SCHWAB INVESTMENTS, 485BPOS, 1997-12-15

SCHWAB INVESTMENTS
485BPOS, 1997-12-15

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<PAGE> 1

File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on December 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. 21 [X]

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 [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. Frances Cole, Esq.
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)
[X] On December 15, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] On [date], 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

<PAGE> 3

SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB 1000 FUND(R) - INVESTORS SHARES
SCHWAB 1000 FUND - SELECT SHARES
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
(FORMERLY SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND)
SCHWAB TOTAL BOND MARKET INDEX FUND
(FORMERLY LONG-TERM GOVERNMENT BOND FUND)

The information required by Items 1 through 9 for Schwab Short-Term
Bond Market Index Fund and Schwab Total Bond Market Index Fund, each a separate
portfolio of the Registrant, is hereby incorporated by reference to the
Prospectus for each of these Portfolios filed with the Securities and Exchange
Commission pursuant to Rule 485(b) on October 31, 1997.

The information required by Items 1 through 9 for Schwab 1000 Fund -
Investor Shares and Schwab 1000 Fund Select Shares, a portfolio of the
Registrant, is hereby incorporated by reference to the Prospectus for this
Portfolio filed with the Securities and Exchange Commission pursuant to Rule
485(a) on October 23, 1997.

<PAGE> 4

SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND

<TABLE>
<CAPTION>
Part A Item Prospectus Caption
- ----------- ------------------
<S> <C>
1. Cover Page Cover Page

2. Synopsis Key Features;
Expenses

3. Condensed Financial Information Not applicable

4. General Description of Registrant Organization & Management;
Investment Objective, Policies & Risks

5. Management of the Fund Organization & Management

5.(a) Management's Discussion of Fund Performance Not applicable

6. Capital Stock and Other Securities Organization & Management;
Investing in Shares

7. Purchase of Securities Being Offered Investing in Shares

8. Redemption or Repurchase Investing in Shares

9. Pending Legal Proceedings Not applicable
</TABLE>

<PAGE> 5

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KEY FEATURES......................... 2
EXPENSES............................. 3
FINANCIAL HIGHLIGHTS................. 5
PERFORMANCE.......................... 7
ORGANIZATION & MANAGEMENT............ 8
INVESTMENT OBJECTIVES, POLICIES &
RISKS.............................. 10
INVESTING IN SHARES.................. 14
</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 December 15, 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 1-800-435-4000 (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.

SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND

SCHWAB LONG-TERM
TAX-FREE BOND FUND

PROSPECTUS
DECEMBER 15, 1997

SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND (Short/Intermediate Tax-Free Fund)
seeks income exempt from federal income tax, while maintaining a dollar-weighted
average maturity between two and five years.

SCHWAB LONG-TERM TAX-FREE BOND FUND (Long-Term Tax-Free Fund) seeks income
exempt from federal income tax, while maintaining a dollar-weighted average
maturity of at least ten years.
<PAGE> 6

KEY FEATURES

MATCHING A FUND TO YOUR INVESTMENT NEEDS. Each Fund may be appropriate for a
variety of investment programs. While an investment in a Fund is not a
substitute for an investment portfolio tailored to an individual's investment
needs and risk tolerance, each Fund could serve as a component of a long-term
investment portfolio designed to accumulate assets for major goals.

The Funds are designed to provide income exempt from federal income tax. The
Funds are not suitable for investors who would not benefit from the tax-exempt
character of each Fund's investments, such as IRAs, qualified retirement plans
or tax-exempt entities.

GOALS. Each Fund seeks income exempt from federal income tax, while maintaining
a specific dollar-weighted average maturity (DWAM).

There is no guarantee the Funds will achieve their goals.

STRATEGIES. Each Fund intends to achieve its goal by investing in debt
securities, the interest on which is exempt from federal income tax.

Each Fund is a non-diversified mutual fund.

RISKS. Because each Fund invests substantially in municipal securities, the
performance of each Fund may be especially affected by state and local economic
conditions and political developments, as well as the ability of issuers to meet
their obligations.

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 $53 billion in assets as of October 31,
1997.

SHAREHOLDER SERVICE. Charles Schwab & Co., Inc. (Schwab) provides professional
representatives 24 hours a day at 1-800-435-4000 to service your accounts. Read
the "Investing in Shares" section of the prospectus for information on "How to
Buy Shares" and "How to Sell Shares" shares of the Funds.

LOW COST INVESTING. The Investment Manager and Schwab have voluntarily
guaranteed that, through at least October 31, 1998, total operating expenses of
each Fund will not exceed 0.49% of each Fund's daily net assets.

