SCHWAB INVESTMENTS, 485BPOS, 1999-11-15

SCHWAB INVESTMENTS
485BPOS, 1999-11-15

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<PAGE> 1
File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on November 15, 1999

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 31 [X]
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 35 [X]

SCHWAB INVESTMENTS
(Exact Name of Registrant as Specified in Charter)

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

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

FRANCES COLE

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

101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)

Copies of communications to:

<TABLE>
<S> <C>
John H. Grady, Jr. Esq. Martin E. Lybecker, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray
1701 Market Street One Franklin Square
Philadelphia, PA 19103 1301 K Street, N.W., Suite 800 East
Washington, D.C. 20005
</TABLE>

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

/ / Immediately upon filing pursuant to paragraph (b)
/X/ On November 15, 1999 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 if appropriate, check
appropriate box:

/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE> 2
PROSPECTUS

November 15, 1999

SCHWAB
CALIFORNIA TAX-FREE
BOND FUNDS

SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND

SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND

As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.

SCHWABFUNDS (R)
<PAGE> 3
Schwab California Tax-Free Bond Funds

<TABLE>
<CAPTION>
ABOUT THE FUNDS
<S> <C>
4 Schwab California Short/
Intermediate Tax-Free Bond Fund

8 Schwab California Long-Term
Tax-Free Bond Fund

12 Fund Management

INVESTING IN THE FUNDS

14 Buying Shares

15 Selling/Exchanging Shares

16 Transaction Policies

17 Distributions and Taxes
</TABLE>

ABOUT THE FUNDS
<PAGE> 4
The Schwab California Tax-Free Bond Funds seek to provide HIGH CURRENT INCOME
free from federal and California state personal income taxes. Each fund has the
same investment goal, but uses a DIFFERENT STRATEGY.

Because these funds invest mainly in California municipal bonds, their dividends
generally are free from federal and California state personal income tax. Each
fund also seeks to lower risk by investing across different sectors of the
investment-grade municipal bond market.

The funds are designed for long-term investing. Their performance will fluctuate
over time and, as with all investments, future performance may differ from past
performance.
<PAGE> 5
SCHWAB CALIFORNIA SHORT/
INTERMEDIATE TAX-FREE BOND FUND

TICKER SYMBOL: SWCSX

GOAL

THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL
INCOME TAX THAT IS CONSISTENT WITH CAPITAL PRESERVATION.

STRATEGY

TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES --
THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA-BBB-) -- FROM CALIFORNIA
ISSUERS. The fund normally invests at least 80% of total assets in these
securities, and typically far more. Interest income from these securities is
free from federal and California personal income tax and federal alternative
minimum tax. To help preserve investors' capital, the fund seeks to keep the
average maturity of its overall portfolio between two and five years.

The fund may invest in securities from municipal issuers in California and in
U.S. territories and possessions. These may include general obligation issues,
which typically are backed by the issuer's ability to levy taxes, and revenue
issues, which typically are backed by a stream of revenue from a given source,
such as an electric utility or a public water system. The fund may invest more
than 25% of total assets in municipal securities financing similar projects, and
may also invest in municipal notes. Many of the fund's securities carry credit
enhancements (such as bond insurance) or liquidity enhancements (such as a
letter of credit), which are designed to provide incremental levels of
creditworthiness or liquidity.

In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit and maturity standards. The investment
adviser's credit research department analyzes and monitors the securities that
the fund owns or is considering buying. If a portfolio security falls below
investment-grade, the fund may continue to hold it if the investment adviser
believes it would benefit the fund. The manager may adjust the fund's holdings
or its average maturity based on actual or anticipated changes in interest rates
or credit quality.

During unusual market conditions, the fund may invest in taxable securities as a
temporary defensive measure. In this case, the fund would not be pursuing its
goal.

SHORTER MATURITIES

As a bond approaches maturity, its market value typically moves closer to its
par value (the amount of the bond's principal, which a bondholder receives when
the bond matures).

Investing in short- and intermediate-term bonds is a common strategy for
reducing price volatility and other risks. In exchange for these lower risks,
short-and intermediate-term bonds typically (though not always) offer lower
yields than longer term bonds.

4 CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
<PAGE> 6
California taxpayers who are seeking double tax-free income along with the
potential for lower volatility may want to consider this fund.

MAIN RISKS

BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.

WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's short-to-intermediate maturity is designed to reduce
this risk, but will not eliminate it. A fall in interest rates could hurt the
fund as well, by lowering its yield. This is because issuers tend to pay off
their bonds when interest rates fall, often forcing the fund to reinvest in
lower-yielding securities.

THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions also could affect
performance. Because the fund is non-diversified, it may divide its assets among
fewer issuers than a diversified fund. This means that the fund could increase
its exposure to the risks of a given issuer.

THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the
extent that the manager anticipates interest rate trends imprecisely, the fund
could miss yield opportunities or its share price could fall.

IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO
BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive
investments in taxable securities could generate taxable income. Also, some
types of municipal securities produce income that is subject to the federal
alternative minimum tax (AMT).

THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange
for its goal of capital preservation, the fund may offer lower long-term
performance than stock investments or certain other types of bond investments.

CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND 5
<PAGE> 7
PERFORMANCE

Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.

ANNUAL TOTAL RETURNS (%) AS OF 12/31

BEST QUARTER: 3.62% Q1 1995
WORST QUARTER: -2.45% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: 1.14%

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1998

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C>
Fund 4.83 4.38 4.63 (1)
Lehman Brothers Three-
Year Municipal Bond Index 5.20 4.91 4.92 (2)
</TABLE>

1 Inception: 4/21/1993.
2 From: 4/21/1993.

FUND FEES AND EXPENSES

The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the fund's total return.

FEE TABLE (%)

SHAREHOLDER FEES
<TABLE>
<CAPTION>
None

ANNUAL OPERATING EXPENSES (% of average net assets)
<S> <C>
MANAGEMENT FEES 0.30
DISTRIBUTION (12b-1) FEES NONE
OTHER EXPENSES 0.36
----
TOTAL ANNUAL OPERATING EXPENSES 0.66

EXPENSE REDUCTION (0.17)
----
NET OPERATING EXPENSES* 0.49
----
</TABLE>

* Guaranteed by Schwab and the investment adviser through 10/31/2000.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions as
other mutual fund prospectuses: a $10,000 investment and 5% return each year.
The expenses would be the same whether you stayed in the fund or sold your
shares at the end of each period. Your actual costs may be higher or lower.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$67 $211 $368 $822
</TABLE>

The performance information above shows you how the fund's performance compares
to its index, which varies over time.

6 CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
<PAGE> 8
FINANCIAL HIGHLIGHTS

This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).

<TABLE>
<CAPTION>
FISCAL PERIODS ENDED 8/31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 10.26 10.16 10.04 10.06 9.89
------------------------------------------------
Income from investment operations:
Net investment income 0.39 0.41 0.43 0.43 0.42
Net realized and unrealized gain (loss)
on investments (0.17) 0.11 0.12 (0.02) 0.17
------------------------------------------------
Total income from investment operations 0.22 0.52 0.55 0.41 0.59
Less distributions:
Dividends from net investment income (0.39) (0.42) (0.43) (0.43) (0.42)
------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.09 10.26 10.16 10.04 10.06
================================================
Total return (%) 2.16 5.19 5.54 4.11 6.17

RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to average
net assets 0.49 0.49 0.49 0.49 0.50
Expense reductions reflected in above ratio 0.28 0.30 0.40 0.38 0.34
Ratio of net investment income to average net
assets 3.81 4.02 4.21 4.23 4.29
Portfolio turnover rate 7 8 23 20 62
Net assets, end of period ($ x 1,000,000) 126 96 59 46 41
</TABLE>

1 Annualized.

CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND 7
<PAGE> 9
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND

TICKER SYMBOL: SWCAX

GOAL

THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL
INCOME TAX THAT IS CONSISTENT WITH CAPITAL PRESERVATION.

STRATEGY

TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES --
THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA-BBB-) -- FROM CALIFORNIA
ISSUERS. The fund normally invests at least 80% of total assets in these
securities, and typically far more. Interest from these securities is free from
federal and California personal income tax and federal alternative minimum tax.
The fund seeks to maintain an average maturity in its overall portfolio of at
least ten years.

In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit standards. The investment adviser's
credit research department analyzes and monitors the securities that the fund
owns or is considering buying. If a portfolio security falls below
investment-grade, the fund may continue to hold it if the investment adviser
believes it would benefit the fund. The manager may adjust the fund's holdings
or its average maturity based on actual or anticipated changes in interest rates
or credit quality.

During unusual market conditions, the fund may invest in taxable securities as a
temporary defensive measure. In this case, the fund would not be pursuing its
goal.

MATURITY AND YIELD

Bond yields typically are higher the longer the bond's maturity. By investing in
longer term bonds, the fund seeks to earn higher yields over time than the
Schwab California Short/Intermediate Tax-Free Bond Fund.

Maintaining a longer average maturity does carry certain risks, however:
investors should expect this fund's share price to be more volatile than that of
the Schwab California Short/Intermediate Tax-Free Bond Fund.

8 CALIFORNIA LONG-TERM TAX-FREE BOND FUND
<PAGE> 10
THIS FUND IS DESIGNED FOR CALIFORNIA TAXPAYERS WHO WANT DOUBLE TAX-FREE INCOME
AND CAN ACCEPT HIGHER RISK IN EXCHANGE FOR POTENTIALLY HIGHER LONG-TERM RETURNS.

MAIN RISKS

BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.

WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's comparatively long average maturity will tend to make it
more sensitive to this risk than funds with shorter average maturities.

CALIFORNIA LONG-TERM TAX-FREE BOND FUND 9
<PAGE> 11
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31

BEST QUARTER: 8.47% Q1 1995
WORST QUARTER: -6.74% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: -3.53%

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1998

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C>
Fund 6.43 5.93 7.79 (1)
Lehman Brothers
General Municipal
Bond Index 6.48 6.24 7.57 (2)
</TABLE>

1 Inception: 2/24/1992.
2 From: 2/24/1992.

FUND FEES AND EXPENSES

FEE TABLE (%)

<TABLE>
<CAPTION>
SHAREHOLDER FEES
None
<S> <C>
ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees 0.30
Distribution (12b-1) fees None
Other expenses 0.34
----
Total annual operating expenses 0.64

EXPENSE REDUCTION (0.15)
----
NET OPERATING EXPENSES* 0.49
----
</TABLE>

* Guaranteed by Schwab and the investment adviser through 10/31/2000.

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$65 $205 $357 $798
</TABLE>

The performance information above shows you how the fund's performance compares
to its index, which varies over time.

10 CALIFORNIA LONG-TERM TAX-FREE BOND FUND
<PAGE> 12
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FISCAL PERIODS ENDED 8/31 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 11.52 11.10 10.63 10.53 10.40
-------------------------------------------------------------
Income from investment operations:
Net investment income 0.54 0.54 0.56 0.57 0.56
Net realized and unrealized gain (loss)
on investments (0.70) 0.43 0.47 0.10 0.13
-------------------------------------------------------------
Total income from investment operations (0.16) 0.97 1.03 0.67 0.69
Less distributions:
Dividends from net investment income (0.54) (0.55) (0.56) (0.57) (0.56)
-------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.82 11.52 11.10 10.63 10.53
=============================================================
Total return (%) (1.57) 8.96 9.95 6.43 6.98

RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to
average net assets 0.49 0.49 0.49 0.49 0.58
Expense reductions reflected in above ratio 0.26 0.27 0.33 0.33 0.23
Ratio of net investment income to average
net assets 4.69 4.79 5.17 5.30 5.54
Portfolio turnover rate 55 28 35 36 46
Net assets, end of period ($ x 1,000,000) 202 190 125 102 90
</TABLE>

CALIFORNIA LONG-TERM TAX-FREE BOND FUND 11
<PAGE> 13
FUND MANAGEMENT

THE FUND'S INVESTMENT ADVISER, CHARLES SCHWAB INVESTMENT MANAGEMENT, INC., HAS
MORE THAN $99 BILLION UNDER MANAGEMENT.

THE INVESTMENT ADVISER for the Schwab California Tax-Free Bond Funds is Charles
Schwab Investment Management, Inc., 101 Montgomery Street, San Francisco, CA
94104. Founded in 1989, the firm today serves as investment adviser for all of
the SchwabFunds.(R) The firm manages assets for more than 4 million accounts.
(All figures on this page are as of 8/31/1999.)

As the investment adviser, the firm oversees the asset management and
administration of the Schwab California Tax-Free Bond Funds. As compensation for
these services, the firm receives a management fee from each fund. For the 12
months ended 8/31/1999, these fees were 0.13% for the Schwab California
Short/Intermediate Tax-Free Bond Fund and 0.15% for the Schwab California
Long-Term Tax-Free Bond Fund. These figures, which are expressed as a percentage
of each fund's average daily net assets, represent the actual amounts paid,
including the effects of reductions.

JOANNE LARKIN, a vice president of the investment adviser, has had overall
responsibility for management of each fund since its inception. Prior to joining
the firm in February 1992, she worked for more than eight years in research and
asset management at another firm.

YEAR 2000 ISSUE

One issue with the potential to disrupt fund operations and affect performance
is the inability of some computers to recognize the year 2000.

The investment adviser will continue to take steps to enable its systems to
handle the year 2000 problem. The investment adviser also is seeking assurances
that its service providers and business partners are taking similar steps as
well. However, it is impossible to know in advance exactly how this issue will
affect fund administration, fund performance or securities markets in general.

12 FUND MANAGEMENT
<PAGE> 14
INVESTING IN THE FUNDS

As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.

On the following pages, you will find information on buying, selling and
exchanging shares using the method that is most convenient for you. You also
will see how to choose a distribution option for your investment. Helpful
information on taxes is included as well.

INVESTING IN THE FUNDS 13
<PAGE> 15
BUYING SHARES

Shares of the funds may be purchased through a Schwab brokerage account or
through certain third-party investment providers, such as other financial
institutions, investment professionals and workplace retirement plans.

The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds. If you
are investing through a third-party investment provider, some of the
instructions, minimums and policies may be different. Some investment providers
may charge transaction or other fees. Contact your investment provider for more
information.

STEP 1

CHOOSE A FUND, then decide how much you want to invest.

<TABLE>
<CAPTION>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
- --------------------------------------------------------------------------------
<S> <C> <C>
$1,000 $100 $500
($500 for custodial ($250 for custodial
accounts) accounts)
</TABLE>

STEP 2

CHOOSE AN OPTION FOR FUND DISTRIBUTIONS. The three options are described below.
If you don't indicate a choice, you will receive the first option.

<TABLE>
<CAPTION>
OPTION FEATURES
- --------------------------------------------------------------------------------
<S> <C>
Reinvestment All dividends and capital gain distributions are invested
automatically in shares of your fund.

- --------------------------------------------------------------------------------
Cash/reinvestment You receive payment for dividends, while any capital gain
mix distributions are invested in shares of your fund.

- --------------------------------------------------------------------------------
Cash You receive payment for all dividends and capital gain distributions.
</TABLE>

STEP 3

PLACE YOUR ORDER. Use any of the methods described at right. Make checks payable
to Charles Schwab & Co., Inc.

SCHWAB ACCOUNTS

Different types of Schwab brokerage accounts are available, with varying account
opening and balance requirements. Some Schwab brokerage account features can
work in tandem with features offered by the funds.

For example, when you sell shares in a fund, the proceeds automatically are paid
to your Schwab brokerage account. From your account, you can use features such
as MoneyLink(R), which lets you move money between your brokerage accounts and
bank accounts, and Automatic Investment Plan (AIP), which lets you set up
periodic investments.

For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.

14 INVESTING IN THE FUNDS
<PAGE> 16
SELLING/EXCHANGING SHARES

Use any of the methods described below to sell shares of a fund.

When selling or exchanging shares, please be aware of the following policies:

- - A fund may take up to seven days to pay sale proceeds.

- - If you are selling shares that were recently purchased by check, the proceeds
may be delayed until the check for purchase clears; this may take up to 15
days from the date of purchase.

- - These funds reserve the right to honor redemptions in portfolio securities
instead of cash when your redemptions over a 90-day period exceed $250,000 or
1% of a fund's assets.

- - Exchange orders must meet the minimum investment and other requirements for
the fund and share class into which you are exchanging.

- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.

WHEN PLACING ORDERS

With every order to buy, sell or exchange shares, you will need to include the
following information:

- - Your name

- - Your account number (for SchwabLink transactions, include the master
account and subaccount numbers)

- - The name and share class of the fund whose shares you want to buy or sell

- - The dollar amount or number of shares you would like to buy, sell or
exchange

- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer

- - When selling shares, how you would like to receive the proceeds

Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.

METHODS FOR PLACING ORDERS

PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).

INTERNET
www.schwab.com/schwabfunds

SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.

MAIL
Write to SchwabFunds(R) at:
P.O. Box 7575, San Francisco, CA 94120-7575

When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.

IN PERSON
Visit the nearest Charles Schwab branch office.

INVESTING IN THE FUNDS 15
<PAGE> 17
TRANSACTION POLICIES

THE FUNDS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN. The funds calculate their share prices each business day after the
close of the NYSE (generally 4 p.m. Eastern time). A fund's share price is its
net asset value per share, or NAV, which is the fund's net assets divided by the
number of its shares outstanding.

Orders that are received in good order are executed at the next NAV to be
calculated. Orders to buy shares that are accepted prior to the close of the
fund generally will receive the next day's dividend. Orders to sell or exchange
shares that are accepted and executed prior to the close of the fund on a given
day generally will receive that day's dividend.

In valuing their securities, the funds use market quotes if they are readily
available. In cases where quotes are not readily available, a fund may value
securities based on fair values developed using methods approved by the fund's
Board of Trustees.

THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:

- - To automatically redeem your shares if the account they are held in is closed
for any reason or your balance falls below the minimum as a result of selling
or exchanging your shares

- - To modify or terminate the exchange privilege upon 60 days' written notice to
shareholders

- - To refuse any purchase or exchange order, including those that appear to be
associated with short-term trading activities

- - To change or waive a fund's investment minimums

- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC

- - To withdraw or suspend any part of the offering made by this prospectus

16 INVESTING IN THE FUNDS
<PAGE> 18
DISTRIBUTIONS AND TAXES

ANY INVESTMENT IN THE FUNDS TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in a fund. You also can
visit the Internal Revenue Service (IRS) web site at www.irs.ustreas.gov.

AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS AND GAINS YOUR
FUND EARNS. Each fund distributes to its shareholders substantially all of its
net investment income and net capital gains, if any. Each fund declares a
dividend every business day, based on its determination of its net investment
income. Each fund pays its dividends on the 25th of every month (or next
business day, if the 25th is not a business day), except that in December
dividends are paid on the last business day of the month. The funds expect to
pay any capital gain distributions every year, typically in December, to all
shareholders of record.

THE FUNDS' DISTRIBUTIONS MAY HAVE TAX CONSEQUENCES. Each fund's dividends
typically are free from federal and California state and local personal income
tax. Each fund's capital gain distributions generally are taxable in the tax
year in which they are declared, whether you reinvest them or take them in cash.

While interest from municipal securities generally is free from federal income
tax, some types of securities produce income that is subject to the federal
alternative minimum tax (AMT). To the extent that a fund invests in these
securities, shareholders who are subject to the AMT may have to pay this tax on
some or all dividends received from that fund.

GENERALLY, ANY SALE OF YOUR SHARES IS A TAXABLE EVENT. A sale may result in a
capital gain or loss for you. The gain or loss generally will be treated as
short-term if you held the shares for 12 months or less, long-term if you held
the shares longer.

AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS the fund paid during the previous
calendar year. Schwab brokerage account customers also receive information on
distributions and transactions in their monthly account statements.

SCHWAB BROKERAGE ACCOUNT CUSTOMERS WHO SELL FUND SHARES typically will receive a
report that calculates their gain or loss using the "average cost"
single-category method. This information is not reported to the IRS, and you
still have the option of calculating gains or losses using any other methods
permitted by the IRS.

INVESTING IN THE FUNDS 17
<PAGE> 19
NOTES

18 NOTES

<PAGE> 20

NOTES 19
<PAGE> 21
TO LEARN MORE

This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.

SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.

The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.

You can obtain copies of these documents by contacting SchwabFunds' or the SEC.
All materials from SchwabFunds are free; the SEC charges a duplicating fee. You
can also review these materials in person at the SEC's Public Reference Room.

SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
www.schwab.com/schwabfunds

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)
www.sec.gov

SEC FILE NUMBER
Schwab California
Tax-Free Bond Funds 811-6200

PROSPECTUS
November 15, 1999

SCHWABFUNDS

SCHWAB
CALIFORNIA TAX-FREE
BOND FUNDS

<PAGE> 22
PROSPECTUS
November 15, 1999

SCHWAB
TAX-FREE BOND FUNDS

SCHWAB SHORT/INTERMEDIATE TAX-FREE
BOND FUND

SCHWAB LONG-TERM TAX-FREE BOND FUND

SCHWABFUNDS(R)
<PAGE> 23
Schwab Tax-Free Bond Funds

ABOUT THE FUNDS

4 Schwab Short/Intermediate
Tax-Free Bond Fund

8 Schwab Long-Term Tax-Free
Bond Fund

12 Fund Management

INVESTING IN THE FUNDS

14 Buying Shares

15 Selling/Exchanging Shares

16 Transaction Policies

17 Distributions and Taxes

ABOUT THE FUNDS
<PAGE> 24
The Schwab Tax-Free Bond Funds seek to provide HIGH CURRENT INCOME free from
federal income tax. Each fund has the same investment goal, but uses a DIFFERENT
STRATEGY.

Because these funds invest in municipal bonds, their dividends generally are
free from federal income tax. Each fund also seeks to lower risk by investing
across different sectors of the investment-grade municipal bond market.

TICKER SYMBOL: SWITX

GOAL

The fund seeks high current income that is exempt from federal income tax,
consistent with capital preservation.

STRATEGY

TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES --
THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA-BBB-). The fund normally
invests at least 80% of total assets in these securities, and typically far
more. Interest from these securities is free from federal income tax and federal
alternative minimum tax. To help preserve investors' capital, the fund seeks to
keep the average maturity of its overall portfolio between two and five years.

The fund may invest in fixed-, variable- or floating-rate securities from state
issuers around the country and from municipal agencies, U.S. territories and
possessions. These may include general obligation issues, which typically are
backed by the issuer's ability to levy taxes, and revenue issues, which
typically are backed by a stream of revenue from a given source, such as an
electric utility or a public water system. The fund may invest more than 25% of
total assets in municipal securities financing similar projects, and may also
invest in municipal notes. Many of the fund's securities carry credit
enhancements (such as bond insurance) or liquidity enhancements (such as a
letter of credit), which are designed to provide incremental levels of
creditworthiness or liquidity.

In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit and average maturity standards. The
investment adviser's credit research department analyzes and monitors the
securities that the fund owns or is considering buying. If a portfolio security
falls below investment-grade, the fund may continue to hold it if the investment
adviser believes it would benefit the fund. The manager may adjust the fund's
holdings or its average maturity based on actual or anticipated changes in
interest rates or credit quality.

During unusual market conditions, the fund may invest in taxable securities as a
temporary defensive measure. In this case, the fund would not be pursuing its
goal.

SHORTER MATURITIES

As a bond approaches maturity, its market value typically moves closer to its
par value (the amount of the bond's principal value, which a bondholder receives
when the bond matures).

Investing in short- and intermediate-term bonds is a common strategy for
reducing price volatility and other risks. In exchange for these lower risks,
short- and intermediate-term bonds typically (though not always) offer lower
yields than longer term bonds.

4
SHORT/INTERMEDIATE TAX-FREE BOND FUND
<PAGE> 26
MAIN RISKS

BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.

STATE AND REGIONAL FACTORS COULD AFFECT THE FUND'S PERFORMANCE. To the extent
that the fund invests in securities from a given state or geographic region, its
share price and performance could be affected by local, state and regional
factors, including erosion of the tax base and changes in the economic climate.
National governmental actions also could affect performance. Because the fund is
non-diversified, it may divide its assets among fewer issuers than a diversified
fund. This means that the fund could increase its exposure to the risks of a
given issuer.

THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default generally is considered unlikely with investment-grade municipal
securities, any default on the part of a portfolio investment could cause the
fund's share price or yield to fall. The fund's emphasis on quality and
preservation of capital also could cause it to underperform certain other types
of bond investments, particularly those that take greater maturity and credit
risks. At the same time, some of the fund's investments may have greater risks
than securities in taxable bond funds.

Individuals in higher tax brackets who are seeking tax-free income along with
the potential for lower volatility may want to consider this fund.

5
SHORT/INTERMEDIATE TAX-FREE BOND FUND
<PAGE> 27
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31

<TABLE>
9.28 3.54 5.17 4.78
(1.12)

BEST QUARTER: 3.00% Q1 1995
WORST QUARTER: -2.33% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: 0.53%

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1998

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- ---------------------------------------------------------
<S> <C> <C> <C>
Fund 4.78 4.28 4.57 1
Lehman Brothers Three-
Year Municipal Bond Index 5.20 4.91 4.92 2
</TABLE>

1 Inception: 4/21/1993.
2 From: 4/21/1993.

FUND FEES AND EXPENSES

FEE TABLE (%)

SHAREHOLDER FEES
- --------------------------------------------------------------------------------
None

ANNUAL OPERATING EXPENSES (% of average net assets)
- ---------------------------------------------------
Management fees 0.30
Distribution (12b-1) fees None
Other expenses 0.40
-----
Total annual operating expenses 0.70

EXPENSE REDUCTION (0.21)
-----
NET OPERATING EXPENSES* 0.49
-----

* Guaranteed by Schwab and the investment adviser through 10/31/2000.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as other mutual fund prospectuses: a $10,000 investment and 5% return each
year. The expenses would be the same whether you stayed in the fund or sold
your shares at the end of each period. Your actual costs may be higher or
lower.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------
<S> <C> <C> <C>
$72 $224 $390 $871
</TABLE>

The performance information above shows you how the fund's performance compares
to its index, which varies over time.

