab and McCarthy are "interested persons" of the Trust.

12
<PAGE> 35
<TABLE>
<S> <C> <C>
DONALD F. DORWARD Trustee Executive Vice President and Managing Director, Grey
September 23, 1931 Advertising. From 1990 to 1996, Mr. Dorward was President
and Chief Executive Officer, Dorward & Associates Dorward &
Associates is an advertising and marketing/consulting firm.

ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director, Semloh
May 15, 1931 Financial, Inc. Semloh Financial is an international
financial services and investment advisory firm.

DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (investment banking).
June 28, 1938 Prior to 1995, Mr. Stephens was Chairman and Chief Executive
Officer of North American Trust (a real estate investment
trust). Prior to 1992, Mr. Stephens was Chairman and Chief
Executive Officer of the Bank of San Francisco.

MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director, Wilsey
August 18, 1943 Bennett, Inc. (truck and air transportation, real estate
investment and management, and investments).

TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles Schwab & Co., Inc.;
March 7, 1951 Financial Officer Controller, Charles Schwab Investment Management, Inc. From
1994 to 1996, Ms. Tung was Controller for Robertson Stephens
Investment Management, Inc. From 1993 to 1994, she was Vice
President of Fund Accounting, Capital Research and Management
Co. Prior to 1993, Ms. Tung was Senior Vice President of the
Sierra Funds and Chief Operating Officer of Great Western
Financial Securities.

WILLIAM J. KLIPP* Executive Vice Executive Vice President, SchwabFunds(R),
</TABLE>

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

13
<PAGE> 36
<TABLE>
<S> <C> <C>
December 9, 1955 President, Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer and Operating Officer, Charles Schwab Investment
Trustee Management, Inc. Prior to 1993, Mr. Klipp was
Treasurer of Charles Schwab & Co., Inc. and
Mayer & Schweitzer, Inc.

STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.

FRANCES COLE Secretary Vice President, Chief Counsel, Chief Compliance
September 9, 1955 Officer and Assistant Corporate Secretary,
Charles Schwab Investment Management, Inc.

DAVID H. LUI Assistant Secretary Vice President and Senior Counsel, Charles
October 14, 1960 Schwab Investment Management, Inc. From 1991 to
1992, he was Assistant Secretary for the
Franklin Group of Mutual Funds and Assistant
Corporate Counsel for Franklin Resources, Inc.

KAREN L. SEAMAN Assistant Secretary Corporate Counsel, Charles Schwab Investment
February 27, 1968 Management, Inc. From October 1994 to July
1996, she was an Attorney for Franklin
Resources, Inc. Prior to 1994, Ms. Seaman was
an Attorney for The Benham Group.
</TABLE>

Each of the above-referenced Officers and/or Trustees also serves in
the same capacity as described for the Trust for The Charles Schwab Family of
Funds, Schwab Capital Trust and Schwab Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.

14
<PAGE> 37
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or
Retirement Benefits
Accrued as Part of Estimated Annual
Fund Expenses Benefits upon Total
Aggregate from Retirement from Compensation
Name of Person, Compensation from the Fund the Fund from the Fund
Position the Trust Complex(2) Complex(2) Complex(2)

<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee

Timothy F. McCarthy, 0 N/A N/A 0
President and Trustee

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

Donald F. Dorward, Trustee [xxxx] N/A N/A [xxxx]

Robert G. Holmes, [xxxx] N/A N/A [xxxx]
Trustee

Donald R. Stephens, [xxxx] N/A N/A [xxxx]
Trustee

Michael W. Wilsey, [xxxx] N/A N/A [xxxx]
Trustee
</TABLE>

1 Figures are for the Trust's fiscal year ended August 31, 1997.

2 "Fund Complex" comprises all 30 funds of the Trust, The Charles Schwab
Family of Funds, Schwab Capital Trust and Schwab Annuity Portfolios.

TRUSTEE DEFERRED COMPENSATION PLAN

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

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

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

15
<PAGE> 38
and reinvested in the securities of the SchwabFund or SchwabFunds(R) selected by
the participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, The Charles
Schwab Family of Funds and Schwab Capital Trust.

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

INVESTMENT MANAGER

The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds Family(R),
a family of 30 mutual funds with over $50 billion in assets as of August 31,
1997. The Investment Manager is an affiliate of: Schwab; the Trust's
distributor; the shareholder services agent; and the transfer agent. The
Advisory Agreement will continue in effect until February 23, 1997 with respect
to each of the Funds, and thereafter will continue for one year terms subject to
annual approval by: (1) the Trust's Board of Trustees or (2) a vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of a
Fund. In either event, the continuance must also be approved by a majority of
the Trust's Board of Trustees who are not parties to the Agreement or interested
persons (as defined in the 1940 Act) of any such party by vote cast in person at
a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time upon 60 days' notice by either party, or
by a majority vote of the outstanding shares of a Fund, and will terminate
automatically upon assignment.

The Investment Manager and Schwab have guaranteed that, through at
least September 31, 1998, Short Bond Fund and Total Market Fund will not exceed
0.38% and 30%, respectively, of each Fund's average daily net assets.

The Government Bond Funds. For the fiscal years ended August 31, 1995,
1996 and 1997, the investment advisory fees incurred by the Schwab Long-Term
Government Bond Fund, were $0 (fees were reduced by $40,554), $0 (fees were
reduced by $68,000) and $_ (fees were reduced by $______), respectively.

For the fiscal years ended August 31, 1995, 1996 and 1997, the
investment advisory fees incurred by the Schwab Short/Intermediate Government
Bond Fund were $439,000 (fees were reduced by $232,000), $453,000 (fees were
reduced by $149,000) and $_ (fees were reduced by $_______), respectively.

From time to time, each Fund may compare its total operating expense
ratio to the total operating expense ratio of other mutual funds or mutual fund
averages with similar investment objectives as reported by Lipper Analytical
Service, Inc., Morningstar, Inc. or other independent sources of such
information ("independent sources").

16
<PAGE> 39
DISTRIBUTOR

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

CUSTODIAN AND FUND ACCOUNTANT

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

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

ACCOUNTANTS AND REPORTS TO SHAREHOLDERS

The Trust's independent accountants audit and report on the annual financial
statements of each series of the Trust and review certain regulatory reports and
each Fund's federal income tax return. It also performs other professional
accounting, auditing, tax and advisory services when the Trust engages it to do
so. Shareholders will be sent audited annual and unaudited semi-annual financial
statements.