2
<PAGE> 7

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 NONE*
Exchange Fee NONE
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 a Fund or in your Schwab account.

The information on shareholder transaction expenses is for transactions through
a Schwab account. If you are purchasing, selling, exchanging or maintaining
shares of a Fund through an entity other than Schwab, other transaction expenses
may be changed by that entity.

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 the Fund's
shares and into the dividends paid to shareholders. As a shareholder, you are
not charged any of these fees directly.

The annual operating expenses stated below are based on historical expenses and
are stated as a percentage of average daily net assets of each Fund.

<TABLE>
<S> <C>
SHORT/INTERMEDIATE TAX-FREE FUND
Management Fee (after reduction) 0.15%
12b-1 Fee NONE
Other Expenses (after reduction) 0.34%
TOTAL OPERATING EXPENSES (AFTER REDUCTION) 0.49%

LONG-TERM TAX-FREE FUND
Management Fee (after reduction) 0.09%
12b-1 Fee NONE
Other Expenses (after reduction) 0.40%
TOTAL OPERATING EXPENSES (AFTER REDUCTION) 0.49%
</TABLE>

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

SHORT/INTERMEDIATE TAX-FREE FUND

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$5 $16 $27 $ 62
</TABLE>

LONG-TERM TAX-FREE FUND

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$5 $16 $27 $ 62
</TABLE>

THE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.

3
<PAGE> 8

The Investment Manager and Schwab have voluntarily agreed to guarantee, at least
through October 31, 1998, that total operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) of each Fund will not
exceed 0.49% of each Fund's average daily net assets. If these guarantees were
not in effect, the management fee, other expenses and total operating expenses
for the Short/Intermediate Tax-Free Fund and Long-Term Tax-Free Fund would have
been 0.41%, 0.55% and 0.96% and 0.41%, 0.61% and 1.02%, respectively, of each
Fund's average daily net assets. Read the "Organization & Management" section of
this prospectus for more information on expenses.

4
<PAGE> 9

FINANCIAL HIGHLIGHTS

The following information has been audited by Price Waterhouse LLP, 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 auditor's 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 1-800-435-4000.

SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND

For a share outstanding throughout each period:

<TABLE>
<CAPTION>
Period
Year ended August 31, ended
------------------------------------------- August 31,
1997 1996 1995 1994 1993**
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.04 $ 10.12 $ 9.92 $ 10.15 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.41 0.41 0.40 0.37 0.13
Net realized and unrealized gain (loss) on investments 0.12 (0.08) 0.20 (0.23) 0.15
------- ------- ------- ------- -------
Total from investment operations 0.53 0.33 0.60 0.14 0.28
LESS DISTRIBUTIONS
Dividends from net investment income (0.41) (0.41) (0.40) (0.37) (0.13)
Distributions from realized gain on investments -- -- -- -- --
------- ------- ------- ------- -------
Total distributions (0.41) (0.41) (0.40) (0.37) (0.13)
------- ------- ------- ------- -------
Net asset value at end of period $ 10.16 $ 10.04 $ 10.12 $ 9.92 $ 10.15
======= ======= ======= ======= =======
TOTAL RETURN (not annualized) 5.40% 3.32% 6.23% 1.42% 2.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s) $54,397 $54,132 $52,504 $63,889 $ 54,450
Ratio of expenses to average net assets+ 0.49% 0.49% 0.49% 0.48% 0.45%*
Ratio of net investment income to average net assets+ 4.08% 4.06% 4.06% 3.71% 3.63%*
Portfolio turnover rate 20% 44% 35% 19% 11%
</TABLE>

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

+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:

<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 0.96% 0.90% 0.89% 0.91% 1.26%*
Ratio of net investment income 3.61% 3.65% 3.66% 3.28% 2.82%*
</TABLE>

* Annualized

** For the period April 21, 1993 (commencement of operations) to August 31,
1993.

5
<PAGE> 10

SCHWAB LONG-TERM TAX-FREE BOND FUND

For a share outstanding throughout each period:

<TABLE>
<CAPTION>
Eight
months Period
Year ended August 31, ended ended
---------------------------------------- August 31, December 31,
1997 1996 1995 1994 1993 1992**
------- ------- ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.52 0.53 0.52 0.36 0.17
Net realized and unrealized gain (loss)
on investments 0.40 (0.03) 0.21 (0.56) 0.67 (0.08)
------- ------- ------- ------- ------- -------
Total from investment operations 0.93 0.49 0.74 (0.04) 1.03 0.09
LESS DISTRIBUTIONS
Dividends from net investment income (0.53) (0.52) (0.53) (0.52) (0.36) (0.17)
Distributions from realized gain on
investments -- -- -- (0.08) -- --
------- ------- ------- ------- ------- -------
Total distributions (0.53) (0.52) (0.53) (0.60) (0.36) (0.17)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 10.53 $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= ======= ======= =======
TOTAL RETURN (not annualized) 9.36% 4.87% 7.76% (0.42)% 10.56% 0.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s) $46,767 $43,672 $41,413 $43,975 $ 50,413 $ 28,034
Ratio of expenses to average net assets+ 0.49% 0.49% 0.54% 0.51% 0.45%* 0.45%*
Ratio of net investment income to
average net assets+ 5.09% 5.06% 5.40% 5.05% 5.30%* 5.61%*
Portfolio turnover rate 61% 50% 70% 62% 91% 54%
</TABLE>

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

+The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios would
have been:

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 1.02% 0.94% 0.93% 0.99% 1.18%* 1.53%*
Ratio of net investment income 4.56% 4.61% 5.01% 4.57% 4.57%* 4.53%*
</TABLE>

* Annualized

** For the period September 11, 1992 (commencement of operations) to December
31, 1992.

6
<PAGE> 11

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.

TAXABLE EQUIVALENT YIELD shows the yield that a taxable investment would have to
generate in order to equal a tax-free yield. A taxable equivalent effective
yield is calculated similarly, except that the effective yield is used in the
calculation.

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 1-800-435-4000.

7
<PAGE> 12

ORGANIZATION & MANAGEMENT

EACH FUND IS A NON-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.

Joanne Larkin is a Vice President of Schwab and Senior Portfolio Manager for the
Funds. Ms. Larkin has primary responsibility for the day-to-day portfolio
management of each Fund, and has since each Fund commenced operation. Prior to
February 1992, Ms. Larkin was portfolio manager for the Shearson Lehman
California Municipal Bond Fund and E.F. Hutton's Municipal Cash Reserve
Management. Ms. Larkin graduated from Rosemont College with a Bachelor of Arts
in Sociology.

Stephen B. Ward is the Trust's Senior Vice President and Chief Investment
Officer. Mr. Ward has overall responsibility for the portfolio management of the
Funds. Mr. Ward 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, Mr. Ward was Vice President and
Portfolio Manager at Federated Investors. Mr. Ward 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 an annual fee, payable monthly from each Fund.

For the fiscal year ended August 31, 1997, the Short/Intermediate Tax-Free Fund
and the Long-Term Tax-Free Fund paid the Investment Manager investment
management fees of 0.15% and 0.09%, respectively, of each Fund's daily net
assets.

SCHWAB IS THE FUNDS' SHAREHOLDER SERVICES AND TRANSFER AGENT. Schwab provides
Fund information to shareholders, including share price, reporting shareholder
ownership and account activities and distributing the Funds' prospectuses,

8
<PAGE> 13

financial reports and other informational literature about the Funds. Schwab
also maintains the office space, equipment and personnel necessary to provide
these services. Schwab also distributes and markets SchwabFunds(R) and provides
other 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.

THE FUNDS PAY OTHER EXPENSES. These expenses are typically connected with the
Trust's operations and include legal, audit and custodian fees, as well as the
costs of accounting and registration of the Funds. Expenses not directly
attributable to a particular fund will generally be allocated among the funds in
the Trust on the basis of each fund's relative net assets at the time the
expense is incurred.

For the fiscal year ended August 31, 1997, the Short/Intermediate Tax-Free Fund
and the Long-Term Tax-Free Fund, paid total operating expenses in the amount of
0.49% 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.

9
<PAGE> 14

INVESTMENT OBJECTIVES, POLICIES & RISKS

INVESTMENT OBJECTIVES
Each Fund's investment objective is to seek a high level of current income that
is exempt from federal income tax, consistent with preservation of capital.

Each Fund's investment objective may be changed only by vote of a majority of a
Fund's shareholders. Unless otherwise noted, policies and limitations may be
changed without shareholder approval.

INVESTMENT STRATEGIES
Each Fund intends to achieve its objective by investing in investment-grade
municipal securities. Each Fund will normally invest at least 80% of its total
assets in these securities.

THE MATURITY of a security generally determines its sensitivity to interest rate
changes. In general, the longer the maturity, the more sensitive the security
will be to interest rate changes. For example, money market securities are
high-quality, short-term debt securities that reflect short-term interest rates
and normally carry little risk of fluctuation of principal value.