6
SHORT/INTERMEDIATE TAX-FREE BOND FUND
<PAGE> 28
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
Fiscal periods ended 8/31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ----------------------------------------------------------------------------------------------
Net asset value at beginning of period 10.26 10.16 10.04 10.12 9.92
---------------------------------------------
Income from investment operations:
Net investment income 0.40 0.42 0.41 0.41 0.40
Net realized and unrealized gain (loss)
on investments (0.21) 0.10 0.12 (0.08) 0.20
---------------------------------------------
Total income from investment operations 0.19 0.52 0.53 0.33 0.60
Less distributions:
Dividends from net investment income (0.40) (0.42) (0.41) (0.41) (0.40)
---------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.05 10.26 10.16 10.04 10.12

=============================================
Total return (%) 1.86 5.17 5.40 3.32 6.23
</TABLE>

<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of actual operating expenses to average
net assets 0.49 0.49 0.49 0.49 0.49
Expense reductions reflected in above ratio 0.32 0.36 0.47 0.41 0.40
Ratio of net investment income to average net
assets 3.87 3.99 4.08 4.06 4.06
Portfolio turnover rate 8 22 20 44 35
Net assets, end of period ($ x 1,000,000) 87 68 54 54 53
</TABLE>

7
SHORT/INTERMEDIATE TAX-FREE BOND FUND
<PAGE> 29
SCHWAB LONG-TERM TAX-FREE BOND FUND

TICKER SYMBOL: SWNTX

GOAL

The fund seeks high current income that is exempt from federal income tax,
consistent with capital preservation.

STRATEGY

TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES --
THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA-BBB-). The fund normally
invests at least 80% of total assets in these securities, and typically far
more. Interest from these securities is free from federal income tax and federal
alternative minimum tax. The fund seeks to maintain an average maturity in its
overall portfolio of at least ten years.

During unusual market conditions, the fund may invest in taxable securities as a
temporary defensive measure. In this case, the fund would not be pursuing its
goal.

MATURITY AND YIELD

Bond yields typically are higher the longer the bond's maturity. By investing in
longer term bonds, the fund seeks to earn higher yields over time than the
Schwab Short/Intermediate Tax-Free Bond Fund.

Maintaining a longer average maturity does carry certain risks, and investors
should expect this fund's share price to fluctuate more than that of the Schwab
Short/Intermediate Tax-Free Bond Fund.

8
LONG-TERM TAX-FREE BOND FUND
<PAGE> 30
MAIN RISKS

BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.

WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's comparatively long maturity will tend to make it more
sensitive to this risk than funds with shorter average maturities.

This fund is designed for individuals in higher tax brackets who are interested
in high current tax-free income and can accept a higher degree of risk to their
investment.

9
LONG-TERM TAX-FREE BOND FUND
<PAGE> 31
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31

Best quarter: 8.03% Q1 1995
Worst quarter: -5.88% Q1 1994
Year-to-date performance as of 9/30/1999: - 5.21%

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1998

<TABLE>
<CAPTION>
Since
1 Year 5 Years inception
- -----------------------------------------------------
<S> <C> <C> <C>
Fund 6.14 5.93 6.97 1
Lehman Brothers
General Municipal
Bond Index 6.48 6.24 7.04 2
</TABLE>

1 Inception: 9/11/1992.
2 From: 9/11/1992.

FUND FEES AND EXPENSES

FEE TABLE (%)

SHAREHOLDER FEES
- --------------------------------------------------------------------------------
None

ANNUAL OPERATING EXPENSES (% of average net assets)
- ----------------------------------------------------
Management fees 0.30
Distribution (12b-1) fees None
Other expenses 0.39
-----
Total annual operating expenses 0.69

Expense reduction (0.20)
-----
Net operating expenses* 0.49
-----

* Guaranteed by Schwab and the investment adviser through 10/31/2000.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as all mutual fund prospectuses: a $10,000 investment and 5% return each year.
The expenses would be the same whether you stayed in the fund or sold your
shares at the end of each period. Your actual costs may be higher or lower.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------
<S> <C> <C> <C>
$70 $221 $384 $859
</TABLE>

The performance information above shows you how the fund's performance compares
to its index, which varies over time.

10
LONG-TERM TAX-FREE BOND FUND
<PAGE> 32
FINANCIAL HIGHLIGHTS

Fiscal periods ended 8/31 1999 1998 1997 1996 1995

per-share data ($)
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 11.01 10.53 10.13 10.16 9.95
----- ----- ----- ----- -----
Income from investment operations:
Net investment income 0.50 0.53 0.53 0.52 0.53
Net realized and unrealized gain (loss) on investments (0.85) 0.48 0.40 (0.03) 0.21
----- ----- ----- ----- -----
Total income from investment operations (0.35) 1.01 0.93 0.49 0.74
Less distributions:
Dividends from net investment income (0.50) (0.53) (0.53) (0.52) (0.53)
Distributions from realized gain on investments (0.05) -- -- -- --
----- ----- ----- ----- -----
Total Distributions (0.55) (0.53) (0.53) (0.52) (0.53)
NET ASSET VALUE AT END OF PERIOD 10.11 11.01 10.53 10.13 10.16
===== ===== ===== ===== =====
Total return (%) (3.34) 9.81 9.36 4.87 7.76

RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to average net assets 0.49 0.49 0.49 0.49 0.54
Expense reductions reflected in above ratio 0.32 0.37 0.53 0.45 0.39
Ratio of net investment income to average net assets 4.59 4.76 5.09 5.06 5.40
Portfolio turnover rate 35 39 61 50 70
Net assets, end of period ($ x 1,000,000) 90 70 47 44 41

</TABLE>

LONG-TERM TAX-FREE BOND FUND 11

<PAGE> 33
FUND MANAGEMENT

The fund's investment advisor, Charles Schwab Investment Management, Inc., has
more than $99 billion under management.

THE INVESTMENT ADVISER for the Schwab Tax-Free Bond Funds is Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
Founded in 1989, the firm today serves as investment adviser for all of the
SchwabFunds.(R) The firm manages assets for more than 4 million accounts. (All
figures on this page are as of 8/31/1999.)

As the investment adviser, the firm oversees the asset management and
administration of the Schwab Tax-Free Bond Funds. As compensation for these
services, the firm receives a management fee from each fund. For the 12 months
ended 8/31/1999, these fees were 0.09% for the Schwab Short/Intermediate
Tax-Free Bond Fund and 0.09% for the Schwab Long-Term Tax-Free Bond Fund. These
figures, which are expressed as a percentage of each fund's average daily net
assets, represent the actual amounts paid, including the effects of reductions.

Year 2000 issue

One issue with the potential to disrupt fund operations and affect performance
is the inability of some computers to recognize the year 2000.

FUND MANAGEMENT 12

<PAGE> 34
INVESTING IN THE FUNDS

As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.

INVESTING IN THE FUNDS 13

<PAGE> 35
BUYING SHARES

Step 1

CHOOSE A FUND, then decide how much you want to invest.

MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
<S> <C> <C>
$1,000 $100 $500
($500 for custodial ($250 for custodial
accounts) accounts)

</TABLE>

Step 2

CHOOSE AN OPTION FOR FUND DISTRIBUTIONS. The three options are described below.
If you don't indicate a choice, you will receive the first option.

OPTION FEATURES
<S> <C>

Reinvestment All dividends and capital gain distributions are
invested automatically in shares of your fund.

Cash/reinvestment You receive payment for dividends, while any
mix capital gain distributions are invested in
shares of your fund.

Cash You receive payment for all dividends and capital
gain distributions.

</TABLE>

Step 3

PLACE YOUR ORDER. Use any of the methods described at right. Make checks
payable to Charles Schwab & Co., Inc.

SCHWAB ACCOUNTS

For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.

14 INVESTING IN THE FUNDS

<PAGE> 36
SELLING/EXCHANGING SHARES

Use any of the methods described below to sell shares of a fund.

When selling or exchanging shares, please be aware of the following policies:

- - A fund may take up to seven days to pay sale proceeds.

- - If you are selling shares that were recently purchased by check, the proceeds
may be delayed until the check for purchase clears; this may take up to 15
days from the date of purchase.

- - These funds reserve the right to honor redemptions in portfolio securities
instead of cash when your redemptions over a 90-day period exceed $250,000 or
1% of a fund's assets.

- - Exchange orders must meet the minimum investment and other requirements for
the fund and share class into which you are exchanging.

- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.

WHEN PLACING ORDERS

With every order to buy, sell or exchange shares, you will need to include the
following information:

- - Your name

- - Your account number (for SchwabLink transactions, include the master account
and subaccount numbers)

- - The name and share class of the fund whose shares you want to buy or sell

- - The dollar amount or number of shares you would like to buy, sell
or exchange

- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer

- - When selling shares, how you would like to receive the proceeds

Please note that orders to buy, sell or exchange become irrevocable at the
time you mail them.

METHODS FOR PLACING ORDERS

PHONE

Call 800-435-4000, day or night (for TDD service, call 800-345-2550).

INTERNET

www.schwab.com/schwabfunds

SCHWABLINK

Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.

MAIL

Write to SchwabFunds(R) at:
P.O. Box 7575, San Francisco, CA 94120-7575

When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.

IN PERSON

Visit the nearest Charles Schwab branch office.

INVESTING IN THE FUNDS 15

<PAGE> 37
TRANSACTION POLICIES

THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:

- - To automatically redeem your shares if the account they are held in is closed
for any reason or your balance falls below the minimum as a result of selling
or exchanging your shares

- - To modify or terminate the exchange privilege upon 60 days' written notice to
shareholders

- - To refuse any purchase or exchange order, including those that appear to be
associated with short-term trading activities

- - To change or waive a fund's investment minimums

- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC

- - To withdraw or suspend any part of the offering made by this prospectus

16 INVESTING IN THE FUNDS

<PAGE> 38
DISTRIBUTIONS AND TAXES

THE FUNDS' DISTRIBUTIONS MAY HAVE TAX CONSEQUENCES. Each fund's dividends
typically are free from federal income tax, but are subject to any state and
local personal income taxes. A portion of each fund's dividends may be free from
state or local income taxes, depending on the extent to which a fund invests in
bonds that are tax-exempt in your state. Each fund's capital gain distributions
generally are taxable in the tax year in which they are declared, whether you
reinvest them or take them in cash.

AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS the fund paid during the previous
calendar year, including a breakdown of the fund's income from each state.
Schwab brokerage account customers also receive information on distributions and
transactions in their monthly account statements.

INVESTING IN THE FUNDS 17

<PAGE> 39
NOTES

18 NOTES

<PAGE> 40

NOTES 19

<PAGE> 41
TO LEARN MORE

This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.

SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.

You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the SEC's Public Reference
Room.

SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
www.schwab.com/schwabfunds

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)
www.sec.gov

SEC FILE NUMBER
Schwab Tax-Free Bond Funds 811-6200

PROSPECTUS
November 15, 1999
SCHWABFUNDS(R)

SCHWAB
TAX-FREE BOND FUNDS

MKT4272FLT
<PAGE> 42
PROSPECTUS
NOVEMBER 15, 1999

SCHWAB

BOND INDEX FUNDS

SCHWAB SHORT-TERM BOND MARKET INDEX FUND

SCHWAB TOTAL BOND MARKET INDEX FUND

[SCHWABFUNDS(R) LOGO]
<PAGE> 43
ABOUT THE FUNDS

SCHWAB BOND INDEX FUNDS

ABOUT THE FUNDS
<TABLE>

<S> <C>

4 Schwab Short-Term Bond Index Fund

8 Schwab Total Bond Market Index Fund

12 Fund Management

INVESTING IN THE FUNDS

14 Buying Shares

15 Selling/Exchanging Shares

16 Transaction Policies

17 Distributions and Taxes
</TABLE>
<PAGE> 44
The funds in this prospectus share the same basic INVESTMENT STRATEGY: They are
designed to track the price and yield performance of a bond index. Each fund
tracks a different index.

This strategy distinguishes an index fund from an "actively managed" fund.
Instead of choosing investments based on judgments about future market or
interest rate movements, a portfolio manager looks to an index to determine
which securities the fund should own.

By investing in bonds, the funds seek to provide current income to shareholders.
Each fund also seeks to lower risk by diversifying broadly across the various
sectors of the bond market represented in its index.

TICKER SYMBOL: SWBDX

GOAL

The fund seeks current income by tracking the performance of the Lehman Brothers
Mutual Fund Short (1-5 year) Government/Corporate Bond Index.

INDEX

THE LEHMAN BROTHERS MUTUAL FUND SHORT (1-5 YEAR) GOVERNMENT/CORPORATE BOND INDEX
INCLUDES INVESTMENT-GRADE GOVERNMENT AND CORPORATE BONDS that are denominated in
U.S. dollars and have maturities of one to five years. Investment-grade
securities are rated in the four highest credit rating categories (AAA-BBB-).
Bonds are represented in the index in proportion to their market value.

STRATEGY

TO PURSUE ITS GOAL, THE FUND INVESTS IN BONDS THAT ARE INCLUDED IN THE INDEX.
The fund normally invests at least 65% of total assets in these securities, and
typically far more. If a portfolio security falls below investment-grade, the
fund may continue to hold it if the investment adviser believes it would benefit
the fund.

Because it would be impractical to invest in every bond in the index, the fund
uses quantitative techniques to assemble a portfolio whose performance is
expected to track that of the index. The fund seeks to remain close to the index
in its dollar-weighted average maturity.

Like many index funds, the fund may enter into swap agreements, in which one
security is exchanged for another, and may invest in futures contracts and lend
securities. The fund would use these securities and techniques in seeking to
enhance total return and minimize the gap between its performance and that of
the index. However, because of fund expenses, the fund's performance normally is
somewhat below that of the index.

SHORT-TERM BONDS

As a bond approaches maturity, its market value typically approaches its par
value (the amount a bondholder receives when the bond matures). Because of this,
short-term bond prices typically do not react as strongly to interest rate
changes.

In exchange for this lower volatility, short-term bonds typically (though not
always) offer lower yields than longer term bonds.

The index focuses on three bond market sectors, in this proportion:

<TABLE>
<CAPTION>
BOND TYPE
- -------------------------------------------------------------------------------
<S> <C>
U.S. government 75.7%
U.S. corporate 19.1%
Dollar-denominated foreign issues 5.2%

</TABLE>

The index has approximately 1,804 bonds and a dollar-weighted average maturity
of 2.78 years. (All figures as of 8/31/1999).

4 SHORT-TERM BOND MARKET INDEX FUND
<PAGE> 46
Investors who are seeking a diversified source of current income and want
potentially lower volatility and lower returns, compared to a long-term fund,
may want to consider this fund.

MAIN RISKS

BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.

YOUR INVESTMENT FOLLOWS THE SHORT-TERM BOND MARKET, AS MEASURED BY THE INDEX.
The fund is designed to follow the index during upturns as well as downturns.
Because of its indexing strategy, the fund will not take steps to reduce market
exposure or to lessen the effects of a declining market.

WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's short average maturity is designed to reduce this risk,
but will not eliminate it. A fall in interest rates could hurt the fund as well,
by lowering its yield. This is because issuers tend to pay off their bonds when
interest rates fall, often forcing the fund to reinvest in lower-yielding
securities.

DIFFERENT TYPES OF BONDS CARRY DIFFERENT TYPES OF RISKS. To the extent that the
fund is exposed to a given sector of the bond market, it takes on the risks of
that sector. Prices of foreign bonds may be more volatile than those of
comparable bonds from U.S. issuers, for reasons ranging from lack of reliable
issuer information to the risk of political upheaval. Although the risk of
default is generally considered unlikely, any default on the part of a portfolio
investment could cause the fund's share price or yield to fall.

OTHER RISK FACTORS

Although the fund's main risks are those associated with its bond investments,
its other investment strategies also involve risks.

For example, the fund's use of quantitative techniques may increase the gap
between the performance of the fund and that of the index.

Futures contracts, which the fund uses to gain exposure to bonds for its cash
balances, also could cause the fund to track the index less closely if they
don't perform as expected.

The fund also may lend a portion of its securities to certain financial
institutions in order to earn income. The fund's loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.

The fund also could lose money if a swap agreement doesn't perform as expected
or if the counterparty to a swap agreement fails to honor the agreement.

Additionally, the fund may have a relatively high portfolio turnover rate, which
could increase transaction costs and the likelihood of capital gain
distributions.

SHORT-TERM BOND MARKET INDEX FUND 5
<PAGE> 47
PERFORMANCE

The fund adopted its current goal and strategies on 11/1/1997; performance
before that time may have been different had its current goal and strategy been
in place.

ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<CAPTION>
92 93 94 95 96 97 98
<S> <C> <C> <C> <C> <C> <C> <C>
6.08 7.84 (2.82) 10.90 4.00 6.88 6.96
</TABLE>

BEST QUARTER: 4.32% Q3 1992
WORST QUARTER: -2.09% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: 1.24%

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1998
<TABLE>
<CAPTION>

SINCE
1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund 6.96 5.08 6.04 1
Lehman Brothers Short
Government/Corporate
Bond Index 7.63 6.23 6.72 2
</TABLE>

1 Inception: 11/5/1991.
2 From: 11/5/1991.

FUND FEES AND EXPENSES

FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- -------------------------------------------------------------------------------
NONE

ANNUAL OPERATING EXPENSES (% of average net assets)
- -------------------------------------------------------------------------------
<S> <C>
Management fees 0.30
Distribution (12b-1) fees None
Other expenses 0.36
-----
Total annual operating expenses 0.66

Expense reduction (0.31)
-----

Net operating expenses* 0.35
-----
</TABLE>

* Guaranteed by Schwab and the investment adviser through 10/31/2000.

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as other mutual fund prospectuses: a $10,000 investment and 5% return each
year. The expenses would be the same whether you stayed in the fund or sold
your shares at the end of each period. Your actual costs may be higher or
lower.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
$67 $211 $368 $822
</TABLE>

The performance information above shows you how the fund's performance compares
to its index, which varies over time.

6 SHORT-TERM BOND MARKET INDEX FUND
<PAGE> 48
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FISCAL PERIODS ENDED 8/31 1999 1998 1997 1996 1995
PER-SHARE DATA ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 9.90 9.74 9.67 9.84 9.81
---------------------------------------------
Income from investment operations:
Net investment income 0.50 0.56 0.59 0.59 0.59
Net realized and unrealized gain (loss) on investments (0.24) 0.17 0.07 (0.17) 0.03
---------------------------------------------
Total income from investment operations 0.26 0.73 0.66 0.42 0.62
Less distributions:
Dividends from net investment income (0.50) (0.57) (0.59) (0.59) (0.59)
---------------------------------------------
NET ASSET VALUE AT END OF PERIOD 9.66 9.90 9.74 9.67 9.84
=============================================
Total return (%) 2.66 7.64 6.96 4.39 6.61
</TABLE>

<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA (%)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of actual operating expenses to average net assets 0.35 0.46 0.49 0.49 0.58
Expense reductions reflected in above ratio 0.42 0.39 0.33 0.31 0.23
Ratio of net investment income to average net assets 5.11 5.58 6.02 6.03 6.11
Portfolio turnover rate 195 128 71 80 203
Net assets, end of period ($ x 1,000,000) 218 157 127 134 157
</TABLE>

SHORT-TERM BOND MARKET INDEX FUND 7
<PAGE> 49
SCHWAB TOTAL BOND MARKET INDEX FUND
TICKER SYMBOL: SWLBX

GOAL

THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN BROTHERS
AGGREGATE BOND INDEX.

INDEX

THE LEHMAN BROTHERS AGGREGATE BOND INDEX INCLUDES INVESTMENT-GRADE GOVERNMENT,
CORPORATE AND MORTGAGE- AND ASSET-BACKED BONDS that are denominated in U.S.
dollars and have maturities longer than one year. Investment-grade securities
are rated in the four highest rating categories (AAA-BBB-). Bonds are
represented in the index in proportion to their market value.

STRATEGY

TO PURSUE ITS GOAL, THE FUND INVESTS IN BONDS THAT ARE INCLUDED IN THE INDEX.
The fund normally invests at least 65% of total assets in these securities. If a
portfolio security falls below investment-grade, the fund may continue to hold
it if the investment adviser believes it would benefit the fund.

Like many index funds, the fund may enter into swap agreements, in which one
security or asset is exchanged for another, and also may invest in futures
contracts and lend securities in seeking to enhance total return and minimize
the gap between its performance and that of the index. However, because of fund
expenses, the fund's performance normally is somewhat below that of the index.

THE BOND MARKET

The fund's index focuses on five main sectors of the bond market, in this
proportion:

<TABLE>
<CAPTION>
BOND TYPE
- -----------------------------------------------------------------------------
<S> <C>
U.S. government 43.0%
Mortgage-backed 33.7%
U.S. corporate 16.4%
Dollar-denominated
foreign issues 4.5%
Asset-backed 1.2%
Commercial MBS 1.2%
</TABLE>

The index has approximately 5,392 bonds and a dollar-weighted average maturity
of 9.03 years. (All figures as of 8/31/1999).

By investing in longer term bonds, the fund seeks to earn higher yields over
time than the Schwab Short-Term Bond Market Index Fund, although with more share
price volatility than that fund.

8 TOTAL BOND MARKET INDEX FUND
<PAGE> 50
This fund is designed for investors seeking to fill the fixed income component
to their asset allocation plan, and who can accept higher risk in exchange for
potentially higher long-term returns compared to a short-term fund.

MAIN RISKS

BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.

YOUR INVESTMENT FOLLOWS THE BOND MARKET, AS MEASURED BY THE INDEX. The fund is
designed to follow the index during upturns as well as downturns. Because of its
indexing strategy, the fund will not take steps to reduce market exposure or to
lessen the effects of a declining market.

WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The longer the fund's dollar-weighted average maturity, the more
sensitive to interest rate movements its share price is likely to be. When
interest rates fall, issuers tend to pay off their bonds, which may force the
fund to reinvest in lower-yielding securities.

DIFFERENT TYPES OF BONDS CARRY DIFFERENT TYPES OF RISKS. To the extent that the
fund is exposed to a given sector of the bond market, it takes on the risks of
that sector. With certain mortgage- and asset-backed bonds, a primary risk is
the possibility that the bonds may be paid off earlier or later than expected.
Either situation could hurt the fund's yield or share price. Prices of foreign
bonds may be more volatile than those of comparable bonds from U.S. issuers, for
reasons ranging from lack of reliable issuer information to the risk of
political upheaval. Although the risk of default is generally considered
unlikely, any default on the part of a portfolio investment could cause the
fund's share price or yield to fall.

OTHER RISK FACTORS

Although the fund's main risks are those associated with its bond investments,
its other investment strategies also involve risks.

For example, the fund's use of quantitative techniques may increase the gap
between the performance of the fund and that of the index.

Futures contracts, which the fund uses to gain exposure to bonds for its cash
balances, also could cause the fund to track the index less closely if they
don't perform as expected.

The fund also could lose money if a swap agreement doesn't perform as expected
or if the counterparty to a swap agreement fails to honor the agreement.

Additionally, the fund may have a relatively high portfolio turnover rate, which
could increase transaction costs and the likelihood of capital gain
distributions.

TOTAL BOND MARKET INDEX FUND 9
<PAGE> 51
PERFORMANCE

The fund adopted its current goal and strategies on 11/1/1997; performance
before that time may have been different had its current goal and strategy been
in place.

ANNUAL TOTAL RETURNS (%) AS OF 12/31

BEST QUARTER: 6.79% Q2 1995
WORST QUARTER: -4.83% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: -0.99%

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1998
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund 8.41 6.82 7.13 1
Lehman Brothers Aggregate
Bond Index 8.69 7.27 7.13 2
</TABLE>

1 Inception: 3/5/1993.

2 From: 3/5/1993.

FUND FEES AND EXPENSES

FEE TABLE (%)

<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ------------------------------------------------------------------------------
None

ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
- ------------------------------------------------------------------------------
<S> <C>
Management fees 0.30
Distribution (12b-1) fees None
Other expenses 0.33
-----
Total annual operating expenses 0.63

EXPENSE REDUCTION (0.28)
-----
NET OPERATING EXPENSES* 0.35
-----
</TABLE>

* Guaranteed by Schwab and the investment adviser through 10/31/2000.

EXPENSES ON A $10,000 INVESTMENT

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
$64 $202 $351 $786
</TABLE>

The performance information above shows you how the fund's performance compares
to its index, which varies over time.

10 TOTAL BOND MARKET INDEX FUND
<PAGE> 52
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FISCAL PERIODS ENDED 8/31 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)

Net asset value at beginning of period 10.18 9.75 9.38 9.80 9.33
--------------------------------------------
Income from investment operations:
Net investment income 0.55 0.60 0.65 0.65 0.69
Net realized and unrealized gain (loss) on investments (0.53) 0.43 0.37 (0.42) 0.47
--------------------------------------------
Total income from investment operations 0.02 1.03 1.02 0.23 1.16
Less distributions:
Dividends from net investment income (0.55) (0.60) (0.65) (0.65) (0.69)
Distributions from net realized gain on investments (0.07) -- -- -- --
--------------------------------------------
Total distributions (0.62) (0.60) (0.65) (0.65) (0.69)
NET ASSET VALUE AT END OF PERIOD 9.58 10.18 9.75 9.38 9.80
============================================
Total return (%) 0.14 10.83 11.18 2.29 13.03
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of actual operating expenses to average net assets 0.35 0.31 0.20 -- --
Expense reductions reflected in above ratio 0.39 0.51 0.98 1.17 1.18
Ratio of net investment income to average net assets 5.55 5.86 6.74 6.67 7.38
Portfolio turnover rate 174 285 51 66 240
Net assets, end of period ($ x 1,000,000) 480 294 25 23 13
</TABLE>

TOTAL BOND MARKET INDEX FUND 11
<PAGE> 53
FUND MANAGEMENT

The fund's investment adviser, Charles Schwab Investment Management, Inc., has
more than $99 billion under management.

THE INVESTMENT ADVISER for the Schwab Bond Index Funds is Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
Founded in 1989, the firm today serves as investment adviser for all of the
SchwabFunds.(R) The firm manages assets for more than 4 million accounts. (All
figures on this page are as of 8/31/1999.)

As the investment adviser, the firm oversees the asset management and
administration of the Schwab Bond Index Funds. As compensation for these
services, the firm receives a management fee from each fund. For the 12 months
ended 8/31/1999, these fees were 0.02% for the Schwab Short-Term Bond Market
Index Fund and 0.02% for the Schwab Total Bond Market Index Fund. These figures,
which are expressed as a percentage of each fund's average daily net assets,
represent the actual amounts paid, including the effects of reductions.

