SCHWAB CAPITAL TRUST, 497, 1995-09-29

SCHWAB CAPITAL TRUST
497, 1995-09-29

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<PAGE> 1

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses.............................. 2
Key Features of the Funds............. 3
Matching the Funds to Your
Investment Needs.................... 5
Investing in Our Funds................ 6
Shareholder Services................ 6
How to Buy Shares................... 6
How to Sell or Exchange Your
Shares........................... 8
Investment Objectives and Policies.... 10
Investment Techniques Used by
Our Funds........................... 11
Important Information About
Your Investment..................... 15
Dividends and Other Distributions... 15
Income Tax Information.............. 16
How We Determine the Price of
Your Shares...................... 16
How the Funds Report Performance.... 17
Organization and Management of
Our Funds........................... 18
Management Functions and
Responsibilities................. 18
Operating Fees and Expenses......... 19
Other Information on the Operation
of Our Funds..................... 20
Glossary of Important Terms........... 21
</TABLE>

READING THIS PROSPECTUS. Explanations of all italicized terms in this Prospectus
are included in the Glossary at the end of this Prospectus. References to "you"
and "your" in this Prospectus refer to prospective investors and/or current
shareholders, while references to "us," "our," and "our Funds" refer to the
three Funds generally.

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

SCHWAB ASSET DIRECTOR(R) FUNDS

THE SCHWAB ASSET DIRECTOR - HIGH GROWTH FUND, THE SCHWAB ASSET
DIRECTOR - BALANCED GROWTH FUND, AND THE SCHWAB ASSET DIRECTOR - CONSERVATIVE
GROWTH FUND (THE "FUNDS") are a family of three asset allocation funds which
provide diversification among major investment categories. Each Fund seeks to
meet its investment objective by investing in a different mix of stocks, bonds,
and cash-equivalents. All three Funds are designed to provide varying degrees of
exposure to the growth potential of the stock market. Each Fund is a diversified
investment portfolio of Schwab Capital Trust (the "Trust"), a no-load, open-end
management investment company.

ABOUT THIS PROSPECTUS: THIS PROSPECTUS PROVIDES YOU WITH CONCISE INFORMATION
THAT YOU SHOULD KNOW BEFORE YOU DECIDE IF THE FUNDS PROVIDE THE INVESTMENT
OPPORTUNITIES YOU ARE LOOKING FOR. READ IT CAREFULLY, AND RETAIN IT FOR FUTURE
REFERENCE. You can find more detailed information in the Statement of Additional
Information, dated September 25, 1995 (as amended from time to time). That
Statement has been filed with the Securities and Exchange Commission ("SEC") and
is incorporated in this Prospectus by reference (which means that it is legally
considered part of this Prospectus even though it is not printed here). The
Prospectus is available electronically by using our Internet address:
http://www.schwab.com. You can get a free paper copy of this Prospectus or the
Statement of Additional Information by calling Schwab at 800-2 NO-LOAD, or by
writing Schwab at 101 Montgomery Street, San Francisco, California 94104.

TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office, or call 800-2 NO-LOAD (800-266-5623).

PROSPECTUS SEPTEMBER 25, 1995

<PAGE> 2

EXPENSES

SHAREHOLDER TRANSACTION EXPENSES are the fees and charges you pay for buying or
selling shares of a fund. You pay no sales fees or charges when you buy or sell
shares of our Funds.

ANNUAL FUND OPERATING EXPENSES include management fees paid to the Investment
Manager, transfer agency fees, and other expenses. These expenses cover services
such as investment research and management of the Funds, maintaining shareholder
records, and issuing shareholder statements. Each Fund pays its own annual
operating expenses from its income, which is factored into the dividends paid to
shareholders and into the Fund's share price. As a shareholder, you are not
charged any of these fees directly.

<TABLE>
<CAPTION>
HIGH BALANCED CONSERVATIVE
GROWTH GROWTH GROWTH
FUND FUND FUND
------ -------- ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge on Purchases and
Reinvested Dividends......... None None None
Deferred Sales Charge or
Redemption Fees.............. None None None
Exchange Fees.................. None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fee (after fee
reduction)1.................. 0.49% 0.49% 0.49%
12b-1 Fees..................... None None None
Other Expenses (after fee
reduction)2.................. 0.40% 0.40% 0.40%
----- ----- -----
TOTAL FUND OPERATING
EXPENSES3,4...................... 0.89% 0.89% 0.89%
</TABLE>

1 This amount reflects a reduction by the Investment Manager, which is
guaranteed through at least December 31, 1996. If there were no such
reduction, the maximum management fee would be 0.74% of the average daily net
assets of each Fund. (See "Organization and Management of Our
Funds - Operating Fees and Expenses.")

2 "Other Expenses" are based on estimated amounts for the current fiscal year
for each Fund.

3 Schwab currently imposes no fees for opening and maintaining a Schwab
brokerage account. Effective October 1, 1995, Schwab will institute a $1,000
minimum equity requirement for brokerage accounts ($500 for custodial
accounts). A quarterly fee of $7.50 will be charged on accounts that fall
below the minimum. This fee, if applicable, will be charged at the end of
each quarter and will be waived if there has been one commissionable trade
within the last six months, or if the shareholder's combined account balances
at Schwab total $10,000 or more. Schwab imposes no fees for opening and
maintaining a Schwab One(R) account with a minimum balance of $5,000. Schwab
One accounts with balances below $5,000 are subject to a monthly fee of $5 if
there have been fewer than two commissionable trades within the last 12
months. Schwab Individual Retirement Accounts with balances of $10,000 or
more by September 15, 1996, are not charged Schwab's $29 annual IRA account
fee for the life of the account. Schwab Keogh plans are currently charged an
annual fee of $45.