The Short/Intermediate Tax-Free Fund is designed to provide higher yields than a
tax-free money market fund by investing in investment-grade, short- and
intermediate-term municipal securities that carry more risk of fluctuation of
principal. The Short/Intermediate Tax-Free Fund will normally seek to maintain a
DWAM of between two and five years.

The Long-Term Tax-Free Fund is designed to provide even higher yields by
investing in investment-grade, long-term municipal securities that carry an even
higher risk of fluctuation of principal value. The Long-Term Tax-Free Fund will
normally expect to maintain a DWAM of at least ten years.

Either Fund may invest in securities of any maturity.

THE RISKS for each Fund are basically those risks associated with investing in
debt securities, although each risk factor may be intensified by the Funds'
concentrated investments in municipal 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 DWAM is an important factor to consider when
determining interest rate risk. This is because DWAM is a measure of a Fund's
maturity and maturity generally determines a Fund's sensitivity to changes in
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 depends on its
portfolio of investments. Because the Funds invest

10
<PAGE> 15

substantially in municipal securities, they are expected to face income, credit
and interest rate risks, although the Long-Term Tax-Free Fund will face greater
interest rate risks as a result of its longer DWAM. Prepayment or call risks are
not predominant risk factors for municipal securities.

PRINCIPAL SECURITIES AND INVESTMENT TECHNIQUES
The different types of 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. Generally,
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 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.

MUNICIPAL SECURITIES are debt securities issued by or on behalf of a state,
including its counties, municipalities, authorities and other subdivisions, or
the territories and possessions of the United States and the District of
Columbia, including their subdivisions, agencies and instrumentalities. These
securities are issued to raise money for various public purposes or private
activities such as general financing for state and local governments or
financing for specific projects or facilities.

Municipal securities pay fixed, variable or floating rates of interest, which
also is meant to be exempt from federal income tax, and, typically, personal
income tax of a state or locality. Municipal securities may be owned directly or
through participation interests, and include general obligation or revenue
securities, anticipation notes and municipal leases.

The value of municipal securities may be affected by legislation or litigation
involving the taxation of municipal securities or the rights of holders of
municipal securities. In addition, some municipal securities involve private
entities, and the value of these securities could be affected by the credit
quality of the private entity and possibly by the circumstances affecting the
project.

Restriction: Each Fund will normally invest at least 80% of its total assets in
municipal securities the interest on which is free from federal income tax
including federal alternative minimum tax. This policy may be changed only by
shareholders. Each Fund also may invest more than 25% of its total assets in
municipal securities financing similar projects.

11
<PAGE> 16

municipal securities are sometimes issued with moral obligations, which are a
type of credit support. Liquidity supports include puts and demand features.
Credit and liquidity supports move the credit risk of an investment from the
issuer of the security to the support provider. Changes in the credit quality of
a support provider could cause losses to a Fund, and affect its share price. In
addition, credit and liquidity supports provided by foreign entities may involve
more risk because of the possibility of adverse foreign economic, political and
legal developments.

VARIABLE AND FLOATING RATE SECURITIES pay an interest rate, which is adjusted
either periodically or at specific intervals or floats continuously according to
a formula or benchmark. Although these structures generally are intended to
minimize the fluctuations in value that occur when interest rates rise and fall,
some structures may be linked to a benchmark in such a way as to cause greater
volatility to the security's value.

PUTS are agreements that allow the buyer to sell a security at a specified price
and time to the seller or "put provider." When a Fund buys a put, losses could
occur as a result of the costs of the put or if the put provider does not
perform as agreed. Losses could result to a Fund (as a put provider), if the
buyer exercises its rights under the put. Standby commitments and demand
features are types of puts.

ASSET-BACKED SECURITIES are securities that are backed by the loans or accounts
receivable of an entity, such as a bank or credit card company. Payment depends
largely on the cash flows generated by the assets backing the securities.

WHEN-ISSUED 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 SECURITIES are securities that are not actively traded and, therefore,
may be difficult to sell quickly. The sale of some illiquid securities and
certain other securities may be subject to legal restrictions. A Fund could
incur losses if it has difficulty selling a security.

Restriction: Each Fund will not invest more than 10% of its net assets in
illiquid securities. This policy may be changed only by shareholders.

SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by a Fund. These
investments will cause a Fund to bear duplicative fees for certain services.

MUNICIPAL MONEY MARKET SECURITIES are high quality, short-term debt securities
issued by state and local governments, including municipalities, and other
entities.

The Funds also may employ the policies described below.

DIVERSIFICATION involves investing in a wide range of securities and, thereby,
spreading and reducing the risks of investment. Non-diversified mutual funds are
more sensitive to changes that affect a single security.