KIMON DAIFOTIS, CFA, a vice president of the investment adviser, has overall
responsibility for management of the funds. Prior to joining the firm in October
1997, he worked for more than 17 years in research and asset management.

YEAR 2000 ISSUE

One issue with the potential to disrupt fund operations and affect performance
is the inability of some computers to recognize the year 2000.

12 FUND MANAGEMENT
<PAGE> 54
INVESTING IN THE FUNDS

As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.

INVESTING IN THE FUNDS 13
<PAGE> 55
BUYING SHARES

SCHWAB ACCOUNTS

For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.

STEP 1

CHOOSE A FUND, then decide how much you want to invest.
<TABLE>
<CAPTION>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
- -------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 $100 $500
($500 for retirement and ($250 for retirement and
custodial accounts) custodial accounts)
</TABLE>

STEP 2

CHOOSE AN OPTION FOR FUND DISTRIBUTIONS. The three options are described below.
If you don't indicate a choice, you will receive the first option.

OPTION FEATURES
- -------------------------------------------------------------------------------
Reinvestment All dividends and capital gain distributions are invested
automatically in shares of your fund.

- -------------------------------------------------------------------------------
Cash/reinvestment You receive payment for dividends, while any capital gain
mix distributions are invested in shares of your fund.

- -------------------------------------------------------------------------------
Cash You receive payment for all dividends and capital gain
distributions.

STEP 3

PLACE YOUR ORDER. Use any of the methods described at right. Make checks payable
to Charles Schwab & Co., Inc.

14 INVESTING IN THE FUNDS
<PAGE> 56
SELLING/EXCHANGING SHARES

Use any of the methods described below to sell shares of a fund.

When selling or exchanging shares, please be aware of the following policies:

- - A fund may take up to seven days to pay sale proceeds.

- - If you are selling shares that were recently purchased by check, the
proceeds may be delayed until the check for purchase clears; this may take
up to 15 days from the date of purchase.

- - These funds reserve the right to honor redemptions in portfolio securities
instead of cash when your redemptions over a 90-day period exceed $250,000
or 1% of a fund's assets.

- - Exchange orders must meet the minimum investment and other requirements for
the fund and share class into which you are exchanging.

- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.

WHEN PLACING ORDERS

With every order to buy, sell or exchange shares, you will need to include the
following information:

- - Your name

- - Your account number (for SchwabLink transactions, include the master account
and subaccount numbers)

- - The name and share class of the fund whose shares you want to buy or sell

- - The dollar amount or number of shares you would like to buy, sell or
exchange

- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer

- - When selling shares, how you would like to receive the proceeds

Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.

METHODS FOR PLACING ORDERS

PHONE

Call 800-435-4000, day or night (for TDD service, call 800-345-2550).

INTERNET

www.schwab.com/schwabfunds

SCHWABLINK

Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.

MAIL

Write to SchwabFunds(R) at:
P.O. Box 7575, San Francisco, CA 94120-7575

When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.

IN PERSON
Visit the nearest Charles Schwab branch office.

INVESTING IN THE FUNDS 15
<PAGE> 57
TRANSACTION POLICIES

Shareholders of the funds should be aware that because foreign markets are often
open on weekends and other days when the fund is closed, the value of some of
the fund's portfolio may change on days when it is not possible to buy or sell
shares of the fund.

THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:

- - To automatically redeem your shares if the account they are held in is
closed for any reason or your balance falls below the minimum as a result of
selling or exchanging your shares

- - To modify or terminate the exchange privilege upon 60 days' written notice
to shareholders

- - To refuse any purchase or exchange order, including those that appear to be
associated with short-term trading activities

- - To change or waive a fund's investment minimums

- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC

- - To withdraw or suspend any part of the offering made by this prospectus

16 INVESTING IN THE FUNDS
<PAGE> 58
DISTRIBUTIONS AND TAXES

UNLESS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, YOUR
FUND DISTRIBUTIONS GENERALLY HAVE TAX CONSEQUENCES. Each fund's net investment
income and short-term capital gains are distributed as dividends and are taxable
as ordinary income. Other capital gain distributions are taxable as long-term
capital gains, regardless of how long you have held your shares in the fund.
Distributions generally are taxable in the tax year in which they are declared,
whether you reinvest them or take them in cash.

Dividends derived from U.S. government securities are generally free from state
and local income taxes. However, some states may limit this benefit, and some
agency-backed securities may not qualify for tax-exempt status.

AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS the fund paid during the previous
calendar year including the percentage of dividends paid that may qualify for
tax-exempt status. Schwab brokerage account customers also receive information
on distributions and transactions in their monthly account statements.

INVESTING IN THE FUNDS 17
<PAGE> 59
NOTES

18 NOTES
<PAGE> 60
NOTES 19
<PAGE> 61
SCHWAB
BOND INDEX FUNDS

TO LEARN MORE

This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.

SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.

SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
www.schwab.com/schwabfunds

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)
www.sec.gov

SEC FILE NUMBER
Schwab Bond Index Funds 811-6200

PROSPECTUS
NOVEMBER 15, 1999

[SCHWABFUNDS (R) LOGO]

MKT4271FLT

<PAGE> 62
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB INVESTMENTS

SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND

NOVEMBER 15, 1999

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with a fund's prospectus dated November 15, 1999 (as amended
from time to time).

To obtain a copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, day or night, or write to the fund at P.O. Box 7575, San
Francisco, CA 94120-7575. For TDD service call 800-345-2550, day or night. The
prospectus also may be available on the Internet at:
http://www.schwab.com/schwabfunds.

The funds are a series of Schwab Investments (the trust).

The funds' most recent annual report is a separate document supplied with the
SAI and includes the funds' audited financial statements, which are incorporated
by reference into this SAI.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE, STRATEGIES,
SECURITIES, RISKS AND LIMITATIONS...............................................................2
MANAGEMENT OF THE FUNDS........................................................................16
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES............................................19
INVESTMENT ADVISORY AND OTHER SERVICES.........................................................20
BROKERAGE ALLOCATION AND OTHER PRACTICES.......................................................21
DESCRIPTION OF THE TRUST.......................................................................22
PURCHASE, REDEMPTION AND PRICING OF SHARES.....................................................23
TAXATION.......................................................................................24
CALCULATION OF PERFORMANCE DATA................................................................26
APPENDIX - RATINGS OF INVESTMENT SECURITIES....................................................29
</TABLE>

1
<PAGE> 63
INVESTMENT OBJECTIVE, STRATEGIES, SECURITIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVE

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. There is no guarantee a fund will
achieve its investment objective.

Each fund's investment objective may be changed by vote of a majority of its
shareholders. A majority vote of outstanding securities of a company means the
vote, at an annual or a special meeting of shareholders of a fund where (a) 67%
of the voting securities present at the meeting, if the shareholders of more
than 50% of the outstanding securities of a fund are present or represented by
proxy, or (b) of more than 50% of the outstanding voting securities of a fund,
whichever is the less.

The following descriptions of investment securities, risks and limitations
supplement those set forth in the prospectus and may be changed without
shareholder approval unless otherwise noted. Also, policies and limitations that
state a maximum percentage of assets that may be invested in a security or other
asset, or that set forth a quality standard, shall be measured immediately after
and as a result of a fund's acquisition of such security or asset unless
otherwise noted. Any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with a fund's investment policies and limitations. Not all investment
securities or techniques discussed below are eligible investments for each fund.
Each fund will invest in securities or engage in techniques that are intended to
help achieve its investment objective.

These funds are not suitable for investors who would not benefit from the
tax-exempt character of each fund's investments, such as holders of IRAs,
qualified retirement plans or other tax-exempt entities.

INVESTMENT STRATEGIES

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

INVESTMENT SECURITIES AND RISKS

BORROWING may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money. Each fund may borrow money
from banks and make other investments or engage in other transactions
permissible under the 1940 Act which may be considered a borrowing. However,
each fund may not purchase securities when bank borrowings exceed 5% of a fund's
total assets. Each fund will monitor its level of borrowing on an on-going
basis.

2
<PAGE> 64
Each fund intends to use the lines to meet large or unexpected redemptions that
would otherwise force a fund to liquidate securities under circumstances which
are unfavorable to the fund's remaining shareholders. Each fund will pay a fee
to the bank for using the lines.

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. Liquidity supports
include puts, demand features, and lines of credit. Most of these arrangements
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.

DEBT SECURITIES are obligations issued by domestic and foreign entities,
including governments and corporations, in order to raise money. They are
basically "IOUs," but are commonly referred to as bonds or money market
securities. These securities 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 upon maturity.

Debt securities experience price changes when interest rates change. For
example, when interest rates fall, the prices of debt securities generally rise.
Also, issuers tend to pre-pay their outstanding debts and issue new ones paying
lower interest rates. This is especially true for bonds with sinking fund
provisions, which commit the issuer to set aside a certain amount of money to
cover timely repayment of principal and typically allow the issuer to annually
repurchase certain of its outstanding bonds from the open market or at a pre-set
call price.

Conversely, in a rising interest rate environment, prepayment on outstanding
debt securities generally will not occur. This is known as extension risk and
may cause the value of debt securities to depreciate as a result of the higher
market interest rates. Typically, longer-maturity securities react to interest
rate changes more severely than shorter-term securities (all things being
equal), but generally offer greater rates of interest.

Debt securities also are subject to the risk that the issuers will not make
timely interest and/or principal payments or fail to make them at all. This is
called credit risk. Corporate debt securities (bonds) tend to have higher credit
risk generally than U.S. government debt securities. Debt securities also may be
subject to price volatility due to market perception of future interest rates,
the creditworthiness of the issuer and general market liquidity (market risk).
Investment-grade debt securities are considered medium- and high-quality
securities, although some still possess varying degrees of speculative
characteristics and risks. Debt securities rated below investment-grade are
riskier, but may offer higher yields. These securities are sometimes referred to
as high yield securities or "junk bonds."

The funds invest in higher-quality investment-grade securities. In the event a
debt security held by a fund were downgraded below BBB-, the fund could continue
to hold it if the investment adviser believed it would benefit the fund.

See the Appendix for a full description of the various ratings assigned to debt
securities by various nationally recognized statistical rating organizations
(NRSROs).

3
<PAGE> 65
settlement period for that type of security. When purchasing securities on a
delayed-delivery basis, a fund assumes the rights and risks of ownership,
including the risk of price and yield fluctuations. Typically, no interest will
accrue to a fund until the security is delivered. Each fund will segregate
appropriate liquid assets to cover its delayed-delivery purchase obligations.
When a fund sells a security on a delayed-delivery basis, the fund does not
participate in further gains or losses with respect to that security. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
securities, a fund could suffer losses.

DEMAND FEATURES, which may include guarantees, are used to shorten a security's
effective maturity and/or enhance its creditworthiness. If a demand feature
provider were to refuse to permit the feature's exercise or otherwise terminate
its obligations with respect to such feature, however, the security's effective
maturity may be lengthened substantially, and/or its credit quality may be
adversely impacted. In either event, a fund may experience an increase in share
price volatility. This also could lengthen a fund's overall average effective
maturity.

DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. Each fund is a series of an
open-end investment management company. Each fund is a non-diversified mutual
fund.

DURATION was developed as a more precise alternative to the concept of
"maturity." Traditionally, a debt obligation's maturity has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "volatility" of the security). However, maturity
measures only the time until a debt obligation provides its final payment,
taking no account of the pattern of the security's payments prior to maturity.
In contrast, duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure. Duration management is one of
the fundamental tools used by the investment adviser.

Duration is a measure of the expected life of a debt obligation on a present
value basis. Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable bond, the time the principal payments are expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For debt obligations with interest payments occurring
prior to the payment of principal, duration will usually be less than maturity.
In general, all other being equal, the lower the stated or coupon rate of the
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of a fixed income security, the
shorter the duration of the security.

There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating- and variable-rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Finally, the duration of the debt obligation may vary over
time in response to changes interest rates and other market factors.

HIGH YIELD SECURITIES are frequently issued by companies without long track
records of sales and earnings, or by those of questionable credit strength, and
are more speculative and volatile (though typically higher yielding) than
investment grade bonds. In addition, the high yield market is relatively new and
its growth has paralleled a long period of economic expansion and an increase in
merger, acquisition and leveraged buyout activity. Adverse economic developments
could disrupt the market for high yield securities, and severely affect the
ability of

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issuers, especially highly-leveraged issuers, to service their debt obligations
or to repay their obligations upon maturity.

Also, the secondary market for high yield securities at times may not be as
liquid as the secondary market for higher-quality debt securities. As a result,
the investment advisor could find it difficult to sell these securities or
experience difficulty in valuing certain high yield securities at certain times.
Prices realized upon the sale of such lower rated securities, under these
circumstances, may be less than the prices at which a fund purchased them.

Thus, high yield securities are more likely to react to developments affecting
interest rates and market and credit risk than are more highly rated securities,
which primarily react to movements in the general level of interest rates. When
economic conditions appear to be deteriorating, medium to lower quality debt
securities may decline in value more than higher-quality debt securities due to
heightened concern over credit quality, regardless of prevailing interest rates.
Prices for high yield securities also could be affected by legislative and
regulatory developments. These laws could adversely affect a fund's net asset
value and investment practices, the secondary market value for high yield
securities, the financial condition of issuers of these securities and the value
of outstanding high yield securities.

ILLIQUID SECURITIES generally are any securities that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which a fund has valued the instruments. The liquidity of a fund's investments
is monitored on an on-going basis under the supervision and direction of the
board of trustees. Investments currently not considered liquid include
repurchase agreements not maturing within seven days and certain restricted
securities.

LENDING of portfolio securities is a common practice in the securities industry.
A fund may engage in security lending arrangements with the primary objective of
increasing its income. For example, a fund may receive cash collateral and it
may invest it in short-term, interest-bearing obligations, but will do so only
to the extent that it will not lose the tax treatment available to mutual funds.
Lending portfolio securities involves risks that the borrower may fail to return
the securities or provide additional collateral.

A fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash-equivalents or other appropriate instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) a fund may at any time call the loan and obtain
the return of the securities loaned; (3) a fund will receive any interest or
dividends paid on the loaned securities; and (4) an aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of a
fund including collateral received from the loan (at market value computed at
the time of the loan).

Although voting rights with respect to loaned securities pass to the borrower,
the lender retains the right to recall a security (or terminate a loan) for the
purpose of exercising the security's voting rights. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to a fund, it is expected that a fund
will do so only where the items being voted upon are, in the judgment of the
investment adviser, either material to the economic value of the security or
threaten to materially impact the issuer's corporate governance policies or
structure.

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MATURITY OF INVESTMENTS will generally be determined using the portfolio
securities' final maturity dates. However for certain securities, maturity will
be determined using the security's effective maturity date. The effective
maturity date for a security subject to a put or demand feature is the demand
date, unless the security is a variable- or floating-rate security. If it is a
variable-rate security, its effective maturity date is the later of its demand
date or next interest rate change date. For variable-rate securities not subject
to a put or demand feature and floating-rate securities, the effective maturity
date is the next interest rate change date. The effective maturity of
mortgage-backed and certain other asset-backed securities is determined on an
"expected life" basis by the investment adviser and securities being hedged with
futures contracts may be deemed to have a longer maturity, in the case of
purchases of future contracts, and a shorter maturity, in the case of sales of
futures contracts, than they would otherwise be deemed to have. In addition, a
security that is subject to redemption at the option of the issuer on a
particular date ("call date"), which is prior to the security's stated maturity,
may be deemed to mature on the call date rather than on its stated maturity
date. The call date of a security will be used to calculate average portfolio
maturity when the investment adviser reasonably anticipates, based upon
information available to it, that the issuer will exercise its right to redeem
the security. The average portfolio maturity of a fund is dollar-weighted based
upon the market value of a fund's securities at the time of the calculation. A
fund may invest in securities with final of effective maturities of any length.

MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
certificates of deposit, bankers' acceptances, notes and time deposits.

Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or these can be sold separately.

Restriction: Each fund will invest only in certificates of deposit and bankers'
acceptances of banks that have capital, surplus and undivided profits in excess
of $100 million.

MORTGAGE-BACKED SECURITIES ("MBS") and other ASSET-BACKED SECURITIES may be
purchased by a fund. MBS represent participations in mortgage loans, and include
pass-through securities and collateralized mortgage obligations. MBS may be
issued or guaranteed by U.S. government agencies or instrumentalities, such as
the Government National Mortgage Association and the Fannie Mae or Freddie Mac,
or by private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage banks, commercial banks, and special
purpose entities (collectively, "private lenders"). MBS issued by private
lenders may be supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by the U.S. government
or one of its agencies or instrumentalities, or they may be issued without any
governmental guarantee of the underlying mortgage assets but with some form of
credit enhancement.

Asset-backed securities ("ABS") have structural characteristics similar to MBS.
Asset-backed debt obligations represent direct or indirect participation in
assets such as automobile loans,

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credit card receivables, trade receivables, home equity loans (which sometimes
are categorized as MBS) or other financial assets. Therefore, repayment depends
largely on the cash flows generated by the assets backing the securities. The
credit quality of most ABS 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 enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by credit enhancements including letters of
credit, an insurance guarantee, reserve funds and overcollateralization.

The rate of principal payment on MBS and ABS 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 price and
yield on any MBS or ABS is difficult to predict with precision and price and
yield to maturity may be more or less than the anticipated yield to maturity. If
a fund purchases these securities at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect of increasing the yield to
maturity. Conversely, if a fund purchases these securities at a discount, a
prepayment rate that is faster than expected will increase yield to maturity,
while a prepayment rate that is slower than expected will reduce yield to
maturity. Amounts available for reinvestment by a fund are likely to be greater
during a period of declining interest rates and, as a result, are likely to be
reinvested at lower interest rates than during a period of rising interest
rates.

While many MBS and ABS are issued with only one class of security, many are
issued in more than one class, each with different payment terms. Multiple class
MBS and ABS are issued as a method of providing credit support, typically
through creation of one or more classes whose right to payments on the security
is made subordinate to the right to such payments of the remaining class or
classes. In addition, multiple classes may permit the issuance of securities
with payment terms, interest rates, or other characteristics differing both from
those of each other and from those of the underlying assets. Examples include
stripped securities, which are MBS and ABS entitling the holder to
disproportionate interest or principal compared with the assets backing the
security, and securities with classes having characteristics different from the
assets backing the securities, such as a security with floating interest rates
with assets backing the securities having fixed interest rates. The market value
of such securities generally is more or less sensitive to changes in prepayment
and interest rates than is the case with traditional MBS and ABS, and in some
cases such market value may be extremely volatile.

MUNICIPAL LEASES are obligations issued to finance the construction or
acquisition of equipment or facilities. These obligations may take the form of a
lease, an installment purchase contract, a conditional sales contract or a
participation interest in any of these obligations. Municipal leases may be
considered illiquid investments. Additionally, municipal leases are subject to
"nonappropriation risk," which is the risk that the municipality may terminate
the lease because funds have not been allocated to make the necessary lease
payments. Further, if there is a non-appropriation but principal and/or interest
is paid by a credit enhancer, such principal and/or interest payments may not be
tax-exempt. The lessor would then be entitled to repossess the property, but the
value of the property may be less to private sector entities than it would be to
the municipality.

MUNICIPAL SECURITIES are debt securities issued by a state, 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 and corporations. These

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securities may be issued to obtain money for various public purposes, including
the construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, public utilities, schools,
streets, and water and sewer works. Other public purposes include refunding
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities.

Municipal securities also may be issued to finance various private activities,
including certain types of private activity bonds ("industrial development
bonds" under prior law). These securities may be issued by or on behalf of
public authorities to obtain funds to provide certain privately owned or
operated facilities. The funds may not be desirable investments for "substantial
users of facilities financed by private activity bonds or industrial development
bonds or for "related persons" of substantial users because distributions from
the funds attributable to interest on such bonds may not be tax exempt. The
funds intend to limit investments in these securities to 20% of their total
assets. Shareholders should consult their own tax advisors regarding the
potential effect on them (if any) of any investments in these funds.

Municipal securities may be owned directly or through participation interests,
and include general obligation or revenue securities, tax-exempt commercial
paper, notes and leases. Municipal securities generally are classified as
"general obligation" or "revenue" and may be purchased directly or through
participation interests. General obligation securities typically are secured by
the issuer's pledge of its full faith and credit and most often its taxing power
for the payment of principal and interest. Revenue securities typically are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special tax or other
specific revenue source. Private activity bonds and industrial development bonds
are, in most cases, revenue bonds and generally do not constitute the pledge of
the credit of the issuer of such bonds. The credit quality of private activity
bonds is frequently related to the credit standing of private corporations or
other entities.

In addition to bonds, municipalities issue short-term securities such as tax
anticipation notes, bond anticipation notes, revenue anticipation notes,
construction loan notes and tax-free commercial paper. Tax anticipation notes
typically are sold to finance working capital needs of municipalities in
anticipation of the receipt of property taxes on a future date. Bond
anticipation notes are sold on an interim basis in anticipation of a
municipality's issuance of a longer-term bond in the future. Revenue
anticipation notes are issued in expectation of the receipt of other types of
revenue, such as that available under the Federal Revenue Sharing Program.
Construction loan notes are instruments insured by the Federal Housing
Administration with permanent financing by "Fannie Mae" (the Federal National
Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association) at the end of the project construction period. Tax-free commercial
paper is an unsecured promissory obligation issued or guaranteed by a municipal
issuer. The fund may purchase other municipal securities similar to the
foregoing that are or may become available, including securities issued to
pre-refund other outstanding obligations of municipal issuers.

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

The value of municipal securities may be affected by uncertainties with respect
to the rights of

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holders of municipal securities in the event of bankruptcy or the taxation of
municipal securities as a result of legislation or litigation. For example,
under federal law, certain issuers of municipal securities may be authorized in
certain circumstances to initiate bankruptcy proceedings without prior notice to
or the consent of creditors. Such action could result in material adverse
changes in the rights of holders of the securities. In addition, litigation
challenging the validity under the state constitutions of present systems of
financing public education has been initiated or adjudicated in a number of
states, and legislation has been introduced to effect changes in public school
finances in some states. In other instances, there has been litigation
challenging the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law, which ultimately could affect the
validity of those municipal securities or the tax-free nature of the interest
thereon.

Municipal securities pay fixed, variable or floating rates of interest, which
may be exempt from federal income tax and, typically, personal income tax of a
state or locality.

The investment adviser relies on the opinion of the issuer's counsel, which is
rendered at the time the security is issued, to determine whether the security
is fit, with respect to its validity and tax status, to be purchased by a fund.

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 security with a put
feature, losses could occur if the put provider does not perform as agreed. If a
put provider fails to honor its commitment upon the fund's attempt to exercise
the put, the fund may have to treat the security's final maturity as its
effective maturity. If that occurs, the security's price may be negatively
impacted, and its sensitivity to interest rate changes may be increased,
possibly contributing to increased share price volatility for the fund. This
also could lengthen a fund's overall average effective maturity. Standby
commitments are types of puts.

QUALITY OF INVESTMENTS will be in investment grade for at least 80% of each
fund's assets. Investment-grade quality securities are rated by at least one
NRSRO in one of the four highest rating categories (within which there may be
sub-categories or gradations indicating relative standing) or have been
determined to be of equivalent quality by the investment adviser pursuant to
procedures adopted by the board of trustees. Sometimes an investment grade
quality security may be downgraded to a below investment grade quality rating.
If a security no longer has at least one investment quality rating from an
NRSRO, the investment adviser would reanalyze the security in light of the
downgrade and determine whether the fund should continue to hold the security.
Each fund will limit its investments in unrated securities to no more that 20%
of its net assets.

Under certain circumstances, repurchase agreements that are fully collateralized
by U.S. government securities may be deemed to be investments in U.S. government
securities.

STATE-SPECIFIC MUNICIPAL FUNDS are municipal funds that invest primarily and
generally predominately in municipal securities issued by or on behalf of one
state or one state's counties, municipalities, authorities or other
subdivisions.

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These funds' securities are subject to the same general risks associated with
other municipal funds' securities. In addition, their values will be
particularly affected by economic, political, geographic and demographic
conditions and developments within the appropriate state. A fund that invests
primarily in securities issued by a single state and its political subdivisions
provides a greater level of risk than a fund that is diversified across numerous
states and municipal entities. The ability of the state or its municipalities to
meet their obligations will depend on the availability of tax and other
revenues; economic, political and demographic conditions within the state; and
the underlying fiscal condition of the state and its municipalities.

CALIFORNIA MUNICIPAL SECURITIES. These funds are state-specific municipal funds
that invest substantially all of their assets in municipal securities issued by
or on behalf of, the State of California, or its counties, municipalities,
authorities or other subdivisions.

A fund that invests primarily in securities issued by a single state and its
political subdivisions entails a greater level of risk than a fund that is
diversified across numerous states and their municipal entities. The ability of
the State or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political and other conditions
within the State; and the underlying fiscal condition of the State and its
municipalities.

In recent years, the State of California has derived a significant portion of
its revenues from personal income and sales taxes. Because the amount collected
from these taxes is sensitive to economic conditions, the State's revenues have
been volatile. In addition, a number of political developments, voter
initiatives, state constitutional amendments and legislative actions in
California in recent years have subjected the State government to spending
obligations and limitations and have constrained the fiscal condition of local
governments by subjecting them to annual appropriation limits, by reducing and
limiting the future growth of property taxes, and by limiting the ability of
local governments to impose special taxes without two-thirds voter approval.

In response to the fiscal constraints on local governments, the State
legislature in the past has provided varying levels of aid to local governments
from the State general fund and other sources. Consequently, the budgets of
California counties and other local governments have been significantly affected
by State budget decisions beyond their control and have been subject to revenue
volatility which reflects that of the State. Whether legislation will be enacted
in the future to either reduce or increase the redistribution of State revenues
to local governments, or to make them less dependent on State budget decisions,
cannot be predicted.