PORTFOLIO TRANSACTIONS AND TURNOVER

PORTFOLIO TRANSACTIONS

Brokerage Commissions. The Funds paid no brokerage commissions for each
such Fund's last three fiscal years.

PORTFOLIO TURNOVER

For reporting purposes, each Fund's turnover rate is calculated by
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
the Fund owned during the fiscal year. When the Fund makes the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded. A 100% portfolio turnover rate would
occur, for example, if all portfolio securities (aside from short-term
securities) were sold and either repurchased or replaced once during the fiscal
year.

From time to time, each Fund may compare its portfolio turnover rate
with that of other mutual funds as reported by independent sources.

The Government Bond Funds. The portfolio turnover rates for the Schwab
Long-Term Government Bond Fund for the fiscal years ended August 31, 1996 and
1997 were 66% and __%,

17
<PAGE> 40
respectively. The portfolio turnover rates for the Schwab Short/Intermediate
Government Bond Fund for the fiscal years ended August 31, 1996 and 1997 were
80% and __%, respectively.

TAXES

FEDERAL INCOME TAX

It is each Fund's policy to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Code. By
following this policy, each Fund expects to eliminate or reduce to a nominal
amount the federal income tax to which it is subject.

In order to qualify as a regulated investment company, each of the
Funds must, among other things, (1) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stocks, securities, foreign currencies or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
derive less than 30% of its gross income from gains from the sale or other
disposition of certain assets (including stocks and securities) held for less
than three months; and (3) diversify its holdings so that at the end of each
quarter of its taxable year (i) at least 50% of the market value of the Fund's
total assets is represented by cash or cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of any other regulated investment company) or of two or more issuers
that the Fund controls, within the meaning of the Code, and that are engaged in
the same, similar or related trades or businesses. These requirements may
restrict the degree to which a Fund may engage in short-term trading and certain
hedging transactions and may limit the range of a Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
meets certain minimum distribution requirements. To comply with these
requirements, a Fund must distribute at least (a) 90% of its "investment company
taxable income" (as that term is defined in the Code) and (b) 90% of the excess
of its (i) tax-exempt interest income over (ii) certain deductions attributable
to that income (with certain exceptions), for its taxable year. Each Fund
intends to make sufficient distributions to shareholders to meet these
requirements.

The Code imposes a non-deductible excise tax on regulated investment
companies that do not distribute in a calendar year (regardless of whether they
otherwise have a non-calendar taxable year) an amount equal to 98% of their
"ordinary income" (as defined in the Code) for the calendar year plus 98% of
their capital gain net income for the one-year period ending on October 31 of
such calendar year, plus any undistributed amounts from prior years. For the
foregoing purposes, a Fund is treated as having distributed any amount on which
it is subject to income tax for any taxable year ending in such calendar year.
If the distributions during a calendar year are less than the required amount,
the Fund is subject to a non-deductible excise tax equal to 4% of the
deficiency.

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

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<PAGE> 41
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.

A Fund's transactions in futures contracts and options and certain
other investment and hedging activities are subject to special tax rules. In a
given case, these rules may accelerate income to a Fund, defer its losses, cause
adjustments in the holding periods of the Fund's assets, convert short-term
capital losses into long-term capital losses or otherwise affect the character
of the Fund's income. These rules could therefore affect the amount, timing and
character of distributions to shareholders. Income earned as a result of these
transactions would, in general, not be eligible for the corporate dividends
received deduction when distributed to corporate shareholders. The Funds will
endeavor to make any available elections pertaining to these transactions in a
manner believed to be in the best interest of the Funds and their shareholders.

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

SHARE PRICE CALCULATION

Each Fund's net asset value per share is determined each day the New
York Stock Exchange is open for trading as of 4:00 p.m., Eastern time.
Currently, the New York Stock Exchange is closed on the following holidays: New
Year's Day (observed), Martin Luther King's Birthday (observed) Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Funds value their portfolio securities daily based on their
fair value. Securities traded on stock exchanges are valued at the last quoted
sales price on the exchange on which such securities are primarily traded, or,
lacking any sales, at the mean between the bid and ask prices.

Investments in mutual funds are valued at their respective net asset
values, as determined by those funds. Securities traded in the over-the-counter
market are valued at the last sales price that day, or if no sales that day, at
the mean between the bid and ask prices. In addition, securities that are
primarily traded on foreign exchanges are generally valued at the preceding
closing values of such securities on their respective exchanges with these
values then translated into U.S. dollars at the current exchange rate. Foreign
securities for which the closing values are not readily available are valued at
fair value as determined in good faith pursuant to the Board of Trustees
guidelines. Securities for which market quotations are not readily available
(including restricted securities that

19
<PAGE> 42
are subject to limitations on their sale) are valued at fair value as determined
in good faith pursuant to the Trust's Board of Trustees guidelines.

Securities may be valued on the basis of prices provided by pricing
services when such prices are believed to reflect fair market value.

From time to time, each Fund may report its net asset value per share
over a specified period. Each Fund's net asset value, for the periods set forth,
may be compared to net asset values for other mutual funds with similar
investment objectives as reported by independent sources.

TOTAL RETURN AND YIELD

STANDARDIZED TOTAL RETURN

Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in a Fund
made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, a Fund
assumes the reinvestment of all distributions at net asset value on applicable
reinvestment dates.

NONSTANDARDIZED TOTAL RETURN

Nonstandardized total return for a Fund differs from standardized
total return in that it relates to periods other than the period for
standardized total return and/or that it represents aggregate (rather than
average) total return.

A Fund may also advertise its cumulative total return since
inception. This number is calculated using the same formula that is used for
average annual total return except that, rather than calculating the total
return based on a one-year period, cumulative total return is calculated from
inception to the date specified.

YIELD

A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Fund over a specific 30-day period. This net
investment income is then annualized, which means that the net investment income
generated during the 30-day period is assumed to be generated in each 30-day
period over an annual period, and is shown as a percentage of the investment.

EFFECTIVE YIELD

A Fund's effective yield is calculated similarly, but the net
investment income earned by the investment is assumed to be compounded monthly
when annualized. The effective yield will be slightly higher than the yield due
to this compounding effect.

COMPARATIVE PERFORMANCE

Each Fund's performance may be compared to various unmanaged bond
indexes in addition to the Lehman Brothers Short (1-5) Government/Corporate
Index and the unmanaged

20
<PAGE> 43
Lehman Brothers Aggregate Bond Index, including but not limited to, the Salomon
Brothers High Grade Index, the Shearson Lehman Government/Corporate Bond Index,
the Merrill Lynch Government/Corporate Bond Master Index and to Lipper
Analytical Services, Inc. averages and Morningstar, Inc. rankings.