Restriction: Each Fund is a non-diversified mutual fund. In order to meet
federal tax requirements, each Fund will not invest more than 25% of its total
assets in the securities of a single issuer, and, with respect to 50% of its
total assets, will not invest more than 5%

12
<PAGE> 17

in a single issuer. This limitation does not apply to U.S. Government
securities.

BORROWING is a form of leveraging if a Fund continues to make investments while
borrowings remain outstanding. Borrowing subjects a Fund to interest costs,
which may exceed the 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. This
policy may be changed only by shareholders.

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

TEMPORARY INVESTMENTS in U.S. Government securities, such as U.S. Treasury
securities; money market securities (taxable equivalents of Municipal Money
Market Securities); repurchase agreements (basically a collateralized loan by a
Fund) and other taxable securities may be made by each Fund as a defensive
measure or under abnormal market conditions.

13
<PAGE> 18

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 each share of each Fund is its net asset value per share (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 Custodial accounts............ $ 500
ADDITIONAL SHARES................. $ 100
MINIMUM BALANCE*.................. $ 500
for Custodial accounts............ $ 250
</TABLE>

* Your shares may be automatically redeemed if, as a result of selling shares,
you no longer meet a Fund's minimum balance requirements. You will be given 30
days' notice prior to redemption to increase your holdings to the required
minimum balance.

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

These minimums may be different if you are buying, selling, exchanging or
maintaining shares of a Fund through an entity other than Schwab.

HOW TO BUY SHARES

Shares may be purchased through a Schwab account or through an account with any
other entity designated by Schwab. The information on how to buy shares is for
shares bought through a Schwab account. Shares are purchased at the NAV next
determined after your purchase order has been received in good order. Purchase
orders received in good order by Schwab prior to 4:00 p.m. Eastern time will be
executed that day. Shares normally begin to earn dividends on the next business
day.

BY TELEPHONE. Call 1-800-435-4000, 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 Web site at http://www.schwab.com. For
more information about StreetSmart(R), The Equalizer(R) and TeleBroker(R) call
1-800-435-4000.

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

- - your name and Schwab account number;
- - the name of the Fund and the dollar amount you would like to purchase; and

- - for initial purchases only, one of the following three distribution choices.

14
<PAGE> 19

CASH OPTION. All distributions will be paid to your Schwab account and, if
requested, mailed to you the next business day; or

CASH DIVIDENDS/REINVESTED CAPITAL GAINS. Dividends will be paid to you in
cash and any capital gain distributions will be reinvested in additional
shares.

HOW TO SELL OR EXCHANGE SHARES

Shares may be sold or exchanged through a Schwab account or an account at any
other entity designated by Schwab. The information on how to sell and exchange
shares is for shares sold or exchanged through a Schwab account. Shares are sold
or exchanged at the NAV next determined after your sale or exchange order has
been received in good order. Sale and exchange orders received in good order by
Schwab prior to 4:00 p.m. Eastern time will be executed that day. Shares sold or
exchanged normally earn dividends on that day.

BY TELEPHONE. Call 1-800-435-4000, 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 Web site at http://www.schwab.com. For
more information about StreetSmart(R), The Equalizer(R) and TeleBroker(R) call
1-800-435-4000.

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

- - your name and Schwab account number;
- - the name of the Fund you would like to sell or exchange from and the number
of shares;
- - for exchanges only, the name of the 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.

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, which may take up to 15 days from the date of your purchase;

- - 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

15
<PAGE> 20

- - 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

Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab helps over 4.7 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 263 branch offices or Schwab's World Wide Web
site (http://www.schwab.com/funds) for information on investment products and
services.

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.

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.

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

16
<PAGE> 21

account: using cash, Sweep Shares of a Schwab Money Fund; or the Schwab
MoneyLink Transfer Service(R). As long as you are purchasing a Fund's shares
through AIP, 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 1-800-435-4000, 24 hours a day.

DIVIDENDS & TAXES

Each business day each Fund's net investment income is determined at the close
of the NYSE and declared as a dividend to shareholders of record as of the
previous NAV calculation. Net investment income is calculated by subtracting
each Fund's 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. 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. Dividends that are derived from exempt-interest
income will be exempt from federal income tax when distributed to shareholders.
Some distributions received by shareholders may be subject to federal or state
and/or local income taxes. For example, distributions derived from the gain on
the sale of tax-free bonds is typically subject to federal income tax. To the
extent distributions are subject to federal or state and/or local income taxes,
they are taxable when paid, whether received in cash or reinvested, although
distributions declared in December, but paid in January, are taxable as if they
were paid on December 31.