From mid-1990 to late 1993, California suffered the worst recession in the State
since the 1930s. The recession reduced State revenues while its health and
welfare costs were increasing. Consequently, the State had a lengthy period of
budget imbalance. During the recession, the State legislature eliminated
significant components of its aid to local governments. With the end of the
recession, the State's financial condition has improved, with a combination of
better than expected revenues, slowdown in growth of social welfare programs,
and continued spending restraint. The accumulated budget deficit from the
recession years has been eliminated and no deficit borrowing has occurred at the
end of the last four fiscal years. The State has also increased aid to local
governments and reduced certain mandates for local services. It is not possible
to predict the future impact of the voter initiatives, State constitutional
amendments, legislation or economic considerations described above, or of such
initiatives, amendments or legislation that may be enacted in the future, on the
long-term ability of the State of California or its municipal issuers to pay
interest or repay principal on their obligations. There

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is no assurance that any California issuer will make full or timely payments of
principal or interest or remain solvent. For example, in December 1994, Orange
County filed for bankruptcy.

Certain tax exempt securities in which these funds may invest may be obligations
payable solely from the revenues of specific institutions, or may be secured by
specific properties, which are subject to provisions of California law that
could adversely affect the holders of such obligations. For example, the
revenues of California health care institutions may be adversely affected by
state laws, and California law limits the remedies of a creditor secured by a
mortgage or deed of trust on real property. Debt obligations payable solely from
revenues of health care institutions may also be insured by the State but no
guarantee exists that adequate reserve funds will be appropriated by the State
legislature for such insurance. California is subject to seismic risks and it is
impossible to predict the time, magnitude or location of a major earthquake or
its effect on the California economy. In January 1994, a major earthquake struck
Los Angeles, causing significant damage to structures and facilities in a four
county area. The possibility exists that another such earthquake could cause a
major dislocation of the California economy.

SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by a fund,
and those issued by foreign investment companies. Mutual funds are registered
investment companies, which may issue and redeem their shares on a continuous
basis (open-end mutual funds) or may offer a fixed number of shares usually
listed on an exchange (closed-end mutual funds). Mutual funds generally offer
investors the advantages of diversification and professional investment
management, by combining shareholders' money and investing it in various types
of securities, such as stocks, bonds and money market securities. Mutual funds
also make various investments and use certain techniques in order to enhance
their performance. These may include entering into delayed-delivery and
when-issued securities transactions or swap agreements; buying and selling
futures contracts, illiquid and restricted securities and repurchase agreements
and borrowing or lending money and/or portfolio securities. The risks of
investing in mutual funds generally reflect the risks of the securities in which
the mutual funds invest and the investment techniques they may employ. Also,
mutual funds charge fees and incur operating expenses.

If a fund decides to purchase securities of other investment companies, a fund
intends to purchase shares of mutual funds in compliance with the requirements
of federal law or any applicable exemptive relief received from the Securities
and Exchange Commission (SEC). Mutual fund investments for a fund are currently
restricted under federal regulations, and therefore, the extent to which a fund
may invest in another mutual fund may be limited. In addition, a fund intends to
vote any proxies of underlying mutual funds in accordance with the instructions
received, or in the same proportion as the vote of all other shareholders of the
underlying mutual fund.

TAXABLE SECURITIES. Under normal conditions, the funds do not intend to invest
in securities in which interest is subject to federal income and/or state and
local personal income taxes. However, from time to time, as a defensive measure
or under abnormal market conditions, the funds may make temporary investments in
securities, the interest on which is subject to federal income and/or state and
local personal income taxes.

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System, Small Business Administration, and the Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), including GNMA certificates and
mortgage-backed securities, whose securities are supported by the full faith and
credit of the United States; the Federal Home Loan Banks and the Tennessee
Valley Authority, whose securities are supported by the right to borrow from the
U.S. Treasury; Freddie Mac (formerly known as the Federal Home Loan Mortgage
Association or "FHLMC") and Fannie Mae (formerly known as the Federal National
Mortgage Association or "FNMA"), or the Student Loan Marketing Association
("Sallie Mae" or "SLMA"), whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the agency
or instrumentality.

There can be no assurance that the U.S. government will provide full financial
support to U.S. government-sponsored agencies or instrumentalities if the U.S.
government is not obligated to do so under law. While U.S. government
securities, including U.S. Treasury securities, are among the safest securities,
like other fixed-income securities, they are sensitive to interest rate changes,
which will cause the yield and value of such securities to fluctuate.

VARIABLE- AND FLOATING-RATE DEBT SECURITIES pay an interest rate, which is
adjusted either periodically or at specific intervals or which 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.

Some variable-rate securities may be combined with a put or demand feature
(variable-rate demand securities) that entitles the holder to the right to
demand repayment in full or to resell at a specific price and/or time. While the
demand feature is intended to reduce credit risks, it is not always
unconditional, and may make the securities more difficult to sell quickly
without losses. There are risks involved with these securities because there may
be no active secondary market for a particular variable-rate demand security
purchased by a fund. In addition, a fund may exercise its demand rights only at
certain times. A fund could also suffer losses in the event that the issuer
defaults on its obligation.

YEAR 2000 presents uncertainties and possible risks to the smooth operations of
the funds and the provision of services to shareholders. Many computer programs
use only two digits to identify a specific year and therefore may not accurately
recognize the upcoming change in the next century. If not corrected, many
computer applications could fail or create erroneous results by or at year 2000.
Due to the funds' and their service providers' dependence on computer technology
to operate, the nature and impact of year 2000 processing failures on the funds
could be material. The funds' investment adviser is taking steps to minimize the
risks of year 2000 for the funds, including obtaining assurances from the funds'
service providers that they are analyzing their systems, testing them for
potential problems and remediating them to the extent possible. There can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
funds, however, minimizing year 2000 risk for the funds is a priority of the
investment adviser.

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The investment adviser generally attempts to take into account all material
information about issuers, including the extent to which they have prepared or
are preparing for the Year 2000 problem. The degree to which the investment
adviser inquires into an issuer's Year 2000 preparedness falls within the
discretion of the particular representatives of credit/investment research and
portfolio management involved and generally depends on various factors,
including the size of a fund's holdings in the issuer and the investment
adviser's assessment of the significance of the Year 2000 problem to the
issuer's business. Issuers whose securities represent a significant portion of a
fund's holdings or for which the Year 2000 problem is seen as posing the most
material risks generally receive the greatest scrutiny, while issuers at the
other end of the continuum receive lesser (if any) scrutiny. The investment
adviser obtains information about issuers' Year 2000 preparedness from issuers,
reports filed with the SEC, rating agencies, securities analysts and various
publications. The investment adviser generally is not in a position to verify
and cannot guarantee the completeness or accuracy of this information.
Information regarding issuers' Year 2000 preparedness may be of limited
usefulness in many important respects. Some issuers may not file reports with
the SEC and may not have made meaningful disclosure about Year 2000
preparedness. Disclosure by issuers who do file reports with the SEC has varied
in level of detail, may be qualified without providing sufficient information to
assess the significance of the qualifications, and may convey the magnitude of
possible problems but not the probability of their occurrence. Altogether, these
constraints limit the investment adviser's ability to form an accurate,
independent judgment of issuer Year 2000 preparedness and may require the
investment adviser to rely on publicly-available assessments made by issuers and
others. These assessments may prove incorrect. Accordingly, the investment
adviser's assessment of any issuer's Year 2000 preparedness does not assure that
the issuer is or will be Year 2000 compliant or that Year 2000 related problems
will not result in a material adverse effect on the issuer's business and,
correspondingly, on a fund.

The State of California's reliance on information technology in every aspect of
its operations has made Year 2000-related information technology ("IT") issues a
high priority for the State. The Department of Information Technology ("DOIT"),
an independent office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully functional
before the Year 2000. The DOIT has created a Year 2000 Task Force and a
California 2000 Office to establish statewide policy requirements, to gather,
coordinate, and share information, and to monitor statewide progress. In
December 1996, the DOIT began requiring departments to report on Year 2000
activities and currently requires departmental monthly reporting of Year 2000
status. The DOIT has emphasized to departments that efforts should be focused on
applications that support mission-critical business practices.

The risks posed by Year 2000 information technology related issues are not
confined to computer systems, but also include problems presented by embedded
microchips (products or systems that contain microchips to perform functions
such as traffic control, instruments used in hospitals or medical laboratories,
and California Aqueduct monitoring). To address these problems, the Governor
issued Executive Order D-3-99, broadening the responsibilities for the DOIT to
resolve these issues as well as legal questions associated with Year 2000
issues. To address these problems, the Governor issued Executive Order D-3-99,
broadening the responsibilities for the DOIT to resolve these issues as well as
legal questions associated with Year 2000 issues. In its quarterly report for
the period ending July 15, 1999, the DOIT discusses the new administration's
progress in addressing Y2K issues under a new action-based strategy and
management model. The key component of this strategy include centralization and
coordination of the State's Y2K efforts, delivery of essential services and
emergency preparedness, elimination of obstacles and barriers in effort to
streamline the current funding request process, and broad-based collaboration

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across public and private sectors through a comprehensive communication plan. A
survey of all State departments has been completed and a total of about 556
mission critical IT systems, 97% have completed remediation. For fiscal year
1999-2000, the legislature created a fund of $33.5 million ($13.5 million
General Fund) for unanticipated Y2K costs, which can be increased if necessary.

Although the State reports that it is making substantial progress overall toward
the goal of Year 2000 compliance, the task is very complex and will likely
encounter unexpected difficulties. The State has not predicted whether all
mission critical systems will be ready and tested by late 1999 or what impact
failure of any particular IT system(s) or of outside interfaces with State IT
systems might have. The State has indicated that all missing critical systems
will have a contingency plan in place to mitigate potential systems failures.

The State Treasurer's Office has reported that its systems for bond payments are
fully Y2K compliant. The State Controller's Office had reported that it has
completed the necessary Y2K remediation projects for the State fiscal and
accounting system, consistent with the Governor's Executive Order. The final
steps of testing will be completed during 1999. Both offices are actively
working with the outside entities with whom they interface to ensure that they
are also compliant. There can be no assurance that steps being taken by
California state or local government agencies with respect to the Year 2000
problem will be sufficient to avoid any material adverse impact upon the budgets
or operations of those agencies or upon a fund.

This discussion is based on publicly available information about Year 2000
efforts that was provided by the State of California, and has not been
independently verified by the investment adviser or the funds. In addition, the
discussion does not address potential risks associated with the computer systems
of California local governments and authorities.

In addition to historical information, this discussion contains forward-looking
statements that reflect certain government officials' publicly stated
expectations about Year 2000 preparedness. Achievement of the expressed
expectations is subject to certain risks and uncertainties that could cause
actual results to differ materially from the expressed expectations. An
important factor that may cause such differences includes the unknown risks
associated with Year 2000 computer system conversions or remediation.

INVESTMENT LIMITATIONS

The following investment limitations may be changed only by vote of a majority
of each fund's shareholders.

EACH FUND MAY NOT:

1) As to 75% of its 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, except
that, with respect to the Schwab California Long-Term Tax-Free Fund,
provided that no more than 25% of the fund's total assets would be
invested in the securities of a single issuer, up to 50% of the fund's
total assets may be invested without regard to this 5% limitation; and,
provided further, that, with respect to the Schwab California
Short/Intermediate Tax-Free Fund and as a matter of non-fundamental
policy that may be changed by the board of trustees, so long as no more
than 25% of the fund's total assets

14
<PAGE> 76
would be invested in the securities of a single issuer, up to 50% of
the fund's total assets may be invested without regard to the 5%
limitation set forth above.

2) Purchase securities (other than securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the value of its total assets would be
invested in any industry. Securities issued by governments or political
subdivisions or authorities of governments are not considered to be
securities
subject to this industry concentration restriction.

3) Invest more than 10% of the total value of its net assets in illiquid
securities, including repurchase agreements with maturities in excess
of seven days.

4) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the trust or the investment adviser
individually own beneficially more than 1/2 of 1% of the securities of
such issuer and together beneficially own more than 5% of the
securities of such issuer.

5) Purchase or sell commodities or real estate, including interests in
real estate limited partnerships, provided that each fund may (1)
purchase securities of companies that deal in real estate or interests
therein, and (2) purchase or sell futures contracts, options contracts,
equity index participations and index participation contracts.

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

7) Purchase securities of other investment companies, except as permitted
by the 1940 Act.

8) Lend money to any person, except that each fund may (1) 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
(2) lend its portfolio securities.

9) Borrow money except from banks as a temporary measure 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 than 5% of its
total assets.

10) Pledge, mortgage or hypothecate any of its assets except that to secure
allowable borrowings, each fund may do so with respect to no more than
10% of its net assets.

11) 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.

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,

15
<PAGE> 77
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.

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) Purchase securities the income of which is subject to federal
alternative minimum tax if, by reason of such purchase, the total
income earned by such securities would exceed 20% of all income earned
by the fund.

10) Purchase an unrated security, if, as a result, more than 20% of its net
assets would be invested in unrated securities.

11) Invest more than 25% of its total assets in when-issued and
delayed-delivery securities, or purchase such securities for
speculative purposes.

12) Each fund will normally invest at least 65% of its total assets in
securities deemed by the investment adviser to be bonds.

Note that with respect to non-fundamental restriction (3), each fund does not
currently intend to invest more than 5% of its total assets in 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.

MANAGEMENT OF THE FUNDS

The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc. (CSIM or the investment adviser), are as follows:

16
<PAGE> 78

<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUST AFFILIATIONS
- -------- --------- ------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Co-Chief Executive Officer and
July 29, 1937 Director, The Charles Schwab Corporation; Chairman, Chief
Executive Officer and Director, Charles Schwab Holdings, Inc.;
Chairman and Director, Charles Schwab & Co., Inc., Charles Schwab
Investment Management, Inc., The Charles Schwab
Trust Company and Schwab Retirement Plan Services,
Inc.; 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).

STEVEN L. SCHEID* President and Trustee Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and
Enterprise President - Financial Products
and Services, Charles Schwab & Co., Inc.;
Chief Executive Officer, Chief Financial
Officer and Director, Charles Schwab
Investment Management, Inc. From 1994 to
1996, Mr. Scheid was Executive Vice
President of Finance for First Interstate
Bancorp and Principal Financial Officer from
1995 to 1996. Prior to 1994, Mr. Scheid was
Chief Financial Officer, First Interstate
Bank of Texas.

DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates.
September 23, 1931 From 1996 to 1999, Mr. Dorward was Executive
Vice President and Managing Director, Grey
Advertising. From 1990 to 1996, Mr. Dorward was
President and Chief Executive Officer, Dorward &
Associates (advertising and marketing/consulting
firm).

ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
</TABLE>

- ----------------------
*This trustee is an "interested person" of the trust.

17
<PAGE> 79

<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUST AFFILIATIONS
- -------- --------- ------------
<S> <C> <C>
WILLIAM J. KLIPP* Trustee Until October 14, 1999, he was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; Executive Vice President and Chief
Operating Officer, Charles Schwab Investment
Management, Inc.

DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments) and Chairman and Chief Executive
Officer of North American Trust (real
estate investment trust).

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

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Financial Officer 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.

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 Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</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.

Each fund is overseen by a board of trustees. The board of trustees meets
regularly to review a fund's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of a fund's shareholders. The following table provides information concerning
compensation of the trustees.

- ----------------------
* This trustee is an "interested person" of the trust.

18
<PAGE> 80

<TABLE>
<CAPTION>
($) Pension or ($)
Aggregate Compensation Retirement Total
Name of Trustee from each Fund Benefits Compensation
Accrued as from Fund
Part of Complex 1
Fund
Expenses
California California
Short/Interme- Long-Term
diate Tax-Free Tax-Free
Bond Fund Bond Fund
- ------------------------------ --------------- -------------- ------------ ----------------
<S> <C> <C> <C> <C>
Charles R. Schwab 0 0 N/A 0
Steven L. Scheid 2 0 0 N/A 0
William J. Klipp 0 0 N/A 0
Donald F. Dorward $2,004 $2,181 N/A $118,150
Robert G. Holmes $2,004 $2,181 N/A $118,150
Donald R. Stephens $2,004 $2,181 N/A $118,150
Michael W. Wilsey $1,858 $2,018 N/A $109,450
</TABLE>

1 Unless otherwise stated, information is for the fund complex, which
included 40 funds as of August 31, 1999.

2 Mr. Scheid became President and trustee on August 18, 1998.

DEFERRED COMPENSATION PLAN

Trustees who are not "interested persons" of a trust ("independent trustees")
may enter into a fee deferral plan. Under this plan, deferred fees will be
credited to an account established by the trust as of the date that such fees
would have been paid to the trustee. The value of this account will equal the
value that the account would be if the fees credited to the account had been
invested in the shares of SchwabFunds selected by the trustee. Currently, none
of the independent trustees has elected to participate in this plan.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of October 20, 1999, the officers and trustees of the funds, as a group owned
of record or beneficially less than 1% of the outstanding voting securities of
the funds.

As of October 15, 1999, William S. Thompson, 5020 S. Lakeshore Drive, Chicago,
Il 60615 directly or beneficially owned, 5.07% of shares of the Schwab
California Short/Intermediate Municipal Bond Fund.

19
<PAGE> 81
INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as each fund's investment adviser and
administrator pursuant to Investment Advisory and Administration Agreements
(Advisory Agreements) between it and the trust. Charles Schwab & Co., Inc.
(Schwab) is an affiliate of the investment adviser and is the trust's
distributor, shareholder services agent and transfer agent. Charles R. Schwab is
the founder, Chairman, Co-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 adviser and Schwab.

For its advisory and administrative services to each fund, the investment
adviser is entitled to receive a graduated annual fee payable monthly based on
each fund's average daily net assets as described below.

First $500 million - 0.30%
More than $500 million - 0.22%

Prior to November 15, 1999 for its advisory and administrative services for each
fund, the investment adviser was entitled to receive an annual fee, payable
monthly from each fund of 0.41% of each fund's average daily net assets.

For the fiscal years ended August 31, 1997, 1998 and 1999, the investment
advisory fees incurred by the Schwab California Short/Intermediate Tax-Free Bond
Fund were $99,000 (fees were reduced by $110,000), $77,000 (fees were reduced by
$215,000), and $149,000 (fees were reduced by $318,000), respectively.

For the fiscal years ended August 31, 1997, 1998 and 1999, the investment
advisory fees incurred by the Schwab California Long-Term Tax-Free Bond Fund
were $238,000 (fees were reduced by $222,000), $209,000 (fees were reduced by
$409,000), and $307,000 (fees were reduced by $533,000), respectively.

The investment adviser and Schwab have voluntarily agreed to guarantee at least
through October 31, 2000 that total operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) will not exceed 0.49%
of each fund's average net assets.

DISTRIBUTOR

Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of a fund and is the trust's agent for the purpose of the continuous
offering of a fund's 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.

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<PAGE> 82
SHAREHOLDER SERVICES AND TRANSFER AGENT

Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing a fund's
prospectuses, financial reports and other informational literature about the
fund. Schwab maintains the office space, equipment and personnel necessary to
provide these services. Schwab also distributes and markets SchwabFunds and
provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these services.

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

CUSTODIAN AND FUND ACCOUNTANT

PFPC Trust Company, Airport Business Center, 103 Bellevue Parkway, Wilmington DE
19809, serves as custodian for the funds and PFPC, Inc., located at the same
address, serves as fund accountant.

The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The accountant maintains all books and records
related to each fund's transactions.

INDEPENDENT ACCOUNTANT

The funds' independent accountant, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trust and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
the trust engages them to do so. Their address is 333 Market Street, San
Francisco CA 94105. Each fund's audited financial statements for the fiscal year
ending August 31, 1999, will be included in the fund's annual report that is
supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

For reporting purposes, a 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 a fund
owned during the fiscal year. When making the calculation, all securities whose
maturities at the time of acquisition were one year or less ("short-term
securities") are excluded.

The portfolio turnover rates for the Schwab California Short/Intermediate
Tax-Free Bond Fund for the fiscal years ended August 31, 1998 and 1999 were 8%
and 7%, respectively. The portfolio turnover rates for the Schwab California
Long-Term Tax-Free Bond Fund for the fiscal years ended August 31, 1998 and 1999
were 28% and 55%, respectively.

21
<PAGE> 83
PORTFOLIO TRANSACTIONS

The funds paid no brokerage commissions in the last three fiscal years.

The funds typically purchase and sell securities on the over-the-counter market
through dealers acting as principals for their own accounts. Accordingly,
commissions are not charged on these transactions. Instead, the subject
securities are sold on a "net" basis with the participating dealer(s) earning a
spread (the difference between ask and bid price) on each purchase or sale. The
funds may, however, pay commissions in connection with their options
transactions. When placing orders for each fund's securities transactions, the
investment adviser uses its best judgement to obtain best price and execution.
The full range and quality of brokerage services available are considered in
making these determinations. For non-debt security trades in which Schwab is not
a principal, the investment adviser may use Schwab to execute a fund's
transactions when it reasonably believes that commissions (or prices) charged
and transaction quality will be at least comparable to those available from
other qualified brokers or dealers.

DESCRIPTION OF THE TRUST

Each fund is a series of Schwab Investments. Schwab Investments was organized
under Massachusetts' law on October 26, 1990.

The Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by a fund or
share class. Each fund's initial and subsequent minimum investment and balance
requirements are set forth in the prospectus. These minimums may be waived for
certain investors, including trustees, officers and employees of Schwab, or
changed without prior notice.

Each fund 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 bylaws of the trust provides that a majority of shares entitled to vote
shall be a quorum for the transaction of business at a shareholders' meeting,
except that where any provision of law, or of the Declaration of Trust or of the
bylaws permits or requires that (1) holders of any series shall vote as a
series, then a majority of the aggregate number of shares of that series
entitled to vote shall be necessary to constitute a quorum for the transaction
of business by that series, or (2) holders of any class shall vote as a class,
then a majority of the aggregate number of shares of that class entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that class. Any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice. 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

22
<PAGE> 84
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. There is a remote possibility that a fund could
become liable for a misstatement in the prospectus or SAI about another fund.

As more fully described in the Declaration of Trust, the trustees may each year,
or more frequently, distribute to the shareholders of each series accrued income
less accrued expenses and any net realized capital gains less accrued expenses.
Distributions of each year's income of each series shall be distributed pro rata
to shareholders in proportion to the number of shares of each series held by
each of them. Distributions will be paid in cash or shares or a combination
thereof as determined by the trustees. Distributions paid in shares will be paid
at the net asset value as determined in accordance with the bylaws.

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE FUNDS

As long as a fund or Schwab follow 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.

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 a
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.

PRICING OF SHARES

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. 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. Securities for which
market quotations or closing values are not readily available (including
restricted securities that are subject to limitations on their sale and illiquid
securities) are valued at fair value as determined in good faith pursuant to
guidelines and procedures adopted by the board of trustees. These procedures
require that securities be valued on the basis of prices provided by approved
pricing services, except when a price appears manifestly incorrect or events
occurring between the time a price is furnished by a service and the time a fund
calculates its share price materially affect the furnished price. The board of
trustees regularly reviews fair values assigned to portfolio securities under
these circumstances and also when no prices from approved pricing services are
available.

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<PAGE> 85
TAXATION

FEDERAL TAX INFORMATION FOR THE FUNDS

It is each fund's policy to qualify for taxation as a "regulated investment
company" (RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, a fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.

The Code imposes a non-deductible excise tax on RICs 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 net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. 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.

A fund's transactions in futures contracts, options and certain other investment
activities may be restricted by the Code and 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 a fund's assets, convert short-term
capital losses into long-term capital losses or otherwise affect the character
of a fund's income. These rules could therefore affect the amount, timing and
character of distributions to shareholders. A fund will endeavor to make any
available elections pertaining to these transactions in a manner believed to be
in the best interest of a fund and its shareholders.

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

The discussion of federal income taxation presented below supplements the
discussion in a fund's prospectus and only summarizes some of the important
federal tax considerations generally affecting shareholders of a fund.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in a fund.

Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. Long-term
capital gains distributions are taxable as long-term capital gains, regardless
of how long you have held your shares. However, if you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss. Distributions by a fund also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.

Each 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

24
<PAGE> 86
(3) fails to provide a certified statement that he or she is not subject to
"backup withholding." Backup withholding is not an additional tax and any
amounts withheld may be credited against the shareholder's ultimate U.S. tax
liability.

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 generally are not subject to U.S.
taxation, unless the recipient is an individual who either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more. 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.

If, at the close of each quarter of its taxable year, at least 50% of the value
of a fund's assets consist of obligations the interest on which is excludable
from gross income, the fund may pay "exempt-interest dividends" to its
shareholders. Those dividends constitute the portion of the aggregate dividends
as designated by the fund, equal to the excess of the excludable interest over
certain amounts disallowed as deductions. Exempt-interest dividends are
excludable from a shareholder's gross income for federal income tax purposes.

Exempt-interest dividends may nevertheless be subject to the federal alternative
minimum tax (AMT) imposed by Section 55 of the Code. The AMT is imposed at rates
of 26% and 28%, in the case of non-corporate taxpayers, and at the rate of 20%,
in the case of corporate taxpayers, to the extent it exceeds the taxpayer's
federal income tax liability. The AMT may be imposed in the following two
circumstances. First, exempt-interest dividends derived from certain private
activity bonds issued after August 7, 1986, will generally be an item of tax
preference (and, therefore, potentially subject to AMT) for both corporate and
non-corporate taxpayers. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless of
when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporations' alternative minimum taxable income for purposes of
determining the AMT.

The funds may realize capital gains or taxable income from the sale of municipal
bonds and may make taxable distributions. For federal tax purposes, each fund's
distributions of short-term capital gains and gains on the sale of bonds
characterized as market discount are taxable to shareholders as ordinary income.
Distributions of long-term capital gains are taxable to the shareholder as
long-term capital gain, no matter how long the shareholder has held shares in
the fund.

Current federal law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest that may have an effect on the ability
of a fund to purchase sufficient amounts of tax-exempt securities to satisfy the
Code's requirements for the payment of "exempt-interest dividends."

Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of the funds is not deductible for federal income tax
purposes. Furthermore, these funds may not be an appropriate investment for
persons (including corporations and other business

25
<PAGE> 87

entities) who are "substantial users" (or persons related to "substantial
users") or facilities financed by industrial development private activity bonds.
Such persons should consult their tax advisors before purchasing shares. A
"substantial user" is defined generally to include "certain persons" who
regularly use in their trade or business a part of a facilities financed from
the proceeds of such bonds.