The following charts illustrate the historical average maturity and
[average] yield of securities comprising the indexes. This historical
information is not indicative of any future trend of the Funds or the particular
market sectors that the Indexes represent.

chart chart

SCHWABFUNDS(R) INVESTMENT STRATEGIES

ASSET ALLOCATION STRATEGIES USING SCHWABFUNDS

Shareholders of SchwabFunds may wish to invest in the SchwabFunds as
components of their personal asset allocation plan. An asset allocation program
is available through Schwab. This program may help shareholders select
investments, including investments in SchwabFunds, that match their individual
investment needs. The shareholders' personal investment plan is based on a
number of factors, including personal financial situation, time horizon,
investment objectives and goals and risk tolerance.

ACCESS TO SCHWAB'S MUTUAL FUND ONESOURCE(R) SERVICE

With Schwab's Mutual Fund OneSource Service ("OneSource"), a
shareholder can invest in over 650 mutual funds from many fund companies,
subject to the following. Schwab's standard transaction fee will be charged on
each redemption of fund shares held for 90 days or less to discourage short-term
trading. Mutual fund shares held for more than 90 days are exempt from the
short-term redemption policy and may be sold without penalty. Up to 15
short-term redemption of fund shares per calendar year are permitted. If you
exceed this number, you will no longer be able to buy or sell fund shares
without paying a transaction fee. As a courtesy, we will notify you in advance
if your short-term redemptions are nearing the point where all of your future
trades will be subject to transaction fees. Schwab reserves the right to modify
OneSource's terms and conditions at any time. For more information, a
shareholder call 800-2 NO-LOAD, 24 hours a day.

GENERAL INFORMATION

The Trust generally is not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
removal of Trustees if a meeting is requested in writing by a shareholder or
shareholders who beneficially own(s) 10% or more of the Trust's shares; (2)
adoption of any contract for which shareholder approval is required by the 1940
Act; (3) any termination of the Trust to the extent and as provided in the
Declaration of Trust; (4) any amendment of the Declaration of Trust (other than
amendments changing the name of the Trust or any of its investment portfolios,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); (5) determining
whether a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class

21
<PAGE> 44
action on behalf of the Trust or the shareholders, to the same extent as the
stockholders of a Massachusetts business corporation; and (6) such additional
matters as may be required by law, the Declaration of Trust, the Bylaws or any
registration of the Trust with the SEC or any state or as the Board of Trustees
may consider desirable. The shareholders also would vote upon changes to a
Fund's fundamental investment objective, policies or restrictions.

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

Upon the written request of 10 or more shareholders who have been such
for at least six months and who hold shares constituting at least 1% of the
Trust's outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.

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

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

Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote, because it is limited to
circumstances in which a disclaimer is inoperative and the Trust itself is
unable to meet its obligations.

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<PAGE> 45
PRINCIPAL HOLDERS OF SECURITIES

As of ____1997, ________ directly or beneficially owned approximately
__% of the _____ Fund.

In addition, as of ___, 1997, the officers and trustees of the Trust,
as a group, owned less than 1% of each Fund's outstanding voting securities.

For further information, please refer to the registration statement and
exhibits for the Trust on file with the SEC in Washington, D.C. and available
upon payment of a copying fee. The statements in the Prospectus and this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.

SCHWABFUNDS(R)

SchwabFunds offers a variety of series and classes of shares of beneficial
interest to help you with your investment needs.

EQUITY FUNDS
Schwab 1000 Fund(R)-Investor Shares(1)
Schwab 1000 Fund-Select Shares(TM)(1)
Schwab International Index Fund(R)-Investor Shares(2)
Schwab International Index Fund-Select Shares(2)
Schwab Small-Cap Index Fund(R)-Investor Shares(2)
Schwab Small-Cap Index Fund-Select Shares(2)
Schwab Asset Director(R)-High Growth Fund(2)
Schwab Asset Director(R)-Balanced Growth Fund(2)
Schwab Asset Director(R)-Conservative Growth Fund(2)
Schwab S&P 500 Fund-Investor Shares(2)
Schwab S&P 500 Fund-Select Shares(2)
Schwab S&P 500 Fund-e.Shares(TM)(2),(3)
Schwab Analytics Fund(TM)(2)
Schwab OneSource Portfolios-International
Schwab OneSource Portfolios-Growth Allocation
Schwab OneSource Portfolios-Balanced Allocation
Schwab OneSource Portfolios-Small Company

FIXED INCOME FUNDS(1)
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund(4)
Schwab California Long-Term Tax-Free Bond Fund(4)

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<PAGE> 46
MONEY MARKET FUNDS(15)
Schwab Money Market Fund
Schwab Government Money Fund
Schwab Institutional Advantage Money Fund(R)(6)
Schwab Retirement Money Fund(R)(6)
Schwab Value Advantage Money Fund(R)-Investor Shares
Schwab Municipal Money Fund-Sweep Shares
Schwab Municipal Money Fund-Value Advantage Shares(TM)
Schwab California Municipal Money Fund-Sweep Shares
Schwab California Municipal Money Fund-Value Advantage Shares(TM)
Schwab New York Municipal Money Fund-Sweep Shares
Schwab New York Municipal Money Fund-Value Advantage Shares(TM)

HOLIDAY CLOSINGS

The following holiday closings are currently scheduled for 1997 and
1998: New Year's Day, Dr. Martin Luther King's Birthday (observed), President's
Day, Good Friday, Memorial Day, Labor Day, Thanksgiving Day and Christmas Day.
On any day that the New York Stock Exchange or principal government securities
markets closes early, such as days in advance or holidays, the Funds reserve the
right to advance the time by which purchase, redemption and exchange orders must
be received on that day.

PURCHASE AND REDEMPTION OF SHARES

Each Fund and class has set minimum initial and subsequent investment
requirements, as disclosed in its respective Prospectus. These minimum
investment requirements may be changed at any time and are not applicable to
certain types of investors. The Trust may waive the minimums for purchases by
Trustees, Directors, officers or employees of the Trust, Schwab or the
Investment Manager.

The Trust has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of its net assets at the beginning
of such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of the stated limits may be paid, in whole or in
part, in investment securities or in cash, as the Trust's Board of Trustees may
deem advisable; however, payment will be made wholly in cash unless the Board of
Trustees believes that economic or market conditions exist that would make such
a practice detrimental to the best interests of the Fund. If redemption proceeds
are paid in investment securities, such securities will be valued as set forth
in the Prospectus of the Fund affected under "Share Price Calculation" and a
redeeming shareholder would normally incur brokerage expenses if he or she were
to convert the securities to cash.