The interest from some municipal securities is subject to the federal
alternative minimum tax. Each Fund may invest up to 20% of its total assets in
these securities; provided that the total income earned on these securities does
not exceed 20% of the total income earned by the Fund. Shareholders subject to
federal alternative minimum tax must take this interest into account in
computing their federal alternative minimum tax liability.

Shareholders receive a record of all distributions by a Fund, as well as
purchases and sales they have made, via their monthly Schwab account statement.
Each year, the Funds notify shareholders of all distributions made by the Funds
that year, including the federal income tax consequences of the distributions.

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 due to unauthorized or fraudulent instructions.

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.

17
<PAGE> 22

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.

Each Fund, in its sole discretion and without prior notice, reserves the right
to reject orders to purchase shares, change minimum investment requirements or
withdraw or suspend any part of the offering made by the prospectus.
- ---------------------------------------------------

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.
- ---------------------------------------------------

18
<PAGE> 23

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 24
<TABLE>
<S> <C>
SCHWAB TAX-FREE ------------------
BOND FUNDS BULK RATE
PROSPECTUS December 15, 1997 U.S. POSTAGE
PAID
[Schwab Graphic] CHARLES SCHWAB
-------------------
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, California 94104

921-7 (12/97) Printed on recycled paper.

</TABLE>
<PAGE> 25

TABLE OF CONTENTS

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

SCHWAB CALIFORNIA
LONG-TERM TAX-FREE
BOND FUND

PROSPECTUS
DECEMBER 15, 1997

SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND (Short/Intermediate
Tax-Free Fund) seeks income exempt from federal and California personal income
taxes, while maintaining a dollar-weighted average maturity between two and five
years.

SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND (Long-Term Tax-Free Fund) seeks
income exempt from federal and California personal income taxes, while
maintaining a dollar-weighted average maturity of at least ten years.
<PAGE> 26

KEY FEATURES

The Funds are designed to provide income exempt from federal and California
personal income taxes. The Funds are not suitable for investors who would not
benefit from the tax-exempt character of each Fund's investments, such as IRAs,
qualified retirement plans or tax-exempt entities.

GOALS. Each Fund seeks income exempt from federal and California personal income
taxes, while maintaining a specific dollar-weighted average maturity (DWAM).

There is no guarantee the Funds will achieve their goals.

STRATEGIES. Each Fund intends to achieve its goal by investing in debt
securities, the interest on which is free from federal and California personal
income taxes.

Each Fund is a non-diversified mutual fund.

RISKS. Because each Fund invests substantially in municipal securities issued by
a single state, the performance of each Fund may be especially affected by the
state's economic conditions and political developments, as well as the ability
of issuers to meet their obligations.

2
<PAGE> 27

EXPENSES

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

* 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 a Fund or in your Schwab account.

The annual operating expenses stated below are based on historical expenses and
are stated as a percentage of average daily net assets of each Fund.

<TABLE>
<S> <C>
SHORT/INTERMEDIATE TAX-FREE FUND
Management Fee (after reduction) 0.19%
12b-1 Fee NONE
Other Expenses (after reduction) 0.30%
TOTAL OPERATING EXPENSES (AFTER REDUCTION) 0.49%
LONG-TERM TAX-FREE FUND
Management Fee (after reduction) 0.21%
12b-1 Fee NONE
Other expenses (after reduction) 0.28%
TOTAL OPERATING EXPENSES (AFTER REDUCTION) 0.49%
</TABLE>

SHORT/INTERMEDIATE TAX-FREE FUND

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$5 $16 $27 $62
</TABLE>

LONG-TERM TAX-FREE FUND

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$5 $16 $27 $62
</TABLE>

THE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.

3
<PAGE> 28

The Investment Manager and Schwab have voluntarily agreed to guarantee, at least
through October 31, 1998 that total operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) of each Fund will not
exceed 0.49% of each Fund's average daily net assets. If these guarantees were
not in effect, the management fee, other expenses and total operating expenses
for the Short/Intermediate Tax-Free Fund and Long-Term Tax-Free Fund would have
been 0.41%, 0.48% and 0.89% and 0.41%, 0.41% and 0.82%, respectively, of each
Fund's average daily net assets. Read the "Organization & Management" section of
this prospectus for more information on expenses.

4
<PAGE> 29

FINANCIAL HIGHLIGHTS

The auditor's 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 1-800-435-4000.