CALIFORNIA TAX CONSIDERATIONS

Each fund intends to qualify to pay dividends to shareholders that are exempt
from California personal income tax ("California exempt-interest dividends"). A
fund will qualify to pay California exempt-interest dividends if (1) at the
close of each quarter of a fund's taxable year, at least 50% of the value of a
fund's total assets consists of obligations the interest on which would be
exempt from California personal income tax if the obligations were held by an
individual ("California Tax Exempt Obligations") and (2) a fund continues to
qualify as a regulated investment company.

If a fund qualifies to pay California exempt-interest dividends, dividends
distributed to shareholders will be considered California exempt-interest
dividends if they meet certain requirements. A fund will notify its shareholders
of the amount of exempt-interest dividends each year.

Corporations subject to California franchise tax that invest in a fund may not
be entitled to exclude California exempt-interest dividends from income.

Dividend distributions that do not qualify for treatment as California
exempt-interest dividends (including those dividend distributions to
shareholders taxable as long-term capital gains for federal income tax purposes)
will be taxable to shareholders at ordinary income tax rates for California
personal income tax purposes to the extent of a fund's earnings and profits.

Interest on indebtedness incurred or continued by a shareholder in connection
with the purchase of shares of a fund will not be deductible for California
personal income tax purposes if a fund distributes California exempt-interest
dividends.

If a fund qualifies to pay dividends to shareholders that are exempt from
California personal income tax ("California exempt-interest dividends"),
dividends distributed to shareholders will be considered California
exempt-interest dividends (1) if they are designated as exempt-interest
dividends by the fund in a written notice to shareholders mailed within 60 days
of the close of the fund's taxable year and (2) to the extent the interest
received by the fund during the year on California Tax-Exempt Obligations
exceeds expenses of the fund that would be disallowed under California personal
income tax law as allocable to tax-exempt interest if the fund were an
individual. If the aggregate dividends so designated exceed the amount that may
be treated as California exempt-interest dividends, only that percentage of each
dividend distribution equal to the ratio of aggregate California exempt-interest
dividends to aggregate dividends so designated will be treated as a California
exempt-interest dividend.

CALCULATION OF PERFORMANCE DATA

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<PAGE> 88

divided by the initial investment, which is annualized and expressed as a
percentage. It is reported for periods of one, five and 10 years or since
commencement of operations for periods not falling on those intervals. In
computing average annual total return, a fund assumes reinvestment of all
distributions at net asset value on applicable reinvestment dates.

Standardized Total Return
<TABLE>
<CAPTION>
Average Annual Total Average Annual Total
Average Annual Total Return for 1 year ended Return for 5 years ended
Return from commencement August 31, 1999 August 31, 1999
of operations to August 31, 1999 * Fund <S> <C>
<C> <C>
Schwab California 2.16% 4.62%
4.24% Short/Intermediate Tax-Free Bond Fund

Schwab California - 1.57% 6.05% 6.58%
Long-Term Tax-Free Bond
Fund
</TABLE>

* April 21, 1993 for the Schwab California Short/Intermediate Tax-Free
Bond Fund and February 24, 1992 for the Schwab California Long-Term
Tax-Free Bond Fund.

Nonstandardized Cumulative Total Return

<TABLE>
<CAPTION>
Fund Cumulative Total Return as of August 31, 1999*
<S> <C>
Schwab California Short/Intermediate Tax-Free Bond 30.24%
Fund

Schwab California Long-Term Tax-Free Bond Fund 61.44%
</TABLE>

* April 21, 1993 for the Schwab California Short/Intermediate Tax-Free
Bond Fund and February 24, 1992 for the Schwab California Long-Term
Tax-Free Bond Fund.

Each fund also may 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 commencement of
operations to the end of the fiscal year.

30-Day Yield

<TABLE>
<CAPTION>
Fund 30-day period ended August 31, 1999
<S> <C>
Schwab California Short/Intermediate Tax-Free Bond 3.87%
Fund
</TABLE>

27
<PAGE> 89
<TABLE>
<S> <C>
Schwab California Long-Term Tax-Free Bond Fund 5.13%
</TABLE>

A 30-day yield is calculated by dividing the net investment per share earned
during a 30-day period by a fund's share price on the last day of the period.

30-Day Tax-Equivalent Yield

<TABLE>
<CAPTION>
Fund 30-day period ended August 31, 1999
<S> <C>
Schwab California Short/Intermediate Tax-Free Bond 7.06%
Fund

Schwab California Long-Term Tax-Free Bond Fund 9.36%
</TABLE>

The tax equivalent yield of the funds is calculated by dividing that portion of
the applicable fund's yield (computed as described above) that is tax-exempt by
an amount equal to 1 minus the applicable effective tax rate, and adding the
result to that portion, if any, of the yield of the Fund that is not tax-exempt.
For the funds, a maximum combined federal and State of California marginal rate
of 45.2% is normally used.

Tax equivalent effective yields are computed in the same manner as tax
equivalent yields, except that effective yield is substituted for yield in the
calculation.

The performance of a fund may be compared with the performance of other mutual
funds by comparing the ratings of mutual fund rating services, various indices,
U.S. government obligations, bank certificates of deposit, the consumer price
index and other investments for which reliable data is available. An index's
performance data assumes the reinvestment of dividends but does not reflect
deductions for administrative, management and trading expenses. A fund will be
subject to these costs and expenses, while an index does not have these
expenses. In addition, various factors, such as holding a cash balance, may
cause a fund's performance to be higher or lower than that of an index.

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<PAGE> 90
APPENDIX - RATINGS OF INVESTMENT SECURITIES

From time to time, a fund may report the percentage of its assets that fall into
the rating categories set forth below.

BONDS

MOODY'S INVESTORS SERVICE

Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an 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 such issues.

Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.

A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.

Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

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<PAGE> 91
STANDARD & POOR'S CORPORATION

INVESTMENT GRADE

AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.

A Debt rated 'A' has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

SPECULATIVE GRADE

Debt rated 'BB' and 'B' is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.

BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.

B Debt rate 'B' has greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions would likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.

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<PAGE> 92
DUFF & PHELPS CREDIT RATING CO.

AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA+ HIGH CREDIT QUALITY. PROTECTION FACTORS ARE STRONG. RISK IS MODEST BUT
AA- MAY VARY SLIGHTLY FROM TIME TO TIME BECAUSE OF ECONOMIC CONDITIONS.

A+ Protection factors are average but adequate. However, risk factors are
A- more variable and greater in periods of economic stress.

BBB+ Below average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during economic
cycles.

BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
BB- to industry conditions or company fortunes. Overall quality may move up
or down frequently within this category.

B+ Below investment grade and possessing risk that obligations will not be
B met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.

FITCH IBCA, INC.

INVESTMENT GRADE BOND

AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.

AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA'. Because
bonds rated in the 'AAA' and 'AA' categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated 'F-1+'.

A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.

BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the

31
<PAGE> 93
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.

SPECULATIVE GRADE BOND

BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.

B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.

DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS

INVESTMENT GRADE

AAA The highest category; indicates that the ability to repay principal and
interest on a timely basis is very high.

AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.

A The third-highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.

BBB The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.

NON-INVESTMENT GRADE

BB While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the
ability to adequately service debt obligations.

B Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse
developments could well negatively affect the payment of interest and
principal on a timely basis.

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<PAGE> 94
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.

FITCH IBCA, INC.

Obligations supported by the highest capacity for timely repayment are
rated F1+. An F1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated F2 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

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.

33
<PAGE> 95
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 IBCA, 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."

34
<PAGE> 96

STATEMENT OF ADDITIONAL INFORMATION

SCHWAB INVESTMENTS

SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND

NOVEMBER 15, 1999

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with a fund's prospectus dated November 15, 1999 (as amended
from time to time).

The funds are a series of Schwab Investments (the trust).

The funds' most recent annual report is a separate document supplied with the
SAI and includes the funds' audited financial statements, which are incorporated
by reference into this SAI.

<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
INVESTMENT OBJECTIVE, STRATEGIES,
SECURITIES, RISKS AND LIMITATIONS.............................................................. 2
MANAGEMENT OF THE FUNDS........................................................................ 14
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES............................................ 16
INVESTMENT ADVISORY AND OTHER SERVICES......................................................... 17
BROKERAGE ALLOCATION AND OTHER PRACTICES....................................................... 18
DESCRIPTION OF THE TRUST....................................................................... 19
PURCHASE, REDEMPTION AND PRICING OF SHARES..................................................... 20
TAXATION....................................................................................... 21
CALCULATION OF PERFORMANCE DATA................................................................ 23
APPENDIX - RATINGS OF INVESTMENT SECURITIES.................................................... 25
</TABLE>

1
<PAGE> 97
INVESTMENT OBJECTIVE, STRATEGIES, SECURITIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVE

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.
There is no guarantee a fund will achieve its investment objective.

INVESTMENT STRATEGIES

INVESTMENT SECURITIES AND RISKS

Each fund may establish lines-of-credit (lines) with certain banks by which it
may borrow funds for temporary or

2
<PAGE> 98
emergency purposes. A borrowing is presumed to be for temporary or emergency
purposes if it is repaid by a fund within 60 days and is not extended or
renewed. Each fund intends to use the lines to meet large or unexpected
redemptions that would otherwise force a fund to liquidate securities under
circumstances which are unfavorable to the fund's remaining shareholders. Each
fund will pay a fee to the bank for using the lines.

The funds invest in higher quality investment-grade securities. In the event a
debt security held by a fund were downgraded below BBB-, a fund could continue
to hold it if the investment adviser believed it would benefit a fund.

See the Appendix for a full description of the various ratings assigned to debt
securities by various nationally recognized statistical rating organizations
(NRSROs).

DELAYED-DELIVERY TRANSACTIONS include purchasing and selling securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to buy or sell specific securities

3
<PAGE> 99
at a predetermined price or yield, with payment and delivery taking place after
the customary settlement period for that type of security. When purchasing
securities on a delayed-delivery basis, a fund assumes the rights and risks of
ownership, including the risk of price and yield fluctuations. Typically, no
interest will accrue to a fund until the security is delivered. Each fund will
segregate appropriate liquid assets to cover its delayed-delivery purchase
obligations. When a fund sells a security on a delayed-delivery basis, the fund
does not participate in further gains or losses with respect to that security.
If the other party to a delayed-delivery transaction fails to deliver or pay for
the securities, a fund could suffer losses.

Duration is a measure of the expected life of a debt obligation on a present
value basis. Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable bond, the time the principal payments are expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For debt obligations with interest payments occurring
prior to the payment of principal, duration will usually be less than maturity.
In general, all else being equal, the lower the stated or coupon rate of the
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of a fixed income security, the
shorter the duration of the security.

4
<PAGE> 100
developments could disrupt the market for high yield securities, and severely
affect the ability of issuers, especially highly-leveraged issuers, to service
their debt obligations or to repay their obligations upon maturity.

5
<PAGE> 101
to the economic value of the security or threaten to materially impact the
issuer's corporate governance policies or structure.

MATURITY OF INVESTMENTS will generally be determined using the portfolio
securities' final maturity dates. However for certain securities, maturity will
be determined using the security's effective maturity date. The effective
maturity date for a security subject to a put or demand feature is the demand
date, unless the security is a variable- or floating-rate security. If it is a
variable-rate security, its effective maturity date is the later of its demand
date or next interest rate change date. For variable-rate securities not subject
to a put or demand feature and floating-rate securities, the effective maturity
date is the next interest rate change date. The effective maturity of
mortgage-backed and certain other asset-backed securities is determined on an
"expected life" basis by the investment adviser and securities being hedged with
futures contracts may be deemed to have a longer maturity, in the case of
purchases of future contracts, and a shorter maturity, in the case of sales of
futures contracts, than they would otherwise be deemed to have. In addition, a
security that is subject to redemption at the option of the issuer on a
particular date ("call date"), which is prior to the security's stated maturity,
may be deemed to mature on the call date rather than on its stated maturity
date. The call date of a security will be used to calculate average portfolio
maturity when the investment adviser reasonably anticipates, based upon
information available to it, that the issuer will exercise its right to redeem
the security. The average portfolio maturity of a fund is dollar-weighted based
upon the market value of a fund's securities at the time of the calculation. A
fund may invest in securities with final or effective maturities of any length.

Restriction: Each fund will invest only in certificates of deposit and bankers'
acceptances of banks that have capital, surplus and undivided profits in excess
of $100 million.

6
<PAGE> 102
Asset-backed securities ("ABS") have structural characteristics similar to MBS.
Asset-backed debt obligations represent direct or indirect participation in
assets such as automobile loans, credit card receivables, trade receivables,
home equity loans (which sometimes are categorized as MBS) or other financial
assets. Therefore, repayment depends largely on the cash flows generated by the
assets backing the securities. The credit quality of most ABS 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
enhancement of the securities. Payments or distributions of principal and
interest on asset-backed debt obligations may be supported by credit
enhancements including letters of credit, an insurance guarantee, reserve funds
and overcollateralization.

MUNICIPAL SECURITIES are debt securities issued by a state, its counties,
municipalities, authorities

7
<PAGE> 103
and other subdivisions, or the territories and possessions of the United States
and the District of Columbia, including their subdivisions, agencies and
instrumentalities and corporations. These securities may be issued to obtain
money for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, public utilities, schools, streets, and water and sewer works.
Other public purposes include refunding outstanding obligations, obtaining funds
for general operating expenses and obtaining funds to loan to other public
institutions and facilities.

8
<PAGE> 104
The value of municipal securities may be affected by uncertainties with respect
to the rights of holders of municipal securities in the event of bankruptcy or
the taxation of municipal securities as a result of legislation or litigation.
For example, under federal law, certain issuers of municipal securities may be
authorized in certain circumstances to initiate bankruptcy proceedings without
prior notice to or the consent of creditors. Such action could result in
material adverse changes in the rights of holders of the securities. In
addition, litigation challenging the validity under the state constitutions of
present systems of financing public education has been initiated or adjudicated
in a number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances, there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law, which ultimately could
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.

Municipal securities pay fixed, variable or floating rates of interest, which
may be exempt from federal income tax and, typically, personal income tax of a
state or locality.

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. Under certain circumstances,
repurchase agreements that are fully collateralized by U.S. government
securities may be deemed to be investments in U.S. government securities.

9
<PAGE> 105
number of shares usually listed on an exchange (closed-end mutual funds). Mutual
funds generally offer investors the advantages of diversification and
professional investment management, by combining shareholders' money and
investing it in various types of securities, such as stocks, bonds and money
market securities. Mutual funds also make various investments and use certain
techniques in order to enhance their performance. These may include entering
into delayed-delivery and when-issued securities transactions or swap
agreements; buying and selling futures contracts, illiquid and restricted
securities and repurchase agreements and borrowing or lending money and/or
portfolio securities. The risks of investing in mutual funds generally reflect
the risks of the securities in which the mutual funds invest and the investment
techniques they may employ. Also, mutual funds charge fees and incur operating
expenses.

U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or its agencies or instrumentalities. U.S.
Treasury securities include bills, notes and bonds and 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. Securities issued by
government agencies or instrumentalities include obligations of the following:
The Farm Credit System, Small Business Administration, and the Government
National Mortgage Association ("GNMA" or "Ginnie Mae"), including GNMA
certificates and mortgage-backed securities, whose securities are supported by
the full faith and credit of the United States; the Federal Home Loan Banks and
the Tennessee Valley Authority, whose securities are supported by the right to
borrow from the U.S. Treasury; Freddie Mac (formerly known as the Federal Home
Loan Mortgage Association or "FHLMC") and Fannie Mae (formerly known as the
Federal National Mortgage Association or "FNMA"), or the Student Loan Marketing
Association ("Sallie Mae" or "SLMA"), whose securities are supported by the
discretionary authority of the U.S. government to purchase certain obligations
of the agency or instrumentality.

10
<PAGE> 106
in such a way as to cause greater volatility to the security's value.

Some variable-rate securities may be combined with a put or demand feature
(variable-rate demand securities) that entitles the holder to the right to
demand repayment in full or to resell at a specific price and/or time. While the
demand feature is intended to reduce credit risks, it is not always
unconditional, and may make the securities more difficult to sell quickly
without losses. There are risks involved with these securities because there may
be no active secondary market for a particular variable-rate demand security
purchased by a fund. In addition, a fund may exercise its demand rights only at
certain times. A fund also could suffer losses in the event that the issuer
defaults on its obligation.

The investment adviser generally attempts to take into account all material
information about issuers, including the extent to which they have prepared or
are preparing for the Year 2000 problem. The degree to which the investment
adviser inquires into an issuer's Year 2000 preparedness falls within the
discretion of the particular representatives of credit/investment research and
portfolio management involved and generally depends on various factors,
including the size of a fund's holdings in the issuer and the investment
adviser's assessment of the significance of the Year 2000 problem to the
issuer's business. Issuers whose securities represent a significant portion of a
fund's holdings or for which the Year 2000 problem is seen as posing the most
material risks generally receive the greatest scrutiny, while issuers at the
other end of the continuum receive lesser (if any) scrutiny. The investment
adviser obtains information about issuers' Year 2000 preparedness from issuers,
reports filed with the SEC, rating agencies, securities analysts and various
publications. The investment adviser generally is not in a position to verify
and cannot guarantee the completeness or accuracy of this information.
Information regarding issuers' Year 2000 preparedness may be of limited
usefulness in many important respects. Some issuers may not file reports with
the SEC and may not have made meaningful disclosure about Year 2000
preparedness. Disclosure by issuers who do file reports with the SEC has varied
in level of detail, may be qualified without providing sufficient information to
assess the significance of the qualifications, and may convey the magnitude of
possible problems but not the probability of their occurrence. Altogether, these
constraints limit the investment adviser's ability to form an accurate,
independent judgment of issuer Year 2000 preparedness and may require the
investment adviser to rely on publicly-available assessments made by issuers and
others. These assessments may prove incorrect. Accordingly, the investment
adviser's assessment of any issuer's Year 2000 preparedness does not assure that
the issuer is or will be Year 2000 compliant or that Year 2000 related problems
will not result in a material adverse effect on the issuer's business and,
correspondingly, on a fund.

11
<PAGE> 107
INVESTMENT LIMITATIONS

The following investment limitations may be changed only by vote of a majority
of each fund's shareholders.

EACH FUND MAY NOT:

1) As to 75% of its 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, except
that, with respect to each fund, and as a matter of non-fundamental
policy that may be changed by the board of trustees, so long as no more
than 25% of the fund's total assets would be invested in the securities
of a single issuer, up to 50% of the fund's total assets may be
invested without regard to the 5% limitation set forth above.

2) Purchase securities (other than securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the value of its total assets would be
invested in any industry. Securities issued by governments or political
subdivisions or authorities of governments are not considered to be
securities subject to this industry concentration restriction.

3) Invest more than 10% of the total value of its net assets in illiquid
securities, including repurchase agreements with maturities in excess
of seven days.

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

7) Purchase securities of other investment companies, except as permitted
by the 1940 Act.

10) Pledge, mortgage or hypothecate any of its assets except that to secure
allowable borrowings, each fund may do so with respect to no more than
10% of its net assets.

12
<PAGE> 108
11) 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.

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.

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.

10) Purchase an unrated security, if, as a result, more than 20% of its net
assets would be invested in unrated securities.

11) Invest more than 25% of its total assets in when-issued and
delayed-delivery securities, or purchase such securities for
speculative purposes.

12) Each fund will normally invest at least 65% of its total assets in
securities deemed by the

13
<PAGE> 109
investment adviser to be bonds.

MANAGEMENT OF THE FUNDS

<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUST AFFILIATIONS
- ------------------------------------- ----------------------- --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Co-Chief Executive Officer and
July 29, 1937 Director, The Charles Schwab Corporation; Chairman, Chief
Executive Officer and Director, Charles Schwab Holdings, Inc.;
Chairman and Director, Charles Schwab & Co., Inc., Charles
Schwab Investment Management, Inc., The Charles Schwab Trust
Company and Schwab Retirement Plan Services, Inc.; 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).

STEVEN L. SCHEID* President and Trustee Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and Enterprise
President - Financial Products and Services, Charles
Schwab & Co., Inc.; Chief Executive Officer, Chief
Financial Officer and Director, Charles Schwab
Investment Management, Inc. From 1994 to 1996, Mr.
Scheid was Executive Vice President of Finance for First
Interstate Bancorp and Principal Financial Officer from
1995 to 1996. Prior to 1994, Mr. Scheid was Chief
Financial Officer, First Interstate Bank of Texas.
</TABLE>

- --------
* This trustee is an "interested person" of the trust.

14
<PAGE> 110

<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUST AFFILIATIONS
- ------------------------------------- ----------------------- --------------------------------------------------
<S> <C> <C>
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates.
September 23, 1931 From 1996 to 1999, Mr. Dorward was Executive
Vice President and Managing Director, Grey
Advertising. From 1990 to 1996, Mr. Dorward was
President and Chief Executive Officer, Dorward &
Associates (advertising and marketing/consulting
firm).

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

WILLIAM J. KLIPP* Trustee Until October 15, 1999, he was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; Executive Vice President and Chief
Operating Officer, Charles Schwab Investment
Management, Inc.

DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments) and Chairman and Chief Executive
Officer of North American Trust (real estate
investment trust).

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

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Financial Officer 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.

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 Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>

- ----------
* This trustee is an "interested person" of the trust.

15
<PAGE> 111
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.

<TABLE>
<CAPTION>
($) Pension or ($)
Aggregate Retirement Total
Name of Trustee Compensation Benefits Compensation
from Accrued as from Fund
each Fund Part of Complex 1
Fund
Expenses
Short/Interme- Long-Term
diate Tax-Free Tax-Free
Bond Fund Bond Fund
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles R. Schwab 0 0 N/A 0
Steven L. Scheid 0 0 N/A 0
William J. Klipp 0 0 N/A 0
Donald F. Dorward $1,943 $1,957 N/A $118,150
Robert G. Holmes $1,943 $1,957 N/A $118,150
Donald R. Stephens $1,943 $1,957 N/A $118,150
Michael W. Wilsey $1,802 $1,816 N/A $109,450
</TABLE>

1 Unless otherwise stated, information is for the fund complex, which included
40 funds as of August 31, 1999.

DEFERRED COMPENSATION PLAN

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of October 20, 1999, the officers and trustees of the funds, as a group owned
of record or beneficially less than 1% of the outstanding voting securities of
the funds.

16
<PAGE> 112

As of October 15, 1999, no shareholder directly or beneficially owned more than
5% of shares of the funds.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

First $500 million - 0.30%
More than $500 million - 0.22%

Prior to November 1, 1999 for its advisory and administrative services for each
fund, the investment adviser was entitled to receive an annual fee, payable
monthly from each fund of 0.41% of each fund's average daily net assets.

For the fiscal years ended August 31, 1997, 1998 and 1999, the investment
advisory fees incurred by the Schwab Short/Intermediate Tax-Free Bond Fund were
$81,000 (fees were reduced by $137,000), $28,000 (fees were reduced by
$212,000), and $69,000 (fees were reduced by $257,000), respectively.

For the fiscal years ended August 31, 1997, 1998 and 1999, the investment
advisory fees incurred by the Schwab Long-Term Tax-Free Bond Fund were $38,000
(fees were reduced by $141,000), $19,000 (fees were reduced by $209,000), and
$80,000 (fees were reduced by $286,000), respectively.

DISTRIBUTOR

17
<PAGE> 113
Schwab receives no fee under the Distribution Agreement. At its own expense,
Schwab may engage third party entities, as appropriate, to perform some or all
of these services.

SHAREHOLDER SERVICES AND TRANSFER AGENT

CUSTODIAN AND FUND ACCOUNTANT

PFPC Trust Company, Airport Business Center, 103 Bellevue Parkway, Wilmington DE
19809, serves as custodian for the funds and PFPC, Inc., located at the same
address, serves as fund accountant.

The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The accountant maintains all books and records
related to each fund's transactions.

INDEPENDENT ACCOUNTANT

The funds' independent accountant, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trust and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
the trust engages them to do so. Their address is 333 Market Street, San
Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ending August 31, 1999, will be included in the fund's annual report that
is supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

The portfolio turnover rates for the Schwab Short/Intermediate Tax-Free Bond
Fund for the fiscal years ended August 31, 1998 and 1999 were 22% and 8%,
respectively. The portfolio turnover

18
<PAGE> 114

rates for the Schwab Long-Term Tax-Free Bond Fund for the fiscal years ended
August 31, 1998 and 1999 were 39% and 35%, respectively.

PORTFOLIO TRANSACTIONS

The funds paid no brokerage commissions in the last three fiscal years.

DESCRIPTION OF THE TRUST

Each fund is a series of Schwab Investments. Schwab Investments was organized
under Massachusetts' law on October 26, 1990.

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,

19
<PAGE> 115
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. There is a remote possibility that a fund could
become liable for a misstatement in the prospectus or SAI about another fund.

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE FUNDS

PRICING OF SHARES

20
<PAGE> 116
securities under these circumstances and also when no prices from approved
pricing services are available.

TAXATION

FEDERAL TAX INFORMATION FOR THE FUNDS

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

21
<PAGE> 117
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." Backup withholding is not an additional tax
and any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.

Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of the funds is not deductible for federal income tax
purposes. Furthermore, these funds

22
<PAGE> 118

may not be an appropriate investment for persons (including corporations and
other business entities) who are "substantial users" (or persons related to
"substantial users") or facilities financed by industrial development private
activity bonds. Such persons should consult their tax advisors before purchasing
shares. A "substantial user" is defined generally to include "certain persons"
who regularly use in their trade or business a part of a facilities financed
from the proceeds of such bonds.

CALCULATION OF PERFORMANCE DATA

Average annual total return is a standardized measure of performance calculated
using methods prescribed by SEC rules. It is calculated by determining the
ending value of a hypothetical initial investment of $1,000 made at the
beginning of a specified period. The ending value is then divided by the initial
investment, which is annualized and expressed as a percentage. It is reported
for periods of one, five and 10 years or since commencement of operations for
periods not falling on those intervals. In computing average annual total
return, a fund assumes reinvestment of all distributions at net asset value on
applicable reinvestment dates.