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

1 The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of the Trust.

2 The Funds are separate investment portfolios or classes of shares of
Schwab Capital Trust.

3 Available only through SchwabLink(R).

4 Available only to California residents and residents of selected other
states.

5 All listed money market funds are separate investment portfolios of The
Charles Schwab Family of Funds.

6 Designed for institutional investors only.

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<PAGE> 47
OTHER INFORMATION

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

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

Each Fund's financial statements and financial highlights for the
fiscal year ended August 31, 1997 are included in each Fund's Annual Report,
which are separate reports supplied with this Statement of Additional
Information. Each Fund's financial statements and financial highlights are
incorporated herein by reference.

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

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<PAGE> 48
APPENDIX - RATINGS OF INVESTMENT SECURITIES

Lower-quality debt securities are sometimes referred to as "junk
bonds," and are considered more speculative and subject too greater risk. Some
junk bonds may already be in default, i.e., failed to meet their interest and/or
principal payment obligations. From time to time, each Fund may report the
percentage of its assets which fall into the rating categories set forth below.

BONDS

MOODY'S INVESTORS SERVICE

Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with Aaa
rated bonds, they comprise what are generally known as high grade bonds. Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protection, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks. A rated bonds are considered
as upper-medium grade obligations as they possess many favorable investment
attributes. Bonds designated Baa are considered medium grade in that they are
not highly protected nor poorly secured. Interest payments and principal
security appear to be adequate at the present, but they may lack certain
protective elements or be characteristically unreliable over any great length of
time. Baa bonds do not have any outstanding investment characteristics and do
have speculative characteristics.

STANDARD & POOR'S CORPORATION

AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree. A
ratings are given to debt which has a strong capacity to pay interest and repay
principal but is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than higher rated debt. BBB debt indicates
the issuer is regarded by S&P as having an adequate capacity to pay interest and
repay principal. These securities appear to have adequate protection, however
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal in this category than in
higher categories.

DUFF & PHELPS CREDIT RATING CO.

Duff confers an AAA designation to bonds of issuers with the highest
credit quality. The risk factors associated with these bonds are negligible,
being only slightly more than for risk-free U.S. Treasury debt. AA rated bonds
are of high credit quality and have strong protection factors. The risks
associated with them are modest but may vary slightly from time to time because
of economic conditions. An A rating indicates that the protection factors are
average but adequate. The risk factors, however, are more variable and greater
in periods of economic stress. BBB rated debt has protection factors that are
below average but still sufficient for prudent investment. There is considerable
variability in the risk of BBB rated debt during economic cycles.

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<PAGE> 49
FITCH INVESTOR SERVICES, INC.

AAA is the highest rating Fitch assigns to bonds, and indicates the
obligor's exceptionally strong ability to pay interest and repay principal.
Bonds which Fitch considers of very high credit quality, and the obligor's
ability to pay interest and repay principal is very strong, although not as
strong as AAA, is rated AA. An A rating is given to show high credit quality and
the issuer's ability to pay interest and repay principal is strong, but there is
more vulnerability to economic conditions and circumstances than higher rated
debt. BBB bonds are considered investment grade, where the issuer has adequate
ability to pay interest and repay principal. Bonds rated BBB are more
susceptible to adverse changes in economic conditions and circumstances, thus
these bonds are more likely to fall below investment grade or have the
timeliness of their payments impaired.

SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS

MOODY'S INVESTORS SERVICE

Short-term notes/variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality, enjoying
strong protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-3 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.

STANDARD & POOR'S CORPORATION

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

IBCA

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

COMMERCIAL PAPER

MOODY'S INVESTORS SERVICE

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

STANDARD & POOR'S CORPORATION
<PAGE> 50
A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates a strong degree of safety regarding timely payment of principal and
interest. Issues determined to possess overwhelming safety characteristics are
denoted A-1+. Capacity for timely payment on commercial paper rated A-2 is
satisfactory, but the relative degree of safety is not as high as for issues
designated A-1.

DUFF & PHELPS CREDIT RATING CO.

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

FITCH INVESTORS SERVICE, INC.

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

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

THOMSON BANKWATCH (TBW)

TBW-1 is the highest category and indicates the degree of safety
regarding timely repayment of principal and interest is very high. TBW-2 is the
second highest category and while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
<PAGE> 51
PART C

OTHER INFORMATION
August 15, 1997

SCHWAB INVESTMENTS

<TABLE>
Item 24. Financial Statements and Exhibits.
<S> <C>

Financial Statements:

(a) Financial statements for Schwab 1000 Fund, Schwab Short/
Intermediate Tax-Free Bond Fund, Schwab Long-Term Tax-Free
Bond Fund, Schwab California Short/Intermediate Tax-Free
Bond Fund and Schwab California Long-Term Tax-Free Bond
Fund were electronically filed and are incorporated herein
by reference to the statement of additional information for
Schwab investments in Post-Effective Amendment No. 16.

(b) Financial statements for Schwab Short/Intermediate Government
Bond Fund and Schwab Long-Term Government Bond Fund to be
filed by subsequent amendment.

</TABLE>
<PAGE> 52
<TABLE>

<S> <C>
(b) Exhibits:

(1) -- Agreement and Declaration of Trust is incorporated by reference to Exhibit (1) to
the Registration Statement on Form N-1A of Schwab Investments ("Registrant"), filed
on October 29, 1990 (the "Agreement and Declaration of Trust")

(2) -- Amended and Restated By-Laws are incorporated by reference to Exhibit (2) to
Post-Effective Amendment No. 12, to Registrant's Registration Statement on Form
N-1A, filed on December 30, 1994

(3) -- Inapplicable

(4) (a) -- Article III, Section 5, Article V, Article VI, Article VIII, Section 4 and Article
IX, Sections 1, 5 and 7 of the Agreement and Declaration of Trust is incorporated
by reference to Exhibit (1) to Registrant's Registration Statement on Form N-1A,
filed on October 29, 1990

(b) -- Article 9, Article 10, Section 6, and Article 11 of the Amended and Restated
By-Laws are incorporated by reference to Exhibit (2) to Post-Effective Amendment
No. 12, to Registrant's Registration Statement on Form N-1A, filed on December 30,
1994