SCHWAB CALIFORNIA SHORT/INTERMEDIATE

TAX-FREE BOND FUND

For a share outstanding throughout each period:

<TABLE>
<CAPTION>
Period
Year ended August 31, ended
---------------------------------------- August 31,
1997 1996 1995 1994 1993++
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.04 $ 10.06 $ 9.89 $ 10.13 $ 10.00
Income from investment operations
Net investment income 0.43 0.43 0.42 0.37 0.13
Net realized and unrealized gain (loss) on investments 0.12 (0.02) 0.17 (0.24) 0.13
------- ------- ------- ------- -------
Total from investment operations 0.55 0.41 0.59 0.13 0.26
Less distributions
Dividends from net investment income (0.43) (0.43) (0.42) (0.37) (0.13)
Distributions from realized gain on investments -- -- -- -- --
------- ------- ------- ------- -------
Total distributions (0.43) (0.43) (0.42) (0.37) (0.13)
------- ------- ------- ------- -------
Net asset value at end of period $ 10.16 $ 10.04 $ 10.06 $ 9.89 $ 10.13
======= ======= ======= ======= =======
Total return (not annualized) 5.54% 4.11% 6.17% 1.29% 2.57%
Ratios/Supplemental data
Net assets, end of period (000s) $58,876 $45,788 $40,639 $48,649 $ 44,545
Ratio of expenses to average net assets+ 0.49% 0.49% 0.50% 0.48% 0.45%*
Ratio of net investment income to average net assets+ 4.21% 4.23% 4.29% 3.69% 3.49%*
Portfolio turnover rate 23% 20% 62% 35% 0%
</TABLE>

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

<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 0.89% 0.87% 0.84% 0.86% 1.25%*
Ratio of net investment income to average net assets 3.81% 3.85% 3.95% 3.31% 2.69%*
</TABLE>

++ For the period April 21, 1993 (commencement of operations) to August 31,
1993.

* Annualized

5
<PAGE> 30

SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND

For a share outstanding throughout each period:

<TABLE>
<CAPTION>
Eight
months Period
Year ended August 31, ended ended
------------------------------------------- August 31, December 31,
1997 1996 1995 1994 1993 1992++
-------- -------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58 $ 10.00
Income from investment operations
Net investment income 0.56 0.57 0.56 0.56 0.38 0.51
Net realized and unrealized gain (loss) on
investments 0.47 0.10 0.13 (0.74) 0.68 0.58
-------- -------- ------- -------- -------- -------
Total from investment operations 1.03 0.67 0.69 (0.18) 1.06 1.09
Less distributions
Dividends from net investment income (0.56) (0.57) (0.56) (0.56) (0.38) (0.51)
Distributions from realized gain on
investments -- -- -- (0.12) -- --
-------- -------- ------- -------- -------- -------
Total distributions (0.56) (0.57) (0.56) (0.68) (0.38) (0.51)
-------- -------- ------- -------- -------- -------
Net asset value at end of period $ 11.10 $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58
======== ======== ======= ======== ======== =======
Total return (not annualized) 9.95% 6.43% 6.98% (1.70)% 10.13% 11.10%
Ratios/Supplemental data
Net assets, end of period (000s) $125,284 $101,616 $90,045 $106,432 $138,067 $ 72,969
Ratio of expenses to average net assets+ 0.49% 0.49% 0.58% 0.60% 0.60%* 0.45%*
Ratio of net investment income to average
net assets+ 5.17% 5.30% 5.54% 5.12% 5.18%* 5.72%*
Portfolio turnover rate 35% 36% 46% 48% 47% 124%
</TABLE>

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

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 0.82% 0.82% 0.81% 0.80% 0.87%* 1.05%*
Ratio of net investment income to
average net assets 4.84% 4.97% 5.31% 4.92% 4.91%* 5.12%*
</TABLE>

++ For the period February 24, 1992 (commencement of operations) to December 31,
1992.

* Annualized

6
<PAGE> 31

PERFORMANCE

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

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

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 1-800-435-4000.

7
<PAGE> 32

ORGANIZATION & MANAGEMENT

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

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

For the fiscal year ended August 31, 1997, the Short/Intermediate Tax-Free Fund
and the Long-Term Tax-Free Fund paid the Investment Manager investment
management fees of 0.19% and 0.21%, respectively, of each Fund's daily net
assets.

8
<PAGE> 33

THE FUNDS PAY OTHER EXPENSES. These expenses are typically connected with the
Trust's operations, and include legal, audit and custodian fees, as well as the
costs of accounting and registration of the Funds. Expenses not directly
attributable to a particular fund will generally be allocated among the funds in
the Trust on the basis of each fund's relative net assets at the time the
expense is incurred.