Standardized Total Return

<TABLE>
<CAPTION>
Average Annual Total Average Annual Total Average Annual Total
Return for 1 year Return for 5 years Return from
ended August 31, 1999 ended August 31, 1999 commencement of
operations to August
31, 1999*
<S> <C> <C> <C>
Schwab Short/Intermediate 1.86% 4.39% 4.11%
Tax-Free Bond Fund

Schwab Long-Term Tax-Free -3.34% 5.57% 5.54%
Bond Fund
</TABLE>

* April 21, 1993 for the Schwab Short/Intermediate Tax-Free Bond Fund and
September 11, 1992 for the Schwab Long-Term Tax-Free Bond Fund.

Nonstandardized Cumulative Total Return

<TABLE>
<CAPTION>
Fund Cumulative Total Return as of August 31, 1999*
<S> <C>
Schwab Short/Intermediate Tax-Free Bond Fund 29.25%

Schwab Long-Term Tax-Free Bond Fund 45.70%
</TABLE>

* April 21, 1993 for the Schwab Short/Intermediate Tax-Free Bond Fund and
September 11, 1992 for the Schwab Long-Term Tax-Free Bond Fund.

Each fund also may 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

23
<PAGE> 119

calculating the total return based on a one-year period, cumulative total return
is calculated from commencement of operations to the end of the fiscal year.

30-Day Yield
<TABLE>
<CAPTION>
<S> <C>
Fund 30-day period ended August 31, 1999

</TABLE>

<TABLE>
<S> <C>
Schwab Short/Intermediate Tax-Free Bond Fund 4.02%

Schwab Long-Term Tax-Free Bond Fund 5.20%
</TABLE>

A 30-day yield is calculated by dividing the net investment income per share
earned during a 30-day period by a fund's share price on the last day of the
period.

30-Day Tax-Equivalent Yield

<TABLE>
<CAPTION>
Fund 30-day period ended August 31, 1999
<S> <C>
Schwab Short/Intermediate Tax-Free Bond Fund 6.66%

Schwab Long-Term Tax-Free Bond Fund 8.61%
</TABLE>

The tax equivalent yield of the funds is calculated by dividing that portion of
the applicable fund's yield (computed as described above) that is tax-exempt by
an amount equal to 1 minus the applicable effective tax rate, and adding the
result to that portion, if any, of the yield of the Fund that is not tax-exempt.
For the funds, the maximum federal marginal rate of 39.6% is normally used.

Tax equivalent effective yields are computed in the same manner as tax
equivalent yields, except that effective yield is substituted for yield in the
calculation.

24
<PAGE> 120
APPENDIX - RATINGS OF INVESTMENT SECURITIES

From time to time, a fund may report the percentage of its assets that fall into
the rating categories set forth below.

BONDS

MOODY'S INVESTORS SERVICE

25
<PAGE> 121
STANDARD & POOR'S CORPORATION

INVESTMENT GRADE

AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.

SPECULATIVE GRADE

26
<PAGE> 122
DUFF & PHELPS CREDIT RATING CO.

AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA+ High credit quality. Protection factors are strong. Risk is modest but MAY
AA- vary slightly from time to time because of economic conditions.

A+ Protection factors are average but adequate. However, risk factors are
A- more variable and greater in periods of economic stress.

BBB+ Below average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during economic
cycles.

B+ Below investment grade and possessing risk that obligations will not be
B met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.

FITCH IBCA, INC.

INVESTMENT GRADE BOND

AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable
events.

AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in
the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated 'F-1+'.

A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.

27
<PAGE> 123
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.

SPECULATIVE GRADE BOND

BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.

B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.

DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS

INVESTMENT GRADE

AAA The highest category; indicates that the ability to repay principal and
interest on a timely basis is very high.

AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.

A The third-highest category; indicates the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.

BBB The lowest investment-grade category; indicates an acceptable capacity to
repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.

NON-INVESTMENT GRADE

BB While not investment grade, the "BB" rating suggests that the likelihood
of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to
adequately service debt obligations.

B Issues rated "B" show a higher degree of uncertainty and therefore greater
likelihood of default than higher-rated issues. Adverse developments could
well negatively affect the payment of interest and principal on a timely
basis.

28
<PAGE> 124
SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS

MOODY'S INVESTORS SERVICE

STANDARD & POOR'S CORPORATION

FITCH IBCA, INC.

COMMERCIAL PAPER

MOODY'S INVESTORS SERVICE

STANDARD & POOR'S CORPORATION

DUFF & PHELPS CREDIT RATING CO.

29
<PAGE> 125
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 IBCA, INC.

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

THOMSON BANKWATCH (TBW)

30
<PAGE> 126

STATEMENT OF ADDITIONAL INFORMATION

SCHWAB INVESTMENTS

SCHWAB SHORT-TERM BOND MARKET INDEX FUND
SCHWAB TOTAL BOND MARKET INDEX FUND(TM)

NOVEMBER 15, 1999

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with a fund's prospectus dated November 15, 1999 (as amended
from time to time).

The funds are a series of Schwab Investments (the trust).

The funds' most recent annual report is a separate document supplied with the
SAI and includes the funds' audited financial statements, which are incorporated
by reference into this SAI.

Prior to November 1, 1997, Schwab Short-Term Bond Market Index Fund was named
Schwab Short/Intermediate Government Bond Index Fund, and Schwab Total Bond
Market Index Fund was named Schwab Long-Term Government Bond Fund.

TABLE OF CONTENTS

Page
<S> <C>
INVESTMENT OBJECTIVE, SECURITIES, RISKS AND LIMITATIONS................... 2
MANAGEMENT OF THE FUNDS................................................... 21
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 23
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 24
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 25
DESCRIPTION OF THE TRUST.................................................. 26
PURCHASE, REDEMPTION AND PRICING OF SHARES................................ 27
TAXATION.................................................................. 28
CALCULATION OF PERFORMANCE DATA........................................... 29
APPENDIX - RATINGS OF INVESTMENT SECURITIES............................... 32
</TABLE>

1
<PAGE> 127
INVESTMENT OBJECTIVE, SECURITIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVE

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.

There is no guarantee a fund will achieve its investment objective.

The indexes are the Lehman Brothers Mutual Fund Short (1-5) Government/Corporate
Index for the Schwab Short-Term Bond Index Fund (the Short-Term Index), and the
Lehman Brothers Aggregate Bond Index for the Schwab Total Bond Market Index Fund
(the Aggregate Bond Index).

The Short-Term Index is a market-capitalization weighted index of
investment-grade debt securities with maturities between one and five years.

The Aggregate Bond Index is a market-weighted index of investment-grade debt
securities with maturities of greater than one year.

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.

INVESTMENT SECURITIES AND RISKS

BANKERS' ACCEPTANCES or notes 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. A fund will invest only in bankers' acceptances of
banks that have capital, surplus and undivided profits in excess of $100
million.

2
<PAGE> 128
BOND SUBSTITUTION is a strategy whereby a fund may, from time to time,
substitute one type of investment-grade bond for another. This means that, as an
example, a fund may have a higher weighting in corporate bonds and a lower
weighting in U.S. Treasury securities than its Index in order to increase
income. This particular substitution - a corporate bond substitution - may
increase a fund's credit risk, although this may be mitigated through increased
diversification in the corporate sector of the bond market.

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

BORROWING may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money. Each fund may borrow money
from banks and make other investments or engage in other transactions
permissible under the 1940 Act which may be considered a borrowing (such as
mortgage dollar rolls and reverse repurchase agreements). However, each fund may
not purchase securities when bank borrowings exceed 5% of a fund's total assets.
Presently, each fund only intends to borrow from banks for temporary purposes.
Each fund will monitor its level of borrowing on an on-going basis. Each fund
will monitor its level of borrowing on an on-going basis.

Each fund may establish lines-of-credit (lines) with certain banks by which it
may borrow funds for temporary or emergency purposes. A borrowing is presumed to
be for temporary or emergency purposes if it is repaid by a fund within 60 days
and is not extended or renewed. Each fund intends to use the lines to meet large
or unexpected redemptions that would otherwise force a fund to liquidate
securities under circumstances which are unfavorable to the fund's remaining
shareholders. Each fund will pay a fee to the bank for using the lines.

CERTIFICATES OF DEPOSIT or time deposits are issued against funds deposited in a
banking institution for a specified period of time at a specified interest rate.
A fund will invest only in certificates of deposit of banks that have capital,
surplus and undivided profits in excess of $100 million.

COMMERCIAL PAPER consists of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but sometimes may be interest bearing.
Commercial paper, which also may be unsecured, is subject to credit risk.

CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure. For example, the automobile industry may have a greater exposure to a
single factor, such as an increase in the price of oil, which may adversely
affect the sale of automobiles and, as a result, the value of the industry's
securities. Based on the primary characteristics of non-U.S. (foreign) banks,
each fund has identified each foreign country as a separate bank industry for
purposes of a fund's concentration policy. Each fund will limit its investments
in securities issued by foreign banks in each country to less than 25% of its
net assets.

Based on the primary characteristics of the various types of asset-backed
securities, for purposes of a fund's concentration policy, the following
asset-backed securities industries have been selected: credit card receivables,
automobile receivables, trade receivables and diversified financial assets.

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Each fund will limit its investments in each such industry to less than 25% of
its net assets.

Debt securities also are subject to the risk that the issuers will not make
timely interest and/or principal payments or fail to make them at all. This is
called credit risk. Corporate debt securities (bonds) tend to have higher credit
risk generally than U.S. government debt securities. Debt securities also may be
subject to price volatility due to market perception of future interest rates,
the creditworthiness of the issuer and general market liquidity (market risk).
Investment-grade debt securities are considered medium- or/and high-quality
securities, although some still possess varying degrees of speculative
characteristics and risks. Debt securities rated below investment-grade are
riskier, but may offer higher yields. These securities are sometimes referred to
as high yield securities or "junk bonds."

See the Appendix for a full description of the various ratings assigned to debt
securities by various nationally recognized statistical rating organizations
(NRSROs).

DELAYED-DELIVERY TRANSACTIONS include purchasing and selling securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to buy or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. When purchasing securities on a delayed-delivery basis, a fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Typically, no interest will accrue to a fund until the security is
delivered. Each fund will segregate appropriate liquid assets to cover its
delayed-delivery purchase obligations. When a fund sells a security on a
delayed-delivery basis, the fund does not participate in further gains or

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losses with respect to that security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, a fund could suffer
losses.

DEPOSITARY RECEIPTS include American or European Depositary Receipts (ADRs or
EDRs), Global Depositary Receipts or Shares (GDRs or GSSs) or other similar
global instruments that are receipts representing ownership of shares of a
foreign-based issuer held in trust by a bank or similar financial institution.
These securities are designed for U.S. and European securities markets as
alternatives to purchasing underlying securities in their corresponding national
markets and currencies. Depositary receipts can be sponsored or unsponsored.
Sponsored depositary receipts are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored depositary
receipts are not contractually obligated to disclose material information in the
United States. Therefore, there may not be a correlation between such
information and the market value of an unsponsored depositary receipt.

Duration is a measure of the expected life of a debt obligation on a present
value basis. Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable bond, the time the principal payments are expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For debt obligations with interest payments occurring
prior to the payment of principal, duration will usually be less than maturity.
In general, all else being equal, the lower the stated or coupon rate of the
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of a fixed income security, the
shorter the duration of the security.

Futures, options, and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions will lengthen the duration of a fund's
portfolio by approximately the same amount of time that holding an equivalent
amount of the underlying securities would.

Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount of time
that selling an equivalent amount of the underlying securities would.

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the frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by duration is mortgage pass-through
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are more critical in determining the securities'
interest rate exposure. Finally, the duration of the debt obligation may vary
over time in response to changes interest rates and other market factors.

FOREIGN SECURITIES involve additional risks, including foreign currency exchange
rate risks, because they are issued by foreign entities, including foreign
governments, banks, corporations or because they are traded principally
overseas. Foreign securities in which a fund may invest include foreign entities
that are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
corporations. In addition, there may be less publicly available information
about foreign entities. Foreign economic, political and legal developments, as
well as fluctuating foreign currency exchange rates and withholding taxes, could
have more dramatic effects on the value of foreign securities. For example,
conditions within and around foreign countries, such as the possibility of
expropriation or confiscatory taxation, political or social instability,
diplomatic developments, change of government or war could affect the value of
foreign investments. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.

Foreign securities typically have less volume and are generally less liquid and
more volatile than securities of U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a fund will endeavor to achieve the most favorable overall
results on portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed companies than in the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. There may be difficulties in obtaining or enforcing judgments
against foreign issuers as well. These factors and others may increase the risks
with respect to the liquidity of a fund, and its ability to meet a large number
of shareholder redemption requests.

Foreign markets also have different clearance and settlement procedures and, in
certain markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of a fund is uninvested and no return is earned
thereon. The inability to make intended security purchases due to settlement
problems could cause a fund to miss attractive investment opportunities. Losses
to a fund arising out of the inability to fulfill a contract to sell such
securities also could result in potential liability for a fund.

Investments in the securities of foreign issuers may be made and held in foreign
currencies. In addition, a fund may hold cash in foreign currencies. These
investments may be affected favorably or unfavorably by changes in currency
rates and in exchange control regulations, and may cause a fund to incur costs
in connection with conversions between various currencies. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange market as well as by political and
economic factors. Changes in the foreign currency exchange rates also may affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities, and net investment income and gains, if any, to be
distributed to shareholders by a fund.

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Among foreign securities in which the funds may invest are Eurodollar Bonds,
which are U.S. dollar denominated bonds issued by foreign issuers payable in
Eurodollars (U.S. dollars held in banks located outside the United States,
primarily Europe), Yankee Bonds, which are U.S. dollar-denominated bonds issued
in the U.S. by foreign banks and corporations, and EuroBonds, which are bonds
denominated in U.S. dollars and usually issued by large underwriting groups
composed of banks, and issuing houses from many countries.

In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the currency of each converting country and the
European Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift from
or to European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of a fund's investments
and/or increase its expenses. While the investment advisor has taken steps to
minimize the impact of the conversion on a fund, it is not possible to know
precisely what impact the conversion will have on a fund, if any, nor is it
possible to eliminate the risks completely.

FORWARD CONTRACTS are sales contracts between a buyer (holding the "long",
position and the seller (holding the "short" position) for an asset with
delivery deferred to a future date. The buyer agrees to pay a fixed price at the
agreed future date and the seller agrees to deliver the asset. The seller hopes
that the market price on the delivery date is less than the agreed upon price,
while the buyer hopes for the contrary. The change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset.

FUTURES CONTRACTS are securities that represent an agreement between two parties
that obligates one party to buy and the other party to sell specific securities
at an agreed-upon price on a stipulated future date. In the case of futures
contracts relating to an index or otherwise not calling for physical delivery at
the close of the transaction, the parties usually agree to deliver the final
cash settlement price of the contract. Each fund may purchase and sell futures
contracts based on securities, securities indices and foreign currencies or any
other futures contracts traded on U.S. exchanges or boards of trade that the
Commodities Future Trading Commission (the "CFTC") licenses and regulates.

Each fund must maintain a small portion of its assets in cash to process
shareholder transactions in and out of it to pay its expenses. In order to
reduce the effect this otherwise uninvested cash would have on its performance a
fund may purchase futures contracts. Such transactions allow a fund's cash
balance to produce a return similar to that of the underlying security or index
on which the futures contract is based. Also, each fund may purchase or sell
futures contracts on a specified foreign currency to "fix" the price in U.S.
dollars of the foreign security it has acquired or sold or expects to acquire or
sell. Each fund may enter into futures contracts for these or other reasons.

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When buying or selling futures contracts, each fund must place a deposit with
its broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and must be in the form of liquid debt instruments, including
cash, cash-equivalents and U.S. government securities. Subsequent payments to
and from the broker, known as "variation margin" may be made daily, if
necessary, as the value of the futures contracts fluctuate. This process is
known as "marking-to-market." The margin amount will be returned to a fund upon
termination of the futures contracts assuming all contractual obligations are
satisfied. Each fund's aggregate initial and variation margin payments required
to establish its futures positions may not exceed 5% of its net assets. Because
margin requirements are normally only a fraction of the amount of the futures
contracts in a given transaction, futures trading can involve a great deal of
leverage. In order to avoid this, a fund will segregate assets in a separate
account in an amount equal to the notional value of its outstanding futures
contracts.

While each fund intends to purchase and sell futures contracts in order to
simulate full investment, there are risks associated with these transactions.
Adverse market movements could cause a fund to experience substantial losses
when buying and selling futures contracts. Of course, barring significant market
distortions, similar results would have been expected if the fund had instead
transacted in the underlying securities directly. There also is the risk of
losing any margin payments held by a broker in the event of its bankruptcy.
Additionally, a fund incurs transaction costs (i.e. brokerage fees) when
engaging in futures trading.

When interest rates are rising or securities prices are falling, a fund may
seek, through the sale of futures contracts, to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising, a
fund, through the purchase of futures contracts, may attempt to secure better
rates or prices than might later be available in the market when they effect
anticipated purchases. Similarly, a fund may sell futures contracts on a
specified currency to protect against a decline in the value of that currency
and its portfolio securities that are denominated in that currency. Each fund
may purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in that currency that a fund has acquired or
expects to acquire.

Futures contracts normally require actual delivery or acquisition of an
underlying security or cash value of an index on the expiration date of the
contract. In most cases, however, the contractual obligation is fulfilled before
the date of the contract by buying or selling, as the case may be, identical
futures contracts. Such offsetting transactions terminate the original contracts
and cancel the obligation to take or make delivery of the underlying securities
or cash. There may not always be a liquid secondary market at the time a fund
seeks to close out a futures position. If a fund is unable to close out its
position and prices move adversely, a fund would have to continue to make daily
cash payments to maintain its margin requirements. If a fund had insufficient
cash to meet these requirements it may have to sell portfolio securities at a
disadvantageous time or incur extra costs by borrowing the cash. Also, a fund
may be required to make or take delivery and incur extra transaction costs
buying or selling the underlying securities. Each fund would seek to reduce the
risks associated with futures transactions by buying and selling futures
contracts that are traded on national exchanges or for which there appears to be
a liquid secondary market.

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an increase in merger, acquisition and leveraged buyout activity. Adverse
economic developments could disrupt the market for high yield securities, and
severely affect the ability of issuers, especially highly-leveraged issuers, to
service their debt obligations or to repay their obligations upon maturity.

Also, the secondary market for high yield securities at times may not be as
liquid as the secondary market for higher-quality debt securities. As a result,
the investment adviser could find it difficult to sell these securities or
experience difficulty in valuing certain high yield securities at certain times.
Prices realized upon the sale of such lower rated securities, under these
circumstances, may be less than the prices at which a fund purchased them.

Thus, high yield securities are more likely to react to developments affecting
interest rates and market and credit risk than are more highly rated securities,
which primarily react to movements in the general level of interest rates. When
economic conditions appear to be deteriorating, medium- to lower-quality debt
securities may decline in value more than higher-quality debt securities due to
heightened concern over credit quality, regardless of prevailing interest rates.
Prices for high yield securities also could be affected by legislative and
regulatory developments. These laws could adversely affect a fund's net asset
value and investment practices, the secondary market value for high yield
securities, the financial condition of issuers of these securities and the value
of outstanding high yield 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.

INDEXING STRATEGIES involve tracking the investments and, therefore, performance
of an index. Each fund normally will invest 65% of its total assets in the
securities of its index. Moreover, each fund will invest so that its portfolio
performs similarly to that of its index. Each fund tries to generally match its
holdings in a particular security to its weight in the index. Each fund will
seek a correlation between its performance and that of its index of 0.90 or
better. A perfect correlation of 1.0 is unlikely as the funds incur operating
and trading expenses unlike their indices. A fund may rebalance its holdings in
order to track its index more closely. In the event its intended correlation is
not achieved, the board of trustees will consider alternative arrangements for a
fund.

INTERNATIONAL BONDS are certain obligations or securities of foreign issuers,
including Eurodollar Bonds, which are U.S. dollar denominated bonds issued by
foreign issuers payable in Eurodollars (U.S. dollars held in banks located
outside the United States, primarily Europe), Yankee Bonds, which are U.S.
dollar-denominated bonds issued in the U.S. by foreign banks and corporations,
and EuroBonds, which are bonds denominated in U.S. dollars and usually issued by
large underwriting groups composed of banks and issuing houses from many
countries. Investments in

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securities issued by foreign issuers, including American Depository Receipts and
securities purchased on foreign securities exchanges, may subject a fund to
additional investment risks, such as adverse political and economic
developments, possible seizure, nationalization or expropriation of foreign
investments, less stringent disclosure requirements, non-U.S. withholding taxes
and the adoption of other foreign governmental restrictions.

Additional risks include less publicly available information, the risk that
companies may not be subject to the accounting, auditing and financial reporting
standards and requirements of U.S. companies, the risk that foreign securities
markets may have less volume and therefore may be less liquid and their prices
more volatile than U.S. securities, and the risk that custodian and transaction
costs may be higher. Foreign issuers of securities or obligations are often
subject to accounting treatment and engage in business practices different from
those respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.

A fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash-equivalents or other appropriate instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) a fund may at any time call the loan and obtain
the return of the securities loaned; (3) a fund will receive any interest or
dividends paid on the loaned securities; and (4) an aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of a
fund, including collateral received from the loan (at market value computed at
the time of the loan.

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"expected life" basis by the investment adviser and securities being hedged with
futures contracts may be deemed to have a longer maturity, in the case of
purchases of future contracts, and a shorter maturity, in the case of sales of
futures contracts, than they would otherwise be deemed to have. In addition, a
security that is subject to redemption at the option of the issuer on a
particular date ("call date"), which is prior to the security's stated maturity,
may be deemed to mature on the call date rather than on its stated maturity
date. The call date of a security will be used to calculate average portfolio
maturity when the investment adviser reasonably anticipates, based upon
information available to it, that the issuer will exercise its right to redeem
the security. The average portfolio maturity of a fund is dollar-weighted based
upon the market value of a fund's securities at the time of the calculation. A
fund may invest in securities with final or effective maturities of any length.

MORTGAGE-BACKED SECURITIES (MBS) and other ASSET-BACKED SECURITIES may be
purchased by a fund. MBS represent participations in mortgage loans, and include
pass-through securities and collateralized mortgage obligations. MBS may be
issued or guaranteed by U.S. government agencies or instrumentalities, such as
the Government National Mortgage Association and the Fannie Mae or Freddie Mac,
or by private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage banks, commercial banks, and special
purpose entities (collectively, "private lenders"). Mortgage-backed securities
issued by private lenders may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any governmental guarantee of the underlying mortgage assets but
with some form of credit enhancement.

Asset-backed securities (ABS) have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in assets such as automobile loans, credit card
receivables, trade receivables, home equity loans (which sometimes are
categorized as MBS) or other financial assets. Therefore, repayment depends
largely on the cash flows generated by the assets backing the securities. The
credit quality of most ABS 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 enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by credit enhancements including letters of
credit, an insurance guarantee, reserve funds and overcollateralization.

The rate of principal payment on MBS and ABS generally depends on the rate of
principal payments received on the underlying assets which in turn may be
affected by a variety of

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economic and other factors. As a result, the price and yield on any MBS or ABS
is difficult to predict with precision and price and yield to maturity may be
more or less than the anticipated yield to maturity. If a fund purchases these
securities at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing the yield to maturity. Conversely,
if a fund purchases these securities at a discount, a prepayment rate that is
faster than expected will increase yield to maturity, while a prepayment rate
that is slower than expected will reduce yield to maturity. Amounts available
for reinvestment by a fund are likely to be greater during a period of declining
interest rates and, as a result, are likely to be reinvested at lower interest
rates than during a period of rising interest rates.

OPTIONS CONTRACTS generally provide the right to buy or sell a security,
commodity, futures contract or foreign currency in exchange for an agreed upon
price. If the right is not exercised after a specified period, the option
expires and the option buyer forfeits the money paid to the option seller.

A call option gives the buyer the right to buy a specified number of shares of a
security at a fixed price on or before a specified date in the future. For this
right, the call option buyer pays the call option seller, commonly called the
call option writer, a fee called a premium. Call option buyers are usually
anticipating that the price of the underlying security will rise above the price
fixed with the call writer, thereby allowing them to profit. If the price of the
underlying security does not rise, the call option buyer's losses are limited to
the premium paid to the call option writer. For call option writers, a rise in
the price of the underlying security will be offset by the premium received from
the call option buyer. If the call option writer does not own the underlying
security, however, the losses that may ensue if the price rises could be
potentially unlimited. If the call option writer owns the underlying security or
commodity, this is called writing a covered call. All call options written by
the portfolios will be covered, which means that the portfolios will own the
securities subject to the option so long as the option is outstanding.

A put option is the opposite of a call option. It gives the buyer the right to
sell a specified number of shares of a security at a fixed price on or before a
specified date in the future. Put option buyers are usually anticipating a
decline in the price of the underlying security, and wish to offset those losses
when selling the security at a later date. All put options a fund writes will be
covered, which means that a fund will deposit with its custodian cash, U.S.
government securities or other high-grade debt securities (i.e., securities
rated in one of the top three categories by Moody's Investor Service ("Moody's")
or Standard & Poor's ("S&P") or, if unrated, determined by the investment
adviser to be of comparable credit quality) with a value at least equal to the
exercise price of the put option.

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The purpose of writing such options is to generate additional income for a fund.
However, in return for the option premium, a fund accepts the risk that it may
be required to purchase the underlying securities at a price in excess of the
securities market value at the time of purchase.

A fund may purchase and write put and call options on any securities in which it
may invest or any securities index based on securities in which it may invest. A
fund may purchase and write such options on securities that are listed on
domestic or foreign securities exchanges or traded in the over-the-counter
market. Like futures contracts, option contracts are rarely exercised. Option
buyers usually sell the option before it expires. Option writers may terminate
their obligations under a written call or put option by purchasing an option
identical to the one it has written. Such purchases are referred to as "closing
purchase transactions." A fund may enter into closing sale transactions in order
to realize gains or minimize losses on options it has purchased or wrote.

An exchange-traded currency option position may be closed out only on an options
exchange that provides a secondary market for an option of the same series.
Although a fund generally will purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option or at any
particular time. If a fund is unable to effect a closing purchase transaction
with respect to options it has written, it will not be able to sell the
underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised. Similarly, if a fund is unable to effect a
closing sale transaction with respect to options it has purchased, it would have
to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.