(5) (a) -- Investment Advisory and Administration Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the "Investment Manager") is incorporated by
reference to Exhibit (5) (a) to Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A, filed on December 30, 1994

(b) -- Amended Schedule to Investment Advisory and Administration Agreement copy referred
to at Exhibit (5)(a) above is incorporated by reference to Exhibit (5)(a) to
Post-Effective Amendment No. 14 to Registrant's Registration Statement on Form
N-1A, filed on December 30, 1996

(6) -- Distribution Agreement between Registrant and Charles Schwab & Co., Inc. ("Schwab")
is incorporated by reference to Exhibit (6)(a) to Post-Effective Amendment No. 12
to Registrant's Registration Statement on Form N-1A, filed on December 30, 1994

(7) -- Inapplicable

(8) (a) -- Custodian Services Agreement between Registrant and PNC Bank, National Association
(formerly Provident National Bank) is incorporated by reference to Exhibit (8)(a)
to Post-Effective Amendment No.2 to Registrant's Registration Statement on Form
N-1A, filed on December 23, 1991

(b) -- Amendment No. 1 to Custodian Services Agreement referred to at Exhibit (8)(a) above
is incorporated by reference to Exhibit (8)(b) to Post-Effective Amendment No. 13
to Registrant's Registration Statement on Form N-1A, filed on December 29, 1996

(c) Amendment No. 2 to Custodian Services Agreement referred to at Exhibit (8)(a) above
-- is incorporated by reference to Exhibit 8(c) to Post-Effective Amendment no.14 to
Registrant's Registration Statement on Form N-1A,
</TABLE>
<PAGE> 53
<TABLE>
<S> <C>
filed on December 30, 1996

(d) -- Amended Schedule to the Custodian Services Agreement referred to at Exhibit (8)(a)
above is incorporated by reference to Exhibit (8)(b) to Post-Effective Amendment
No. 12 to Registrant's Registration Statement on Form N-1A, filed on December 30,
1994

(e) -- Transfer Agency Agreement between the Registrant and Schwab is incorporated by
reference to Exhibit (8)(b) to Post-Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A, filed on August 27, 1993

(f) -- Amended Schedule to the Transfer Agency Agreement referred to at Exhibit (8)(e) above is
incorporated by reference to Exhibit 8(d) to Post-Effective Amendment No.
11 to Registrant's Registration Statement on Form N-1A, filed on December 28, 1993

(g) -- Shareholder Service Agreement between the Registrant and Schwab is incorporated by
reference to Exhibit (8)(c) to Post-Effective Amendment No.9 to Registrant's
Registration Statement on Form N-1A, filed on August 27, 1993

(h) -- Form of Amended Schedule to the Shareholder Services Agreement referred to at
Exhibit (8)(g) above is incorporated by reference to Exhibit (8)(g) to
Post-Effective Amendment No. 16 to Registrant's Registration Statement on Form
N-1A, filed on March 26, 1997.

(i) -- Accounting Services Agreement between Registrant and Provident Financial Processing
Corporation is incorporated by reference to Exhibit (8)(c) to Post-Effective
Amendment No. 2 to Registrant's Registration Statement on Form N-1A, filed on
December 23, 1991

(j) -- Amendment No. 1 to Accounting Services Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to Exhibit (8)(i) to Post-Effective Amendment
No. 13 to Registrant's Registration Statement on Form N-1A, filed on December 29,
1996

(k) -- Amendment No. 2 to Accounting Services Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to Exhibit (8)(k) to Post-Effective Amendment
No. 14 to Registrant's Registration Statement on Form N-1A, filed on December 30,
1996.

(l) -- Amended Schedule to the Accounting Services Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to Exhibit (8)(h) to Post-Effective Amendment
No. 12 to Registrant's Registration Statement on Form N-1A, filed on December 30,
1994

(9) -- Inapplicable

(10) -- Opinion and Consent of Ropes & Gray as to legality of the securities being
registered is filed herewith

(11) (a) -- Consent of Ropes & Gray is incorporated by reference to Exhibit 11(a)
to the Registrant's Registration Statement on Form N-1A filed on March 26,
</TABLE>
<PAGE> 54
<TABLE>

<S> <C>
1997.

(b) -- Consent of Price Waterhouse LLP, Independent Accountants, is incorporated
by reference to Exhibit 11(b) to the Registrant's Registration Statement on
Form N-1A filed on March 26, 1997.

(12) -- Inapplicable

(13) -- Purchase Agreement relating to shares of the Schwab Short/Intermediate Tax-Free
Bond Fund, Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
Long-Term Government Bond Fund (formerly, Schwab Long-Term U.S. Government Bond
Fund) is incorporated by reference to Exhibit (13) to Post N-1A, filed on August
27, 1993

(14) -- Inapplicable

(15) -- Inapplicable

(16) -- Performance Calculations are incorporated by reference to Exhibit (16) to the
Registrant's Registration Statement on Form N-1A filed on March 3, 1992 and August
30, 1992

(17) (a) -- Financial Data Schedule for Schwab 1000 Fund(R) is incorporated by reference to its
Exhibit 17 to Post-Effective Amendment No. 16 on Form N1-A, electronically filed on
March 26, 1997.

(b) -- Financial Data Schedule for Schwab Short/Intermediate Government Bond Fund is
incorporated by reference to its Exhibit 17 to Post-Effective Amendment No. 16 on Form
N1-A, electronically filed on March 26, 1997.

(c) -- Financial Data Schedule for Schwab Long-Term Government Bond Fund is incorporated by
reference to its Exhibit 17 to Post-Effective Amendment No. 16 on Form N1-A,
electronically filed on March 26, 1997.

(d) -- Financial Data Schedule for Schwab Short/Intermediate Tax-Free Bond Fund is
incorporated by reference to its Exhibit 17 to Post-Effective Amendment No. 16 on Form
N1-A, electronically filed on March 26, 1997.

(e) -- Financial Data Schedule for Schwab Long-Term Tax-Free Bond Fund is incorporated by
reference its Exhibit 17 to Post-Effective Amendment No. 16 on Form N1-A, electronically
filed on March 26, 1997.

(f) -- Financial Data Schedule for Schwab California Short/Intermediate Tax-Free Bond Fund is
incorporated by reference to its Exhibit 17 to Post-Effective Amendment No. 16 on Form
N1-A, electronically filed on March 26, 1997.

(g) -- Financial Data Schedule for Schwab California Long-Term Tax-Free Bond Fund is
incorporated by reference to its Exhibit 17 to Post-Effective Amendment No. 16 on Form
N1-A, electronically filed on March 26, 1997.