9
<PAGE> 34

INVESTMENT OBJECTIVES, POLICIES & RISKS

INVESTMENT OBJECTIVES
Each Fund's investment objective is to seek a high level of current income that
is exempt from federal income and State of California personal income taxes,
consistent with preservation of capital.

Each Fund's investment objective may be changed only by vote of a majority of a
Fund's shareholders. Unless otherwise noted, policies and limitations may be
changed without shareholder approval.

INVESTMENT STRATEGIES
Each Fund intends to achieve its objective by investing in investment-grade
California municipal securities. Each Fund will normally invest at least 80% of
its total assets in these securities.

The Short/Intermediate Tax-Free Fund is designed to provide higher yields than a
tax-free money market fund by investing in investment-grade, short- and
intermediate-term California municipal securities that carry more risk of
fluctuation of principal. The Short/Intermediate Tax-Free Fund will normally
seek to maintain a DWAM of between two and five years.

The Long-Term Tax-Free Fund is designed to provide even higher yields by
investing in investment-grade, long-term California municipal securities that
carry an even higher risk of fluctuation of principal value. The Long-Term
Tax-Free Fund is expected to maintain a DWAM of at least ten years. Either Fund
may invest in securities of any maturity.

Generally speaking, there are four types of risk attendant to investing in debt
securities.

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.

10
<PAGE> 35

The amount of each type of risk each Fund will be subject to depends on its
portfolio of investments. Because the Funds invest substantially in California
municipal securities, they are expected to face income, credit and interest rate
risks, although the Long-Term Tax-Free Fund will face greater interest rate
risks as a result of its longer DWAM. Prepayment or call risks are not
predominant risk factors for California municipal securities.

PRINCIPAL SECURITIES AND INVESTMENT TECHNIQUES
The different types of securities in which the Funds may invest are described
below.

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

CALIFORNIA MUNICIPAL SECURITIES are municipal securities issued by or on behalf
of the state of California or its counties, municipalities, authorities or other
subdivisions. These securities are subject to the same general risks associated
with other municipal securities, although their value will be particularly
affected by economic, political, geographic and demographic

11
<PAGE> 36

conditions and developments within California. Additionally, like all
securities, the value of California municipal securities may be affected by any
change in the perceived ability of issuers to meet their obligations.

Restriction: Each Fund will normally invest at least 80% of its total assets in
California municipal securities the interest on which is free from California
personal income tax and federal income tax, including federal alternative
minimum tax. This policy may be changed only by shareholders. Each Fund may
invest more than 25% of its total assets in municipal securities financing
similar projects.

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 provided by foreign and domestic entities, and municipal
securities are sometimes issued with moral obligations, which are a type of
credit support. Liquidity supports include puts and demand features. Credit and
liquidity supports move the credit risk of an investment from the issuer of the
security to the support provider. Changes in the credit quality of a support
provider could cause losses to a Fund, and affect its share price. In addition,
credit and liquidity supports provided by foreign entities may involve more risk
because of the possibility of adverse foreign economic, political and legal
developments.

Restriction: Each Fund will not invest more than 10% of its net assets in
illiquid securities. This policy may be changed only by shareholders.

12
<PAGE> 37

SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by a Fund. These
investments will cause a Fund to bear duplicative fees for certain services.

MUNICIPAL MONEY MARKET SECURITIES are high quality, short-term debt securities
issued by state and local governments, including municipalities, and other
entities.

The Funds also may employ the policies described below.

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).

MINIMUM INVESTMENTS

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

These minimums may be different if you are buying, selling, exchanging or
maintaining shares of a Fund through an entity other than Schwab.

HOW TO BUY SHARES

BY TELEPHONE. Call 1-800-435-4000, 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 Web site at http://www.schwab.com. For
more information about StreetSmart(R), The Equalizer(R) and TeleBroker(R) call
1-800-435-4000.

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

- - your name and Schwab account number;
- - the name of the Fund and the dollar amount you would like to purchase; and

- - for initial purchases only, one of the following three distribution choices.

AUTOMATIC REINVESTMENT. Dividends and capital gain distributions will be
reinvested in shares of your Fund. If you do not choose an option, this
option will be assigned to you and all distributions will be reinvested; or
CASH OPTION. All distributions will be paid to your Schwab account and, if
requested, mailed to you the next business day; or

CASH OPTION. All distributions will be paid to your Schwab account and, if
requested, mailed to you the next business day; or

CASH DIVIDENDS/REINVESTED CAPITAL GAINS. Dividends will paid to you in cash
and any capital gain distributions will be reinvested in additional shares.