Reasons for the absence of a liquid secondary market on an exchange include the
following: (1) there may be insufficient trading interest in certain options;
(2) an exchange may impose restrictions on opening transactions or closing
transactions or both; (3) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (4) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or the Options Clearing Corporation (the "OCC")
may not at all times be adequate to handle current trading volume; or (6) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), although outstanding options on that exchange that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.

The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the Securities and Exchange Commission (the "SEC")
changes its position, a fund will treat purchased over-the-counter options and
all assets used to cover written over-the-counter options as illiquid
securities, except that with respect to options written with primary dealers in
U.S. government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to a formula the staff of the SEC approves.

Additional risks are involved with options trading because of the low margin
deposits required and the extremely high degree of leverage that may be involved
in options trading. There may be imperfect correlation between the change in
market value of the securities held a fund and the prices of the options,
possible lack of a liquid secondary markets, and the resulting inability to
close such positions prior to their maturity dates.

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A fund may write or purchase an option only when the market value of that
option, when aggregated with the market value of all other options transactions
made on behalf of a fund, does not exceed 5% of its net assets.

QUALITY OF INVESTMENTS will be principally investment-grade for each fund's
assets. Investment-grade quality securities are rated by at least one NRSRO in
one of the four highest rating categories (within which there may be
sub-categories or gradations indicating relative standing) or have been
determined to be of equivalent quality by the investment adviser pursuant to
procedures adopted by the board of trustees. Sometimes an investment-grade
quality security may be down-graded to a below investment-grade quality rating.
If a security no longer has at least one investment-quality rating from an
NRSRO, the investment adviser would reanalyze the security in light of the
downgrade and determine whether a fund should continue to hold the security.
However, such downgrade would not require the investment adviser to sell the
security on behalf of a fund. Sometimes lower-quality securities may be
downgraded to an even lower quality. If any of a fund's lower-quality securities
were down-graded to below the sixth rating category, the investment adviser will
promptly sell the security on behalf of the fund.

The investment adviser may also elect to purchase high-yield securities for
either fund, subject to an aggregate limit of 5% of the investing fund's assets
and only in circumstances where the investment adviser believes that the credit
quality of the security (or issuer thereof) is reasonably likely to be upgraded
to investment-grade in the foreseeable future. If such an upgrade were to occur
under these circumstances, the value of the security would likely increase,
thereby raising the potential for the investing fund to realize a gain on its
investment and/or track the performance of its index. There is no guarantee that
any such upgrade will occur, however, and all such high-yield securities are
subject to the risks associated with non-investment grade instruments. In order
to limit the funds' exposure in this regard, the investment manager will not
purchase for the funds high-yield securities that are rated (at the time of
purchase) below B or the equivalent by Moody's or S&P. In addition, if a
high-yield security that is held by either fund is downgraded to below B or the
equivalent by Moody's or S&P, the investment adviser will promptly dispose of
the security.

RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. Restricted securities may be considered to be liquid if an
institutional or other market exists for these securities. In making this
determination, a fund, under the direction and supervision of the board of
trustees, will take into account the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). To the
extent a fund invests in restricted securities that are deemed liquid, the
general level of illiquidity in a fund's portfolios may be increased if
qualified institutional buyers become uninterested in purchasing these
securities.

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RISK MANAGEMENT TECHNIQUES used by a fund may include buying and selling futures
and options contracts, entering into swap and wrap agreements and investing in
various types of derivative instruments. A fund may use risk management
techniques, including derivative instruments, for any lawful purpose consistent
with its investment objective, such as hedging or managing risk. Derivative
instruments are commonly defined to include securities or contracts whose values
depend on (or "derive" from) the value of one or more other assets such as
securities, currencies, or commodities. These "other assets" are commonly
referred to as "underlying assets."

A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Options and forward
contracts are considered to be the basic "building blocks" of derivatives. For
example, forward-based derivatives include forward contracts, as well as
exchange-traded futures. Option-based derivatives include privately negotiated,
over-the-counter ("OTC") options (including caps, floors, collars, and options
on forward and swap contracts) and exchange-traded options on futures. Diverse
types of derivatives may be created by combining options or forward contracts in
different ways, and applying these structures to a wide range of underlying
assets.

Risk management strategies include investment techniques designed to facilitate
the sale of portfolio securities, manage the average effective maturity of the
portfolio or create or alter exposure to certain asset classes, such as equity,
other debt or foreign securities.

In addition to the derivative instruments and strategies described in the SAI,
the investment adviser expects to discover additional derivative instruments and
other hedging or risk management techniques. The investment adviser may utilize
these new derivative instruments and techniques to the extent that they are
consistent with a fund's investment objective and permitted by a fund's
investment limitations, operating policies, and applicable regulatory
authorities.

SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by a fund and
those issued by foreign investment companies. Mutual funds are registered
investment companies, which may issue and redeem their shares on a continuous
basis (open-end mutual funds) or may offer a fixed number of shares usually
listed on an exchange (closed-end mutual funds). Mutual funds generally offer
investors the advantages of diversification and professional investment
management, by combining shareholders' money and investing it in various types
of securities, such as stocks, bonds and money market securities. Mutual funds
also make various investments and use certain techniques in order to enhance
their performance. These may include entering into delayed-delivery and
when-issued securities transactions or swap agreements; buying and selling
futures contracts, illiquid and restricted securities and repurchase agreements
and borrowing or lending money and/or portfolio securities. The risks of
investing in mutual funds generally reflect the risks of the securities in which
the mutual funds invest and the investment techniques they may employ. Also,
mutual funds charge fees and incur operating expenses.

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<PAGE> 141
Funds in which a fund also may invest include unregistered or privately-placed
funds, such as hedge funds and off-shore funds, and unit investment trusts.
Hedge funds and off-shore funds are not registered with the SEC, and therefore
are largely exempt from the regulatory requirements that apply to registered
investment companies (mutual funds). As a result, these funds may have greater
ability to make investments or use investment techniques that offer a higher
degree of investment return, such as leveraging, which also may subject fund
assets to substantial risk to the investment principal. These funds, while not
regulated by the SEC like mutual funds, may be indirectly supervised by the
sources of their assets, which tend to be commercial and investment banks and
other financial institutions. Investments in these funds also may be more
difficult to sell, which could cause losses to a fund. For example, hedge funds
typically require investors to keep their investment in a hedge fund for some
period of time, such as one month. This means investors would not be able to
sell their shares of a hedge fund until such time had past.

SINKING FUNDS may be established by bond issuer's to set aside a certain amount
of money to cover timely repayment of bondholders' principal raised through 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 bond's sinking fund provision.
This call provision will allow bonds to be prepaid or called prior to a bond's
maturity. The likelihood of this occurring is during periods of falling interest
rates.

STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While risks associated with stripped securities
are similar to other money market 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.

SWAP AGREEMENTS can be structured to increase or decrease a fund's exposure to
long- or short-term interest rates, mortgage securities, corporate borrowing
rates or other conditions, such as security prices or inflation rates. For
example, if a fund agreed to pay a fixed rate in exchange for a floating rate
while holding fixed-rate bonds, the swap would tend to decrease the fund's
exposure to long-term interest rates. Swap agreements tend to increase or
decrease the overall volatility of a fund's investments and its share price and
yield. Changes in interest rates, or other factors determining the amount of
payments due to and from a fund, can be the most significant factors in the
performance of a swap agreement. If a swap agreement calls for payments from a
fund, the fund must be prepared to make such payments when they are due. In
order to help minimize risks, a fund will segregate appropriate assets for any
accrued but unpaid net amounts owed under the terms of a swap agreement entered
into on a net basis. All other swap agreements will require a fund to segregate
appropriate assets in the amount of the accrued amounts owed under the swap. A
fund could sustain losses if a counterparty does not perform as agreed under the
terms of the swap. A fund will enter into swap agreements with counterparties
deemed creditworthy by the investment adviser.

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<PAGE> 142
whose securities are supported by the full faith and credit of the United
States; the Federal Home Loan Banks and the Tennessee Valley Authority, whose
securities are supported by the right to borrow from the U.S. Treasury; Freddie
Mac (formerly known as the Federal Home Loan Mortgage Association or "FHLMC")
and Fannie Mae (formerly known as the Federal National Mortgage Association or
"FNMA"), or the Student Loan Marketing Association ("Sallie Mae" or "SLMA"),
whose securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or instrumentality.

WRAP AGREEMENTS may be entered into by a fund with insurance companies, banks or
other financial institutions (wrapper providers). A wrap agreement typically
obligates the wrapper provider to maintain the value of the assets covered under
the agreement (covered assets) up to a specified maximum dollar amount upon the
occurrence of certain specified events. The value is pre-determined using the
purchase price of the securities plus interest at a specified rate minus an
adjustment for any defaulted securities. The specified interest rate may be
adjusted periodically under the terms of the agreement. While the rate typically
will reflect movements in the market rates of interest, it may at times be less
or more than the actual rate or income earned on the covered assets. The rate
also can be impacted by defaulted securities and by purchase and redemption
levels in a fund. A fund also pays a fee under the agreement, which reduces the
rate as well.

Wrap agreements may be used as a risk management technique intended to help
minimize fluctuations in a fund's NAV. However, a fund's NAV will typically
fluctuate at least minimally, and may fluctuate more at times when interest
rates are fluctuating. Additionally, wrap agreements do not protect against
losses a fund may incur if the issuers of portfolio securities do not make
timely payments of interest and/or principal. A wrap agreement provider also
could default on its obligations under the agreement. There is no active trading
market for wrap agreements and none is expected to develop. Therefore, wrap
agreements are considered illiquid investments. There is no guarantee that a
fund will be able to purchase any wrap agreements or replace ones that
defaulted. Wrap agreements are valued using procedures adopted by the board

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<PAGE> 143
of trustees. There are risks that the value of a wrap agreement may not be
sufficient to minimize the fluctuations in a fund's NAV. All of these factors
might result in a decline in the value of a fund's shares.

Because each fund intends to track an index rather than focus on the
fundamentals of the underlying issuers, the investment adviser generally will
not take into account the extent to which an issuer has prepared or is preparing
for the year 2000 problem when managing a fund's portfolio. It is possible that
a fund's portfolio and performance may be materially affected by an issuer's
year 2000 related problems.

INVESTMENT LIMITATIONS

The following investment limitations may be changed only by vote of a majority
of each fund's shareholders.

EACH FUND MAY:

1) Lend or borrow money to the extent permitted by the Investment Company
Act of 1940 or rule 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 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.

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<PAGE> 144
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.

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 DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE POLICIES AND RESTRICTIONS.

Concentration. The SEC has presently defined concentration as investing 25% or
more of an investment company's net assets in an industry or group of
industries, with certain exceptions.

Borrowing. The 1940 Act presently allows a fund to borrow from any bank
(including pledging, mortgaging or hypothecating assets) in an amount up to 33
1/3% of its total assets (not including temporary borrowings not in excess of 5%
of its total assets).

Lending. Under the 1940 Act, a fund may only make loans if expressly permitted
by its investment policies. Each fund's non-fundamental investment policy on
lending is set forth below.

Underwriting. Under the 1940 Act, underwriting securities involves a fund
purchasing securities directly from an issuer for the purpose of selling
(distributing) them or participating in any such activity either directly or
indirectly. Under the 1940 Act, a diversified fund may not make any commitment
as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the
outstanding voting securities, exceeds 25% of the value of its total assets.

Senior Securities. Senior securities may include any obligation or instrument
issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds
from issuing senior securities, although it provides allowances for certain
borrowings and certain other investments, such as short sales, reverse
repurchase agreements, firm commitment agreements and standby commitments, with
appropriate segregation of 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.

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<PAGE> 145
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.

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 (1) 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
(2) 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 each fund will
not purchase securities while borrowings represent more than 5% of its
total assets.

11) Pledge, mortgage or 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.

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<PAGE> 146

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) Purchase or sell commodities or real estate, including interests in
real estate limited partnerships, provided that each fund may (1)
purchase securities of companies that deal in real estate or interests
therein, and (2) purchase or sell futures contracts, options contracts,
equity index participations and index participations contracts.

MANAGEMENT OF THE FUNDS

<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
OF BIRTH THE TRUST
- --------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Co-Chief Executive Officer and
July 29, 1937 Director, The Charles Schwab Corporation;
Chairman, Chief Executive Officer and Director,
Charles Schwab Holdings, Inc.; Chairman and Director,
Charles Schwab & Co., Inc., Charles Schwab Investment
Management, Inc., The Charles Schwab Trust Company
and Schwab Retirement Plan Services, Inc.; 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).

STEVEN L. SCHEID* President and Trustee Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and
Enterprise President - Financial Products and
Services, Charles Schwab & Co., Inc.; Chief Executive
Officer, Chief Financial Officer and Director,
Charles Schwab Investment Management, Inc. From 1994
to 1996, Mr. Scheid was Executive Vice President of
Finance for First Interstate Bancorp and Principal
Financial Officer from 1995 to 1996. Prior to 1994,
Mr. Scheid was Chief Financial Officer, First
Interstate Bank of Texas.
</TABLE>

- ----------------
* This trustee is an "interested person" of the trust.
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<PAGE> 147

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

DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments) and Chairman and Chief Executive
Officer of North American Trust (real estate
investment trust).

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

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Financial Officer 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.

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 Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>

- ----------------
* This trustee is an "interested person" of the trust.

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<PAGE> 148
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.

<TABLE>
<CAPTION>
($) Pension or ($)
Aggregate Retirement Total
Name of Trustee Compensation Benefits Accrued Compensation
from each Fund 1 as Part of Fund from Fund
Expenses Complex 2
Short- Total
Term Bond
Bond Market
- ---------------------------------- ------ ------ ------------------ ---------------
<S> <C> <C> <C> <C>
Charles R. Schwab 0 0 N/A 0
Steven L. Scheid 0 0 N/A 0
William J. Klipp 0 0 N/A 0
Donald F. Dorward $2,139 $2,475 N/A $118,150
Robert G. Holmes $2,139 $2,475 N/A $118,150
Donald R. Stephens $2,139 $2,475 N/A $118,150
Michael W. Wilsey $1,982 $2,295 N/A $109,450
</TABLE>

1 For the fiscal year ended August 31, 1999.

2 Unless otherwise stated, information is for the fund complex, which included
40 funds as of August 31, 1999.

DEFERRED COMPENSATION PLAN

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of October 20, 1999, the officers and trustees of Schwab Total Bond Market
Index Fund, as a group owned of record or beneficially less than 1% of the
outstanding voting securities of the fund.

As of October 20, 1999, the officers and trustees of Schwab Short-Term Bond
Market Index Fund owned of record or beneficially less than 1% of the
outstanding voting securities of the fund, excluding Charles R. Schwab as
reported below.

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<PAGE> 149

As of October 15, 1999, Charles R. Schwab, 101 Montgomery Street, San Francisco
CA 94119 directly or beneficially owned, 10.8% of shares of the Schwab
Short-Term Bond Market Index Fund. As of the same date, Market Track Growth II
Portfolio, Market Track Growth Portfolio, Market Track Balanced Portfolio and
Market Track Conservative Portfolio, 101 Montgomery Street, San Francisco, CA
94119, in the aggregate, directly or beneficially owned 57.9% of the Schwab
Total Bond Market Index Fund.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

First $500 million - 0.30%
More than $500 million - 0.22%

For the fiscal years ended August 31, 1997, 1998 and 1999, the investment
advisory fees incurred by the Schwab Short-Term Bond Market Index Fund were
$295,000 (fees were reduced by $234,000), $25,000 (fees were reduced by
$561,000) and $0 (fees were reduced by $760,000), respectively.

For the fiscal years ended August 31, 1997, 1998 and 1999, the investment
advisory fees incurred by the Schwab Total Bond Market Index Fund, were $0 (fees
were reduced by $89,000), $0 (fees were reduced by $580,000) and $76,000 (fees
were reduced by $1,498,000), respectively.

The investment adviser and Schwab have voluntarily guaranteed that, through at
least October 31, 2000, total operating expenses of the Schwab Short-Term Bond
Market Index Fund and Schwab Total Bond Market Index Fund will not exceed 0.35%,
of each fund's average daily net assets.

DISTRIBUTOR

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<PAGE> 150
offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement.

SHAREHOLDER SERVICES AND TRANSFER AGENT

CUSTODIAN AND FUND ACCOUNTANT

PFPC Trust Company, 103 Bellevue Parkway, Wilmington DE 19809, serves as
custodian for the funds and PFPC, Inc., located at the same address, serves as
fund accountant.

The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The accountant maintains all books and records
related to each fund's transactions.

INDEPENDENT ACCOUNTANT

The funds' independent accountant, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trust and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
the trust engages them to do so. Their address is 333 Market Street, San
Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ending August 31, 1999, will be included in the fund's annual report that
is supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

The portfolio turnover rates for the Schwab Total Bond Market Index Fund for the
fiscal years ended August 31, 1998 and 1999 were 285% and 174%, respectively.
The portfolio turnover rates for the Schwab Short-Term Bond Index Fund for the
fiscal years ended August 31, 1998 and 1999 were 128% and 195%, respectively.

25
<PAGE> 151

The funds experienced higher turnover rates during fiscal year ended August 31,
1998 due to each portfolio being restructured to reflect its new investment
strategy.

PORTFOLIO TRANSACTIONS

The funds paid no brokerage commissions in the last three fiscal years.

DESCRIPTION OF THE TRUST

Each fund is a series of Schwab Investments. Schwab Investments was organized
under Massachusetts' law on October 26, 1990.

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<PAGE> 152
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. There is a remote possibility
that a fund could become liable for a misstatement in the prospectus or SAI
about another fund.

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE FUNDS

PRICING OF SHARES

27
<PAGE> 153
time a price is furnished by a service and the time a fund calculates its share
price materially affect the furnished price. The board of trustees regularly
reviews fair values assigned to portfolio securities under these circumstances
and also when no prices from approved pricing services are available.

TAXATION

FEDERAL TAX INFORMATION FOR THE FUNDS

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

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<PAGE> 154
Each 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." Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.

CALCULATION OF PERFORMANCE DATA

<TABLE>
<CAPTION>
Average Annual Total Average Annual Total Average Annual Total
Return for 1 year Return for 5 years Return from commencement
ended August 31, 1999 ended August 31, 1999 of operations to
August 31, 1999*
<S> <C> <C> <C>
Schwab Short-Term Bond Fund 2.66% 5.63% 5.58%

Schwab Total Bond Market 0.14% 7.36% 5.99%
Index Fund
</TABLE>

* November 5, 1991 for Schwab Short-Term Bond Market Index Fund and March 5,
1993 for the Schwab Total Bond Market Index Fund.

29
<PAGE> 155

<TABLE>
<CAPTION>
Fund Cumulative Total Return as of August 31, 1999*
<S> <C>
Schwab Short-Term Bond Index Fund 52.89%

Schwab Total Bond Market Index Fund 45.94%
</TABLE>

* November 5, 1991 for Schwab Short-Term Bond Market Index Fund and March 5,
1993 for the Schwab Total Bond Market Index Fund.

A 30-day yield is calculated by dividing the net investment income per share
earned during a 30-day period by a fund's share price on the last day of the
period.
<TABLE>
<CAPTION>
Fund 30-day period ended August 31, 1999
<S> <C>
Schwab Short-Term Bond Index Fund 5.71%

Schwab Total Bond Market Index Fund 6.25%
</TABLE>

COMPARATIVE INDEX 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 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 tables illustrate the historical total return of securities
comprising the indexes beginning calendar year end December 31, 1989 through
calendar end December 30, 1998. This historical information is not indicative of
any future trend of the funds or the particular market sectors that the Indexes
represent.

DATE AGGREGATE BOND INDEX GOVERNMENT/CORPORATE INDEX
<S> <C> <C>
Dec. 31, 1989 14.53 11.70
Dec. 31, 1990 8.96 9.69
Dec. 31, 1991 16.00 13.14
Dec. 31, 1992 7.40 6.83
Dec. 31, 1993 9.75 7.10
Dec. 31, 1994 -2.92 -0.72
</TABLE>

30
<PAGE> 156

<TABLE>

31
<PAGE> 157
APPENDIX - RATINGS OF INVESTMENT SECURITIES

From time to time, a fund may report the percentage of its assets that fall into
the rating categories set forth below.

BONDS

MOODY'S INVESTORS SERVICE

STANDARD & POOR'S CORPORATION

INVESTMENT GRADE

AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.

32
<PAGE> 158
A Debt rated 'A' has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

SPECULATIVE GRADE

DUFF & PHELPS CREDIT RATING CO.

AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA- High credit quality. Protection factors are strong. Risk is modest but
AA- may vary slightly from time to time because of economic conditions.

A+ Protection factors are average but adequate. However, risk factors are
A- more variable and greater in periods of economic stress.

BBB+ Below average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during
economic cycles.

BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate
B- according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.

B+ Below investment grade and possessing risk that obligations will not be
met when due.

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<PAGE> 159
B Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into
a higher or lower rating grade.

FITCH IBCA, INC.

INVESTMENT GRADE BOND

SPECULATIVE GRADE BOND

DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS

INVESTMENT GRADE

AAA The highest category; indicates that the ability to repay principal and
interest on a timely basis is very high.

34
<PAGE> 160
AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.

NON-INVESTMENT GRADE

SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS

MOODY'S INVESTORS SERVICE

STANDARD & POOR'S CORPORATION

FITCH IBCA, INC.

35
<PAGE> 161
COMMERCIAL PAPER

MOODY'S INVESTORS SERVICE

STANDARD & POOR'S CORPORATION

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 IBCA, INC.

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

THOMSON BANKWATCH (TBW)

36
<PAGE> 162
PART C
OTHER INFORMATION
SCHWAB INVESTMENTS

Item 23. Exhibits.
<TABLE>
<S> <C> <C> <C>
(a) Articles of Incorporation Agreement and Declaration of Trust, dated October 26, 1990, was
electronically filed and is incorporated by reference to Exhibit 1 of
Post-Effective Amendment No. 22 to Registrant's Registration Statement
on Form N-1A, filed on December 30, 1997.

(b) By-Laws Amended and Restated By-Laws were electronically filed and are
incorporated by reference to Exhibit 2 of Post-Effective Amendment No.
22 to Registrant's Registration Statement on Form N-1A, filed on
December 30, 1997.

(c) Instruments Defining Rights (i) Article III, Section 5, Article V, Article VI, Article VIII, Section 4
of Security Holders and Article IX, Sections 1, 5 and 7 of the Agreement and Declaration of
Trust were filed and are incorporated by reference to Exhibit 1 of
Post-Effective Amendment No. 22 to Registrant's Registration Statement
on Form N-1A, filed on December 30, 1997.

(ii) Article 9, Article 10, Section 6, and Article 11 of the Amended and
Restated By-Laws were filed and are incorporated by reference to
Exhibit 2 of Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A filed on December 30, 1997.

(d) Investment Advisory Contracts (i) Investment Advisory and Administration Agreement between Registrant and
Charles Schwab Investment Management, Inc. (the "Investment Manager")
and Schedules B and C were electronically filed and are incorporated by
reference to Exhibit 5(a) of Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A, filed on December 30,
1997.

(ii) Amended Schedules A and D to Investment Advisory and Administration
Agreement referred to at Exhibit (d)(i) above was electronically filed
and is incorporated by reference to Exhibit (d) (ii) of Post-Effective
Amendment No. 29 to Registrant's Registration Statement on Form N-1A,
filed on July 21, 1999.
</TABLE>
<PAGE> 163
<TABLE>
<S> <C> <C> <C>
(e) Underwriting Contracts (i) Distribution Agreement between Registrant and Charles Schwab & Co.,
Inc. ("Schwab") was electronically filed and is incorporated by
reference to Exhibit 6 of Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A, filed on December 30,
1997.

(ii) Amended Schedule A to the Distribution Agreement was electronically
filed and is incorporated by reference to Exhibit (e) (ii) of
Post-Effective Amendment No. 29 to Registrant's Registration Statement
on Form N-1A, on July 21, 1999.

(f) Bonus or Profit Sharing Inapplicable.
Contracts

(g) Custodian Agreements (i) Custodian Services Agreement between Registrant and PNC Bank, National
Association (formerly Provident National Bank) was electronically filed
and is incorporated by reference to Exhibit 8(a) of Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form N-1A,
filed on December 30, 1997.

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

(iii) Amendment No. 2 to Custodian Services Agreement referred to at Exhibit
8(a) above was filed and is incorporated by reference to Exhibit 8(c)
of Post-Effective Amendment No.14 to Registrant's Registration
Statement on Form N-1A, filed on December 30, 1996.

(iv) Amended Schedule A to the Custodian Services Agreement referred to at
Exhibit 8(a) above was electronically filed by reference to Exhibit
(g)(iv) of Post-Effective Amendment No. 29 to Registrant's Registration
Statement on Form N-1A , filed on July 21, 1999.

(v) Transfer Agency Agreement between the Registrant and Schwab and
Schedule B were electronically filed and are incorporated by reference
to Exhibit 8(e) of Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A, filed on December 30, 1997.
</TABLE>
<PAGE> 164
<TABLE>
<S> <C> <C> <C>
(vi) Amended Schedules A and C to the Transfer Agency Agreement referred to
at Exhibit 8(e) above were electronically filed and are incorporated by
reference to Exhibit (g)(vi) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form 1-1A, filed on July 21,
1999.

(vii) Shareholder Service Agreement between the Registrant and Schwab and
Schedule B were electronically filed and are incorporated by reference
to Exhibit 8(g) of Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A, filed on December 30, 1997.

(viii) Schedules A and C to the Shareholder Service Agreement between the
Registrant and Schwab referenced at Exhibit (g)(vii) above were
electronically filed and are incorporated by reference to Exhibit
(g)(viii) of Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed on July 21, 1999.

(ix) Accounting Services Agreement between Registrant and Provident
Financial Processing Corporation was electronically filed and is
incorporated by reference to Exhibit 8(i) of Post-Effective Amendment
No. 22 to Registrant's Registration Statement on Form N-1A filed on
December 30, 1997.