(18) -- Registrant's Multiple Class Plan for Schwab 1000 Fund Investor Shares and Schwab 1000
Fund Select Shares is incorporated by reference to its Exhibit 17 to Post-Effective
Amendment No. 16 on form N1-A, electronically filed on March 26, 1997.
</TABLE>

Item 25. Persons Controlled by or under Common Control with the
Registrant.

The Charles Schwab Family of Funds (the "Schwab Fund Family"),
Schwab Capital Trust and Schwab Annuity Portfolios are each Massachusetts
business trusts registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). Each is advised by the Investment Manager and employs Schwab
as principal underwriter, transfer agent and shareholder services agent. As a
result, the Schwab Fund Family, Schwab Capital Trust and Schwab Annuity
Portfolios may each be deemed to be under common control with Registrant.
<PAGE> 55
Item 26. Number of Holders Securities.

The number of record holders of shares of beneficial interest
for the Series of Registrant to be filed by subsequent amendment:

<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Schwab 1000 Fund(R)- Investor Shares 1 (for the benefit of [ ] accounts)
Schwab 1000 Fund - Select Shares(TM) 1 (for the benefit of [ ] accounts)
Schwab Long-Term Government Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Short/Intermediate Government Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Long-Term Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Short/Intermediate Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab California Long-Term Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab California Short/Intermediate Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
</TABLE>

Item 27. Indemnification.

Article VIII of Registrant's Agreement and Declaration of Trust
(Exhibit (1) hereto, which is incorporated herein by reference) provides in
effect that Registrant will indemnify its officers and trustees against all
liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise, or as fines and penalties, and counsel
fees reasonably incurred by any such officer or trustee in connection with the
defense or disposition of any action, suit, or other proceeding. However, in
accordance with Section 17(h) and 17(i) of the 1940 Act and its own terms, said
Agreement and Declaration of Trust does not protect any person against any
liability to Registrant or its shareholders to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
In any event, Registrant will comply with 1940 Act Releases No. 7221 and 11330
respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.

Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
trustees, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
<PAGE> 56
Item 28. Business and Other Connections of Investment Manager.

(a) Information pertaining to business and other connections of
Registrant's Investment Manager is hereby incorporated by reference to the
section of the Prospectuses captioned "Management of the Fund(s)" and to the
section of the Statement of Additional Information captioned "Management of the
Trust."

Registrant's Investment Manager, Charles Schwab Investment
Management, Inc., a Delaware corporation, organized in October 1989 to serve as
Investment Manager to the Schwab Fund Family, also serves as the Investment
Manager to Schwab Capital Trust and Schwab Annuity Portfolios, each an open-end
management investment company. The principal place of business of the Investment
Manager is 101 Montgomery Street, San Francisco, California 94104. The only
business in which the Investment Manager engages is that of investment manager
and administrator to Registrant, Schwab Fund Family, Schwab Capital Trust,
Schwab Annuity Portfolios and any other investment companies that Schwab may
sponsor in the future.

(b) The business, profession, vocation or employment of a
substantial nature in which each director and/or executive officer of Schwab
and/or the Investment Manager is or has been engaged during the past two fiscal
years for his or her own account in the capacity of director, officer, employee,
partner or trustee is as follows:

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------

<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Chief Executive Officer
and Director

Charles Schwab Investment Management, Inc. Chairman and Director

The Charles Schwab Trust Company Chairman and Director

Mayer & Schweitzer, Inc. Director and Chairman of Board of
Directors; Director until
December 1995

The Gap, Inc. Director

Transamerica Corporation Director

AirTouch Communications Director

Siebel Systems Director

Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995;
Vice Chairman until August 1994

The Charles Schwab Corporation Vice Chairman and Director; Chief
Operating Officer until
</TABLE>
<PAGE> 57
<TABLE>
<S> <C> <C>
March 1994

Mayer & Schweitzer, Inc. Director until February 1995

The Charles Schwab Trust Company Director

David S. Pottruck Charles Schwab & Co., Inc. President, Chief Executive
Officer and Director

The Charles Schwab Corporation President, Chief Operating
Officer and Director

Charles Schwab Investment Director
Management, Inc.

Mayer & Schweitzer, Inc. Chairman, Chief Executive Officer
and Director

Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and Director until
January 1996; Senior Executive
Vice President and Chief
Operating Officer until January
1995

The Charles Schwab Corporation Executive Vice President until
January 1996; Senior Executive
Vice President until January 1995

Mayer & Schweitzer, Inc. Director until January 1996

John P. Coghlan Charles Schwab & Co., Inc. Executive Vice President

The Charles Schwab Corporation Executive Vice President

The Charles Schwab Trust Company Director and Executive Vice
President

Dawn G. Lepore Charles Schwab & Co., Inc. Executive Vice President and
Chief Information Officer

The Charles Schwab Corporation Executive Vice President and
Chief Information Officer

Daniel O. Leemon The Charles Schwab Corporation Executive Vice President

Charles Schwab & Co., Inc. Executive Vice President
</TABLE>
<PAGE> 58
<TABLE>
<S> <C> <C>
Timothy F. McCarthy, Charles Schwab Investment Chief Executive Officer
Trustee and President Management, Inc.

Charles Schwab & Co., Inc. Executive Vice President

The Charles Schwab Corporation Executive Vice President,
President

Jardine Fleming Unit Trusts Ltd. Chief Executive Officer until
October 1995

Fidelity Investment Advisor Group President until 1994

Mayer & Schweitzer, Inc. Director

Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President

The Charles Schwab Corporation Executive Vice President

Steven L. Scheid Charles Schwab & Co., Inc. Director and Chief Financial
Officer

The Charles Schwab Corporation Executive Vice President - Chief
Financial Officer

Charles Schwab Investment Management, Inc. Executive Vice President,
Director and Chief Financial
Officer

The Charles Schwab Trust Company Chief Financial Officer

Schwab Retirement Plan Services, Inc. Director

Performance Technologies, Inc. Director

Mayer & Schweitzer, Inc. Director

Tom D. Seip Charles Schwab & Co., Inc. Executive Vice President

The Charles Schwab Corporation Executive Vice President

Charles Schwab Investment Management, Inc. President and Chief Operating
Officer until 1994

John N. Tognino Charles Schwab & Co., Inc. Executive Vice President

The Charles Schwab Corporation Executive Vice President
</TABLE>
<PAGE> 59
<TABLE>
<S> <C> <C>
Mayer & Schweitzer, Inc. Director and Vice Chairman until
February 1996

Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President

The Charles Schwab Corporation Executive Vice President and
Chief Administrative Officer

Commercial Credit Corporation Managing Director until February
1994

Christopher V. Dodds Charles Schwab & Co., Inc. Treasurer and Senior Vice
President

The Charles Schwab Corporation Treasurer and Senior Vice
President

Mayer & Schweitzer, Inc. Treasurer

William J. Klipp, Charles Schwab & Co., Inc. Executive Vice President
Trustee, Executive Vice President
and Chief Operating Officer

Charles Schwab Investment Management, Inc. President and Chief Operating
Officer

Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Chief Investment Officer
Investment Officer

Frances Cole, Charles Schwab Investment Management, Inc. Vice President, Chief Counsel,
Secretary Chief Compliance Officer and
Assistant Corporate Secretary

Tai-Chin Tung, Charles Schwab & Co., Inc. Vice President
Treasurer and Principal
Financial Officer

Charles Schwab Investment Management, Inc. Controller

Robertson Stephens Investment Management, Controller until 1996
Inc.

Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
</TABLE>
<PAGE> 60
<TABLE>
<S> <C> <C>
Charles Schwab & Co., Inc. Assistant Corporate Secretary

Charles Schwab Investment Management, Inc. Corporate Secretary

The Charles Schwab Trust Company
Assistant Corporate Secretary

Mayer & Schweitzer Secretary

Mary B. Templeton Charles Schwab Investment Management, Inc. Assistant Corporate Secretary

The Charles Schwab Corporation Senior Vice President, General
Counsel and Corporate Secretary

Charles Schwab & Co., Inc. Senior Vice President, General
Counsel and Corporate Secretary

Mayer & Schweitzer Assistant Corporate Secretary

The Charles Schwab Trust Company Assistant Corporate Secretary
until February 1996

David H. Lui Charles Schwab Investment Management, Inc. Vice President and Senior Counsel
Assistant Secretary

Christina M. Perrino Charles Schwab Investment Management, Inc. Vice President and Senior Counsel
Assistant Secretary
Karen L. Seaman Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
</TABLE>

Item 29. Principal Underwriters.

(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab currently also acts as principal underwriter for the
Schwab Fund Family, Schwab Capital Trust, Schwab Annuity Portfolios and intends
to act as such for any other investment company which Schwab may sponsor in the
future.

(b) See Item 28(b) for information on the officers and
directors of Schwab. The principal business address of Schwab is 101 Montgomery
Street, San Francisco, California 94104.

Item 30. Location of Accounts and Records.

All accounts, books and other documents required to be
maintained pursuant to Section 31(a) of the 1940 Act and the Rules thereunder
are maintained at the offices of: Registrant (transfer
<PAGE> 61
agency and shareholder records); Registrant's investment manager and
administrator, Charles Schwab Investment Management, Inc., 101 Montgomery
Street, San Francisco, California 94104; Registrant's principal underwriter,
Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's Custodian, PNC Bank, National Association, Broad and Market
Streets, Philadelphia, Pennsylvania 19809 (ledgers, receipts, and brokerage
orders); Registrant's fund accountants, PFPC, Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809; or Ropes & Gray, counsel to Registrant, 1301 K
Street, N.W., Suite 800 East, Washington, District of Columbia, 20005 (minute
books, bylaws, and declaration of trust).

Item 31. Management Services.

Not applicable.

Item 32. Undertakings.

(a) Registrant undertakes to call a meeting of Shareholders, at
the request of at least 10% of Registrant's outstanding shares, for the purpose
of voting upon the question of removal of a trustee or trustees and to assist in
communications with other Shareholders as required by Section (16) of the 1940
Act.

(b) Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of Registrant's latest Annual Report to
Shareholders upon request and without charge.
<PAGE> 62
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended,
Registrant has duly caused this Post-Effective Amendment No. 17 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Washington, District of Columbia on the 14th day of August, 1997.

SCHWAB INVESTMENTS
Registrant

Charles R. Schwab*
------------------
Charles R. Schwab, Chairman

Pursuant to the requirements of the 1933 Act, this
Post-Effective Amendment No. 17 to Registrant's Registration Statement on Form
N-1A has been signed below by the following persons in the capacities indicated
this 14th day of August, 1997.

Signature Title
- --------- -----

Charles R. Schwab* Chairman and Trustee
- ------------------
Charles R. Schwab

Timothy F. McCarthy* President and Trustee
- ------------------
Timothy F. McCarthy

William J. Klipp* Executive Vice President, Trustee and
- ------------------ Chief Operating Officer
William J. Klipp

Donald F. Dorward* Trustee
- ------------------
Donald F. Dorward

Robert G. Holmes* Trustee
- ------------------
Robert G. Holmes

Donald R. Stephens* Trustee
- ------------------
Donald R. Stephens

Michael W. Wilsey* Trustee
- ------------------
Michael W. Wilsey

Tai-Chin Tung** Treasurer and Principal Financial Officer
- ------------------
Tai-Chin Tung

*By: /s/ Alan G. Priest
---------------------
Alan G. Priest, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
<PAGE> 63
EXHIBITS INDEX

<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(10) Opinion and Consent of Ropes & Gray

(18) Multiple Class Plan
</TABLE>

<PAGE> 1
EXHIBIT 10

WRITER'S DIRECT DIAL NUMBER: (202) 626-3913

August 14, 1997

Schwab Investments
c/o Charles Schwab Investment
Management, Inc.
101 Montgomery Street
San Francisco, California 94104

Gentlemen:

You have registered under the Securities Act of 1933, as amended (the
"1933 Act") an indefinite number of shares of beneficial interest ("Shares") of
Schwab Investments ("Trust"), as permitted by Rule 24f-2 under the Investment
Company Act of 1940, as amended (the "1940 Act"). You propose to file a
post-effective amendment on Form N-1A (the "Post-Effective Amendment") to your
Registration Statement as required by the 1933 Act and the rules thereunder and
the 1940 Act and the rules thereunder with respect to certain units of
beneficial interest of the Trust ("Shares").

We have examined your Agreement and Declaration of Trust on file in the
office of the Secretary of The Commonwealth of Massachusetts and the Clerk of
the City of Boston. We have also examined a copy of your Bylaws and such other
documents, receipts and records as we have deemed necessary for the purpose of
this opinion.