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

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

(xii) Amended Schedule A to the Accounting Services Agreement referred to at
Exhibit 8(xiii) above was electronically filed and is incorporated by
reference to Exhibit (g)(xii) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A, filed on July 21,
1999.
</TABLE>
<PAGE> 165
<TABLE>
<S> <C> <C> <C>
(xiii) Amended Custodian Services Fee Agreement dated November 1, 1998 by and
between the Registrant and PNC Bank, National Association, is
incorporated herein by reference to Exhibit (g)(xii) of Post-Effective
Amendment No. 27 to Registrant's Registration Statement on Form N-1A,
electronically filed on December 30, 1998.

(xiv) Schedule A to the Custodian Services Fee Agreement between the
registrant and PNC Bank, National Association and PFPC, Inc. was
electronically filed and is incorporated by reference to Exhibit
(g)(xiv) of Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed on July 21, 1999.

(xv) Accounting Services Agreement with SEI Fund Resources dated April 1,
1998, is incorporated herein by reference to Exhibit g(xiii) of
Post-Effective Amendment No. 27 to Registrant's Registration Statement
on Form N-1A, electronically filed on December 30, 1998.

(xvi) Amended Schedule A of the Accounting Services Agreement between the
Registrant and SEI Fund Resources was electronically filed and is
incorporated by reference to Exhibit (g)(xvi) of Post-Effective
Amendment No. 29 to Registrant's Registration Statement on Form N-1A,
filed on July 21, 1999.

(xvii) Amendment No. 1 to the Accounting Services Agreement dated December 17,
1998, by and between Schwab Capital Trust, Schwab Annuity Portfolios,
Schwab Investments and SEI Fund Resources was electronically filed and
is incorporated by reference to exhibit (g)(xvii) of Post-Effective
Amendment No. 29 to Registrant's Registration Statement on Form N-1A,
filed on July 21, 1999.

(h) Other Material Contracts Inapplicable.

(i) Legal Opinion Opinion of Counsel is electronically filed herein as Exhibit (i).

(j) Other Opinions Auditors Consent is electronically filed herein as Exhibit (j).

(k) Omitted Financial Statements Inapplicable.

(l) Initial Capital Agreement (i) Purchase Agreement relating to shares of the Schwab 1000 Fund was
electronically filed and incorporated by reference to Exhibit (l)(i) of
Post-Effective Amendment No. 29 to Registrant's Registration Statement
on Form N-1A, filed on July 21, 1999.
</TABLE>
<PAGE> 166

<TABLE>
<S> <C> <C> <C>
(ii) Purchase Agreement relating to shares of the Schwab Short-Term Bond
Market Index Fund (formerly Schwab Short/Intermediate Government Bond
Fund) was electronically filed and incorporated by reference to Exhibit
(l)(ii) of Post-Effective Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, filed on July 21, 1999.

(iii) Purchase Agreement relating to shares of the Schwab California
Long-Term Tax-Free Bond Fund (formerly Schwab California Tax Free Bond
Fund) was electronically filed and is incorporated by reference to
Exhibit (l)(iii) of Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed on July 21, 1999.

(iv) Purchase Agreement relating to shares of the Schwab Long-Term Tax-Free
Bond Fund (formerly Schwab National Tax Free Bond Fund) was
electronically filed and is incorporated by reference to Exhibit
(l)(iv) of Post-Effective Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, filed on July 21, 1999.

(v) Purchase Agreement relating to shares of the Schwab Short/Intermediate
Tax-Free Bond Fund, Schwab California Short/Intermediate Tax-Free Bond
Fund and Schwab Total Bond Market Index Fund (formerly, Schwab
Long-Term Government Bond Fund) was filed and is incorporated by
reference to Exhibit 13 to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A filed on December 30,
1997.

(vi) Purchase Agreement relating to shares of the Schwab Yield Plus Fund was
electronically filed and is incorporated by reference to Exhibit
(l)(vi) of Post-Effective Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, filed on July 29, 1999.

(m) Rule 12b-1 Plan Inapplicable.

(n) Financial Data Schedule (i) Financial Data Schedule for Schwab Short-Term Bond Market Index Fund
(formerly Schwab Short/Intermediate Government Bond Fund) is
electronically filed herein as Exhibit (n)(i).

(ii) Financial Data Schedule for Schwab Total Bond Market Index Fund
(formerly Schwab Long-Term Government Bond Fund) Fund is electronically
filed herein as Exhibit (n)(ii).

(iii) Financial Data Schedule for Schwab Short/Intermediate Tax-Free Bond
Fund is electronically filed herein as Exhibit (n)(iii).
</TABLE>

<PAGE> 167

<TABLE>
<S> <C> <C> <C>
(iv) Financial Data Schedule for Schwab Long-Term Tax-Free Bond Fund is
electronically filed herein as Exhibit (n)(iv).

(v) Financial Data Schedule for Schwab California Short/Intermediate
Tax-Free Bond Fund is electronically filed herein as Exhibit (n)(v).

(vi) Financial Data Schedule for Schwab California Long-Term Tax-Free Bond
Fund was filed and is incorporated by reference to Exhibit is
electronically filed herein as Exhibit (n)(vi).

(o) Rule 18f-3 Plan Registrant's Amended and Restated Multiple Class Plan for Investor and
Select Shares of Schwab 1000 Fund(R)and Schwab YieldPlus Fund(TM)was
electronically filed and is incorporated by reference to Exhibit (o)(i)
of Post-Effective Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, filed on July 29, 1999.
</TABLE>

Item 24. 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.

Item 25. 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
<PAGE> 168
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.

Item 26. Business and Other Connections of Investment Adviser

Registrant's Investment Manager, Charles Schwab Investment Management, Inc., a
Delaware corporation, organized in October 1989 to serve as Investment Manager
to Registrant, also serves as the Investment Manager to The Charles Schwab
Family of Funds, 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, The Charles Schwab Family of Funds,
Schwab Capital Trust, Schwab Annuity Portfolios and any other investment
companies that Schwab may sponsor in the future as well as provider of advisory
services to The Schwab Fund for Charitable Giving and to Charles Schwab Asset
Management (Ireland) Limited.

The business, profession, vocation or employment of a substantial nature in
which each director and/or senior or executive officer of the Investment Manager
(CSIM) and/or Schwab & Co. Inc. (principal underwriter) is or has been engaged
during the past two fiscal years 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, Co-Chief Executive
Officer and Director

Charles Schwab Investment Management, Inc. Chairman and Director

The Charles Schwab Trust Company Chairman and Director

Mayer & Schweitzer, Inc. Chairman and Director until
January 1999

Schwab Retirement Plan Services, Inc. Chairman and Director until
January 1999

Charles Schwab Limited Chief Executive Officer

Performance Technologies, Inc. Chairman and Director until
January 1999

TrustMark, Inc. Chairman and Director until
January 1999
</TABLE>
<PAGE> 169

Transamerica Corporation Director

AirTouch Communications Director

Siebel Systems Director

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

The Charles Schwab Corporation President, Co-Chief Executive
Officer and Director

Schwab Retirement Plan Services, Inc. Director until January 1999

Charles Schwab Limited Director until January 1999

Charles Schwab Investment Management, Inc. Director

Mayer & Schweitzer, Inc. Director until January 1999

Performance Technologies, Inc. Director until January 1999

TrustMark, Inc. Director until January 1999

Steven L. Scheid Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President and Trustee President - Financial Products
and Services

The Charles Schwab Corporation Executive Vice President and
Chief Financial Officer

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

The Charles Schwab Trust Company Director until July 1998

Charles Schwab Limited Finance Officer

Schwab Retirement Plan Services, Inc. Director until January 1999

Performance Technologies, Inc. Director until January 1999

Mayer & Schweitzer, Inc. Director until January 1999

Charles Schwab Asset Management (Ireland) Director
Limited
</TABLE>

<PAGE> 170

Name and Position
with Registrant Name of Company Capacity
- ----------------------------- -------------------------------------------- ---------------------------------
<S> <C> <C>
Willie C. Bogan The Charles Schwab Corporation Assistant Corporate Secretary

Charles Schwab & Co., Inc. Vice President and Assistant
Corporate Secretary

Charles Schwab Investment Management, Inc. Corporate Secretary

Jeremiah H. Chafkin Charles Schwab & Co., Inc. Executive Vice President -
SchwabFunds
Charles Schwab Investment Management, Inc. Executive Vice President and Chief
Operating Officer

Karen W. Chang Charles Schwab & Co., Inc. Enterprise President - General
Investor Services

The Charles Schwab Corporation Executive Vice President

John P. Coghlan Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President - Retirement Plan
Services and Services to
Investment Managers

The Charles Schwab Corporation Executive Vice President

The Charles Schwab Trust Company President, Chief Executive Officer
and Director

Schwab Retirement Plan Services, Inc. Director

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

Linnet F. Deily Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President - Financial Products &
Services

The Charles Schwab Corporation Executive Vice President

Christopher V. Dodds Charles Schwab & Co., Inc. Executive Vice President and Chief
Financial Officer

The Charles Schwab Corporation Executive Vice President and
Controller
</TABLE>

<PAGE> 171

Name and Position
with Registrant Name of Company Capacity
- ----------------------------- -------------------------------------------- ---------------------------------
<S> <C> <C>
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President -
Corporate Oversight and Corporate
Secretary

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

Wayne W. Fieldsa Charles Schwab & Co., Inc. Enterprise President - Brokerage
Operations

Lon Gorman Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President - Capital Markets and
Trading

The Charles Schwab Corporation Executive Vice President

James M. Hackley Charles Schwab & Co., Inc. Executive Vice President - Retail
Client Services

Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President - Mutual
Fund Operations

Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and Chief
Strategy Officer

Charles Schwab & Co., Inc. Executive Vice President and Chief
Strategy Officer

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

The Charles Schwab Corporation Executive Vice President and Chief
Information Officer

Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President - Retail
Client Services

The Charles Schwab Corporation Executive Vice President

Frederick E. Matteson Charles Schwab & Co., Inc. Executive Vice President - Schwab
Technology Services

John P. McGonigle Charles Schwab & Co., Inc. Executive Vice President - Mutual
</TABLE>

Name and Position
with Registrant Name of Company Capacity
- ----------------------------- -------------------------------------------- ---------------------------------
<S> <C> <C>
Geoffrey Penney Charles Schwab & Co., Inc. Executive Vice President -
Financial Products and
International Technology

George Rich Charles Schwab & Co., Inc. Executive Vice President - Human
Resources

Gideon Sasson Charles Schwab & Co., Inc. Enterprise President - Electronic
Brokerage

The Charles Schwab Corporation Executive Vice President

Elizabeth Sawi Charles Schwab & Co., Inc. Executive Vice President and Chief
Administrative Officer

Leonard Short Charles Schwab & Co., Inc. Executive Vice President - CRS
Advertising and Branch Management

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

Item 27. 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 26(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 28. 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; 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, PFPC Trust Company, 103 Bellevue Parkway,
Wilmington, DE 19809; Registrant's fund accountants, PFPC, Inc., 400 Bellevue
Parkway, Wilmington, Delaware 19809 or SEI Fund Resources, Oaks, Pennsylvania;
or Ropes & Gray, 1301 K Street, N.W., Suite 800 East, Washington, District of
Columbia, 20005.
<PAGE> 173
Item 29. Management Services.

Not applicable.

Item 30. Undertakings.

Not applicable.
<PAGE> 174
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 certifies that it meets all of the requirements for the effectiveness
of this Registration Statement pursuant to Rule 485(b) under the 1933 Act and
has duly caused this Post Effective Amendment No. 31 to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on the 12th day of November, 1999.

SCHWAB INVESTMENTS
Registrant

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

Pursuant to the requirements of the 1933 Act, this
Post-Effective Amendment No. 31 to Registrant's Registration Statement on Form
N-1A has been signed below by the following persons in the capacities indicated
this 12th day of November, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- ------------------------------
Charles R. Schwab

Steve Scheid* President and Trustee
- ------------------------------
Steve Scheid

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

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/ John H. Grady, Jr.
------------------------------
John H. Grady, Jr., Attorney-in-Fact
pursuant to Powers of Attorney
</TABLE>
<PAGE> 175
EXHIBIT INDEX

EXHIBITS DESCRIPTION

(i) Legal Opinion Opinion of Counsel is electronically filed
herein as Exhibit (i).

(j) Other Opinions Auditors Consent is electronically filed
herein as Exhibit (j).

(n) Financial Data Schedule (i) Financial Data Schedule for Schwab
Short-Term Bond Market Index Fund (formerly
Schwab Short/Intermediate Government Bond
Fund) is electronically filed herein as
Exhibit (n)(1).

(ii) Financial Data Schedule for Schwab Total
Bond Market Index Fund (formerly Schwab
Long-Term Government Bond Fund) Fund is
electronically filed herein as
Exhibit (n)(2).

(iii) Financial Data Schedule for Schwab
Short/Intermediate Tax-Free Bond Fund is
electronically filed herein as
Exhibit (n)(3).

(iv) Financial Data Schedule for Schwab Long-Term
Tax-Free Bond Fund is electronically filed
herein as Exhibit (n)(4).

(v) Financial Data Schedule for Schwab
California Short/Intermediate Tax-Free Bond
Fund is electronically filed herein as
Exhibit (n)(5).

(vi) Financial Data Schedule for Schwab
California Long-Term Tax-Free Bond Fund was
filed and is incorporated by reference to
Exhibit is electronically filed herein as
Exhibit (n)(6).

<PAGE> 1
Exhibit (i)

[Letterhead of Morgan, Lewis & Bockius LLP]
November 12, 1999

Schwab Investments
101 Montgomery Street
San Francisco, CA 94104

Re: Opinion of Counsel regarding Post-Effective Amendment No. 31 to the
Registration Statement filed on Form N-1A under the Securities Act of
1933 (File No. 33-37459).

Ladies and Gentlemen:

We have acted as counsel to Schwab Investments, a Massachusetts
business trust (the "Trust"), in connection with the above-referenced
Registration Statement on Form N-1A (as amended, the "Registration Statement")
which relates to the Trust's shares of beneficial interest, par value $.00001
per share (collectively, the "Shares") of the Schwab California Long-Term
Tax-Free Bond Fund, Schwab California Short/Intermediate Tax-Free Bond Fund,
Schwab Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond
Fund, Schwab Short-Term Bond Market Index Fund and the Schwab Total Bond Market
Index Fund. This opinion is being delivered to you in connection with the
Trust's filing of Post-Effective Amendment No. 31 to the Registration Statement
(the "Amendment") to be filed with the Securities and Exchange Commission
pursuant to Rule 485(b) of the Securities Act of 1933 (the "1933 Act"). With
your permission, all assumptions and statements of reliance herein have been
made without any independent investigation or verification on our part except to
the extent otherwise expressly stated, and we express no opinion with respect to
the subject matter or accuracy of such assumptions or items relied upon.

In connection with this opinion, we have reviewed, among other things,
executed copies of the following documents:

(a) a certificate of the Commonwealth of Massachusetts as to the
existence and good standing of the Trust;
<PAGE> 2
(b) copies of the Fund's Agreement and Declaration of Trust and of
all amendments and all supplements thereto (the "Declaration
of Trust");

(c) a certificate executed by Frances Cole, the Secretary of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration of Trust and Amended and Restated By-Laws (the
"By-Laws"), and certain resolutions adopted by the Board of
Trustees of the Trust authorizing the issuance of the Shares;
and

(d) a printer's proof of the Amendment.

In our capacity as counsel to the Trust, we have examined the
originals, or certified, conformed or reproduced copies, of all records,
agreements, instruments and documents as we have deemed relevant or necessary as
the basis for the opinion hereinafter expressed. In all such examinations, we
have assumed the legal capacity of all natural persons executing documents, the
genuineness of all signatures, the authenticity of all original or certified
copies, and the conformity to original or certified copies of all copies
submitted to us as conformed or reproduced copies. As to various questions of
fact relevant to such opinion, we have relied upon, and assume the accuracy of,
certificates and oral or written statements of public officials and officers or
representatives of the Fund. We have assumed that the Registration Statement, as
filed with the Securities and Exchange Commission, will be in substantially the
form of the printer's proof referred to in paragraph (d) above.

Based upon, and subject to, the limitations set forth herein, we are of
the opinion that the Shares, when issued and sold in accordance with the Trust's
Declaration of Trust and By-Laws, and for the consideration described in the
Registration Statement, will be legally issued, fully paid and nonassessable
under the laws of the Commonwealth of Massachusetts.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.

Very truly yours,

/s/ Morgan, Lewis & Bockius LLP

<PAGE> 1
Exhibit (j)

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 31 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated October 5, 1999, relating to the financial
statements and financial highlights appearing in the August 31, 1999 Annual
Reports to Shareholders of Schwab Short-Term Bond Market Index Fund, Schwab
Total Market Index 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 (six of the portfolios
constituting Schwab Investments), which are also incorporated by reference into
the Registration Statement. We also consent to the references to us under the
heading "Financial Highlights" in the Prospectuses and under the heading
"General Information" in the Statements of Additional Information.

PricewaterhouseCoopers LLP
San Francisco, CA

November 9, 1999

<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 02
[NAME] SCHWAB S/T BOND MARKET INDEX FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] AUG-31-1999
[PERIOD-END] AUG-31-1999
[INVESTMENTS-AT-COST] 219291
[INVESTMENTS-AT-VALUE] 216937
[RECEIVABLES] 27384
[ASSETS-OTHER] 24
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 244345
[PAYABLE-FOR-SECURITIES] 25928
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 367
[TOTAL-LIABILITIES] 26295
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 230825
[SHARES-COMMON-STOCK] 22580
[SHARES-COMMON-PRIOR] 15899
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (68)
[ACCUMULATED-NET-GAINS] (10353)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 2354
[NET-ASSETS] 218050
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 10131
[OTHER-INCOME] 0
[EXPENSES-NET] (657)
[NET-INVESTMENT-INCOME] 9474
[REALIZED-GAINS-CURRENT] (680)
[APPREC-INCREASE-CURRENT] (4340)
[NET-CHANGE-FROM-OPS] 4454
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (9475)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 13551
[NUMBER-OF-SHARES-REDEEMED] (7598)
[SHARES-REINVESTED] 728
[NET-CHANGE-IN-ASSETS] 60629
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (9673)
[OVERDISTRIB-NII-PRIOR] (67)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 760
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1418
[AVERAGE-NET-ASSETS] 185322
[PER-SHARE-NAV-BEGIN] 9.90
[PER-SHARE-NII] .50
[PER-SHARE-GAIN-APPREC] (.24)
[PER-SHARE-DIVIDEND] (.50)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 9.66
[EXPENSE-RATIO] .35
</TABLE>

<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 07
[NAME] SCHWAB TOTAL BOND MARKET
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] AUG-31-1999
[PERIOD-END] AUG-31-1999
[INVESTMENTS-AT-COST] 566185
[INVESTMENTS-AT-VALUE] 547211
[RECEIVABLES] 24994
[ASSETS-OTHER] 21
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 572226
[PAYABLE-FOR-SECURITIES] 88494
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 3793
[TOTAL-LIABILITIES] 92287
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 500631
[SHARES-COMMON-STOCK] 50091
[SHARES-COMMON-PRIOR] 28894
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (83)
[ACCUMULATED-NET-GAINS] (10286)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (10323)
[NET-ASSETS] 479939
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 22639
[OTHER-INCOME] 0
[EXPENSES-NET] 1328
[NET-INVESTMENT-INCOME] 21311
[REALIZED-GAINS-CURRENT] (9470)
[APPREC-INCREASE-CURRENT] (14129)
[NET-CHANGE-FROM-OPS] (2288)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (21326)
[DISTRIBUTIONS-OF-GAINS] (2225)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 30255
[NUMBER-OF-SHARES-REDEEMED] (11128)
[SHARES-REINVESTED] 2160
[NET-CHANGE-IN-ASSETS] 185919
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 1409
[OVERDISTRIB-NII-PRIOR] (74)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1574
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2826
[AVERAGE-NET-ASSETS] 383961
[PER-SHARE-NAV-BEGIN] 10.18
[PER-SHARE-NII] .55
[PER-SHARE-GAIN-APPREC] (.53)
[PER-SHARE-DIVIDEND] (.55)
[PER-SHARE-DISTRIBUTIONS] (.07)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 9.58
[EXPENSE-RATIO] .35
</TABLE>

<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 05
[NAME] SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] AUG-31-1999
[PERIOD-END] AUG-31-1999
[INVESTMENTS-AT-COST] 86604
[INVESTMENTS-AT-VALUE] 85860
[RECEIVABLES] 1239
[ASSETS-OTHER] 15
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 87114
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 146
[TOTAL-LIABILITIES] 146
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 88133
[SHARES-COMMON-STOCK] 8653
[SHARES-COMMON-PRIOR] 6652
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (16)
[ACCUMULATED-NET-GAINS] (405)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (744)
[NET-ASSETS] 86968
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 3463
[OTHER-INCOME] 0
[EXPENSES-NET] (389)
[NET-INVESTMENT-INCOME] 3074
[REALIZED-GAINS-CURRENT] 82
[APPREC-INCREASE-CURRENT] (1898)
[NET-CHANGE-FROM-OPS] 1258
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (3125)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 5071
[NUMBER-OF-SHARES-REDEEMED] (3302)
[SHARES-REINVESTED] 232
[NET-CHANGE-IN-ASSETS] 18687
[ACCUMULATED-NII-PRIOR] 27
[ACCUMULATED-GAINS-PRIOR] (461)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 326
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 646
[AVERAGE-NET-ASSETS] 79473
[PER-SHARE-NAV-BEGIN] 10.26
[PER-SHARE-NII] .40
[PER-SHARE-GAIN-APPREC] (.21)
[PER-SHARE-DIVIDEND] (.40)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.05
[EXPENSE-RATIO] .49
</TABLE>

<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 04
[NAME] SCHWAB LONG TERM TAX-FREE BOND FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] AUG-31-1999
[PERIOD-END] AUG-31-1999
[INVESTMENTS-AT-COST] 92459
[INVESTMENTS-AT-VALUE] 88610
[RECEIVABLES] 1336
[ASSETS-OTHER] 57
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 90003
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 155
[TOTAL-LIABILITIES] 155
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 93851
[SHARES-COMMON-STOCK] 8884
[SHARES-COMMON-PRIOR] 6352
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (26)
[ACCUMULATED-NET-GAINS] (128)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (3849)
[NET-ASSETS] 89848
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 4529
[OTHER-INCOME] 0
[EXPENSES-NET] (437)
[NET-INVESTMENT-INCOME] 1092
[REALIZED-GAINS-CURRENT] (120)
[APPREC-INCREASE-CURRENT] (7494)
[NET-CHANGE-FROM-OPS] (3522)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (4162)
[DISTRIBUTIONS-OF-GAINS] (395)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 5077
[NUMBER-OF-SHARES-REDEEMED] (2852)
[SHARES-REINVESTED] 307
[NET-CHANGE-IN-ASSETS] 19923
[ACCUMULATED-NII-PRIOR] 42
[ACCUMULATED-GAINS-PRIOR] 397
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 366
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 723
[AVERAGE-NET-ASSETS] 89244
[PER-SHARE-NAV-BEGIN] 11.01
[PER-SHARE-NII] .50
[PER-SHARE-GAIN-APPREC] (.85)
[PER-SHARE-DIVIDEND] (.50)
[PER-SHARE-DISTRIBUTIONS] (.05)
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.11
[EXPENSE-RATIO] .49
</TABLE>

<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 06
[NAME] SCHWAB CALIFORNIA S/I TAX-FREE BOND FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] AUG-31-1999
[PERIOD-END] AUG-31-1999
[INVESTMENTS-AT-COST] 125280
[INVESTMENTS-AT-VALUE] 124644
[RECEIVABLES] 1771
[ASSETS-OTHER] 3
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 126418
[PAYABLE-FOR-SECURITIES] 494
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 226
[TOTAL-LIABILITIES] 720
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 127126
[SHARES-COMMON-STOCK] 12460
[SHARES-COMMON-PRIOR] 9345
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (28)
[ACCUMULATED-NET-GAINS] (764)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (636)
[NET-ASSETS] 125698
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 4895
[OTHER-INCOME] 0
[EXPENSES-NET] (558)
[NET-INVESTMENT-INCOME] 4337
[REALIZED-GAINS-CURRENT] 24
[APPREC-INCREASE-CURRENT] (2238)
[NET-CHANGE-FROM-OPS] 2123
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (4341)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 7935
[NUMBER-OF-SHARES-REDEEMED] (5151)
[SHARES-REINVESTED] 331
[NET-CHANGE-IN-ASSETS] 29804
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (788)
[OVERDISTRIB-NII-PRIOR] (25)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 467
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 876
[AVERAGE-NET-ASSETS] 113776
[PER-SHARE-NAV-BEGIN] 10.26
[PER-SHARE-NII] .39
[PER-SHARE-GAIN-APPREC] (.17)
[PER-SHARE-DIVIDEND] (.39)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.09
[EXPENSE-RATIO] .49
</TABLE>

<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 03
[NAME] SCHWAB CALIFORNIA L/T TAX-FREE BOND FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] AUG-31-1999
[PERIOD-END] AUG-31-1999
[INVESTMENTS-AT-COST] 202407
[INVESTMENTS-AT-VALUE] 199169
[RECEIVABLES] 2998
[ASSETS-OTHER] 3
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 202170
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 488
[TOTAL-LIABILITIES] 488
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 205251
[SHARES-COMMON-STOCK] 18634
[SHARES-COMMON-PRIOR] 16510
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (65)
[ACCUMULATED-NET-GAINS] (266)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (3238)
[NET-ASSETS] 201682
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 10625
[OTHER-INCOME] 0
[EXPENSES-NET] (1005)
[NET-INVESTMENT-INCOME] 9620
[REALIZED-GAINS-CURRENT] 327
[APPREC-INCREASE-CURRENT] (13671)
[NET-CHANGE-FROM-OPS] (3724)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (9629)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 7967
[NUMBER-OF-SHARES-REDEEMED] (6399)
[SHARES-REINVESTED] 556
[NET-CHANGE-IN-ASSETS] 11485
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (554)
[OVERDISTRIB-NII-PRIOR] (61)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 840
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1538
[AVERAGE-NET-ASSETS] 204982
[PER-SHARE-NAV-BEGIN] 11.52
[PER-SHARE-NII] .54
[PER-SHARE-GAIN-APPREC] (.70)
[PER-SHARE-DIVIDEND] (.54)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.82
[EXPENSE-RATIO] .49
</TABLE>