Based upon the foregoing, we are of the opinion that the issue and sale
of the authorized but unissued Shares have been duly authorized under
Massachusetts law. Upon the original issue and sale of your authorized but
unissued Shares and upon receipt of the authorized consideration therefor in an
amount not less than the net asset value of the Shares established and in force
at the time of their sale, the Shares issued will be validly issued, fully paid
and non-assessable.

<PAGE> 2
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust provides for indemnification
out of the property of a particular series of shares for all loss and expenses
of any shareholder of that series held personally liable solely by reason of
his being or having been a shareholder. Thus, the risk of shareholder liability
is limited to circumstances in which that series of shares itself would be
unable to meet its obligations.

We understand that this opinion is to be used in connection with the
filing of the Post-Effective Amendment. We consent to the filing of this
opinion with and as part of your Post-Effective Amendment.

Sincerely,

Ropes & Gray

<PAGE> 1
EXHIBIT (18)

SCHWAB INVESTMENTS
MULTIPLE CLASS PLAN

This constitutes a MULTIPLE CLASS PLAN (the "Plan") of SCHWAB
INVESTMENTS, a Massachusetts business trust (the "Trust"), adopted pursuant to
Rule 18f-3(d) under the Investment Company Act of 1940, as amended (the "1940
Act"). The Plan is applicable to the Trust's investment portfolio(s) identified
on Schedule A hereto, as such Schedule may be amended from time to time (each a
"Fund", collectively the "Funds").

WHEREAS, it is desirable to enable the Trust to have flexibility in
meeting the investment and shareholder servicing needs of its current and future
investors; and

WHEREAS, the Board of Trustees of the Trust (the "Board of Trustees"),
including a majority of the Trustees who are not "interested persons" of the
Trust, as such term is defined by the 1940 Act, mindful of the requirements
imposed by Rule 18f-3(d) under the 1940 Act, has determined to adopt this Plan
to enable the Fund to provide appropriate services to certain designated classes
of shareholders of the Fund;

NOW, THEREFORE, the Trust designates the Plan as follows:

1. Designation of Classes. The Fund shall offer its units of beneficial
interest ("Shares") in two classes: Investor Shares and Select Shares.

2. Redesignation of Existing Shares. The currently outstanding Shares
of each Fund shall be redesignated as Investor Shares.

3. Shareholder Services Specific to Each Class. As a result of costs
and expenses attributable to servicing shareholders of Investor Shares and the
services rendered to Investor Shares, the shareholder service and transfer agent
fees charged to Investor Shares shall be higher than those charged to Select
Shares as set forth on Schedule A hereto and in the Shareholder Service
Agreement and schedules, dated May 1, 1993, as amended from time to time,
between the Trust and Charles Schwab & Co., Inc. (the "Shareholder Servicing
Agent").

4. Minimum Transaction Requirements. The minimum initial investment and
Fund balance requirements applicable to the Select Shares shall be higher than
those applicable to Investor Shares, as determined from time to time by Charles
Schwab Investment Management, Inc. ("CSIM").

5. Exchange Privilege. Each class of Shares shall be exchangeable for
shares of any Fund of the Trust or of Schwab Capital Trust and The Charles
Schwab Family of Funds, including all classes of shares of such Funds, provided
that the minimum investment and any other requirements of the Fund or class for
which the shares are exchanged are satisfied.

6. Allocation of Expenses. Each class shall pay all of the expenses of
its distribution and shareholder services arrangement (such arrangements for
shareholder services or distribution, or both, shall be a different arrangement
from other classes). At the Board of Trustees' discretion, each class may pay a
different share of other expenses, not including advisory or custodial fees or
other expenses related to the management of the Fund's assets, if these expenses
are actually
<PAGE> 2
incurred in a different amount by that class, or if the class receives services
of a different kind or to a different degree than other classes. All other
expenses, including (i) advisory or custodial fees or other expenses related to
the management of the Fund's assets and (ii) costs of implementing this plan,
shall be allocated to each class on the basis of the relative net asset value of
that class in relation to the net asset value of the Fund. If, in the future,
new class(es) are added to a Fund, any costs of implementing this plan for such
new class(es) shall be allocated to those classes of the Fund then in existence
before the addition of the new class structure and shall not be charged to the
new class(es).

7. Voting Rights. Each Share held entitles the Shareholder of record to
one vote. Each Fund will vote separately on matters relating solely to that
Fund. Each class of a Fund shall have exclusive voting rights on any matter
submitted to Shareholders that relates solely to that class, and shall have
separate voting rights on any matter submitted to Shareholders in which the
interests of one class differ from the interests of any other class. However,
all Fund Shareholders will have equal voting rights on matters that affect all
Fund Shareholders equally.

8. Distributions. The amount of dividends payable on each class will be
calculated pro rata on the basis of net asset value per share. Dividends
declared will be paid annually, subject to the Trust's Board of Trustees'
discretion. Capital gains will be distributed to each class in accordance with
Rule 18f-3.

9. Termination and Amendment. This Plan may be terminated or materially
amended at any time by vote of a majority of the Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust, as such
term is defined by the 1940 Act. Any non-material amendment of this Plan may be
made by CSIM.

10. The names "Schwab Investments" and "Board of Trustees" refer
respectively to the Trust created and the Trustees, as Trustees but not
individually or personally, acting from time to time under a Declaration of
Trust, to which reference is hereby made and a copy of which is on file at the
office of the Secretary of the Commonwealth of Massachusetts and elsewhere as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of Schwab Investments entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, Shareholders or representatives of the Trust personally, but bind only
the assets of the Trust, and all persons dealing with any series and/or class of
Shares of the Trust must look solely to the assets of the Trust belonging to
such series and/or class for the enforcement of any claims against the Trust.

SCHWAB INVESTMENTS

Signature: /s/ William J. Klipp
---------------------------
Name: William J. Klipp
Title: Executive Vice President and Chief
Operating Officer
Date: April 30, 1997
<PAGE> 3
SCHEDULE A TO THE
MULTIPLE CLASS PLAN OF
SCHWAB INVESTMENTS

<TABLE>
<CAPTION>
Name of Fund and Class Shareholder Service Fee (as a percentage Transfer Agent Fee (as a percentage of
of average daily net assets of the Fund average daily net assets of the Fund
Class) Class)
<S> <C> <C>
Schwab 1000 Fund Investor Shares 0.20% 0.05%
Schwab 1000 Fund Select Shares 0.05% 0.05%
</TABLE>

SCHWAB INVESTMENTS

Signature: /s/ William J. Klipp
-------------------------
Name: William J. Klipp
Title: Executive Vice President and Chief
Operating Officer
Date: April 30, 1997