4 This amount reflects the guarantee by Schwab and the Investment Manager that,
through at least December 31, 1996, total fund operating expenses will not
exceed 0.89% of each Fund's average daily net assets. Without this guarantee,
estimated maximum total fund operating expenses would be 1.14% of each Fund's
average daily net assets.

2
<PAGE> 3

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
High Growth Fund............. $9 $28
Balanced Growth Fund......... $9 $28
Conservative Growth Fund..... $9 $28
</TABLE>

THIS IS AN EXAMPLE ONLY AND DOES NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE EXAMPLE. This
example reflects the guarantee by Schwab and the Investment Manager that,
through at least December 31, 1996, total fund operating expenses will not
exceed 0.89% of each Fund's average daily net assets. Please remember that,
while this example assumes a 5% annual return on investment, each Fund's actual
returns may be more or less than the 5% used in this example.

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

KEY FEATURES OF THE FUNDS

STRATEGY: Each Fund invests in a diversified mix of stocks, bonds, and
cash-equivalents. Research shows that the greatest impact on investment returns
is due to the asset allocation decision (the mix of stocks, bonds, and
cash-equivalents) rather than market timing or individual stock and bond
selections. A study of the performance of pension funds indicated that over 90%
of the performance was determined by asset mix.*

The primary difference between the Funds is the proportion invested in stocks.
Each Fund targets a different mix of investments as described below and on the
following page. This mix among major asset classes will vary within defined
ranges based on the Investment Manager's and the Sub-Adviser's determination of
relative attractiveness of securities in the financial markets. For more
detailed information, see "Investment Objectives and Policies."

SCHWAB ASSET DIRECTOR(R) -

HIGH GROWTH FUND

INVESTMENT OBJECTIVE: to provide you with high capital growth with less
volatility than an all-stock portfolio. This Fund provides the greatest exposure
to various stock categories, including domestic large and small company stocks
and international stocks.

[PIE CHART 1]

<TABLE>
TARGET DEFINED
MIX RANGE
------ -------
<S> <C> <C>
CASH 5% 65%-95%
BONDS 15%
STOCKS 80%
LARGE COMPANIES 40%
SMALL COMPANIES 20%
INTERNATIONAL 20%
</TABLE>

*Financial Analysts Journal; Brinson, Singer, Beebower; May - June 1991

3
<PAGE> 4

SCHWAB ASSET DIRECTOR(R) -

BALANCED GROWTH FUND

INVESTMENT OBJECTIVE: to provide you with maximum total return, including both
capital growth and income. This Fund represents a more balanced approach to
stocks and bonds.

[PIE CHART 2]

TARGET DEFINED
MIX RANGE
------ -------
<TABLE>
<S> <C> <C>
CASH 5% 30%-50%
BONDS 35%
STOCKS 60%
(DEFINED RANGE 50% - 70%)
LARGE COMPANIES 30%
SMALL COMPANIES 15%
INTERNATIONAL 15%
</TABLE>

SCHWAB ASSET DIRECTOR(R) -

CONSERVATIVE GROWTH FUND

INVESTMENT OBJECTIVE: to provide you with income and more growth potential than
an all-bond portfolio. This Fund's stock component is designed to help offset
inflation.

[PIE CHART 3]

TARGET DEFINED
MIX RANGE
------ -------
<TABLE>
<S> <C> <C>
CASH 5% 30%-50%
BONDS 55%
STOCKS 40%
LARGE COMPANIES 20%
SMALL COMPANIES 10%
INTERNATIONAL 10%
</TABLE>

MANAGEMENT. The Investment Manager, Charles Schwab Investment Management, Inc.,
currently manages the mutual funds in the SchwabFunds Family([), a family of 18
mutual funds with over $29 billion in assets as of August 31, 1995. The
Sub-Adviser, Symphony Asset Management, Inc., is a wholly-owned subsidiary of
BARRA, Inc. BARRA, established in 1975, provides innovative analytical models,
software, and services designed to enable its more than 800 clients in 30
countries to make superior investment decisions. Symphony presently acts as
Sub-Adviser to two other investment companies and manages over $700 million of
institutional and private account assets. For more detailed information, see
"Organization and Management of Our Funds."

MARKET PERFORMANCE. For the twenty years ended 1994, the asset categories to be
used by the Funds have provided the following average annual returns:*

<TABLE>
<S> <C>
Large company stocks
S&P 500 Index(R)) ................ 15.0%
Small company stocks (Ibbotson and
BARRA small cap index)............ 19.6%
International stocks (MSCI EAFE).... 15.6%
Bonds (Ibbotson and Lehman
long-term government bond
index)............................ 9.8%
Cash-equivalents (commercial
paper A1P1)....................... 8.5%
</TABLE>

* Source: BARRA, Inc. See Glossary for definitions of the various indices.
Indices do not include fees such as those charged by the Funds. Past
performance of indices does not necessarily reflect future performance results
of the Funds.

LOW COST INVESTING. You pay no sales fees or charges when you buy or sell shares
of the Funds. Additionally, the Funds were designed with operating expenses
below the industry average, which helps provide more competitive returns.

The Investment Manager and Schwab guarantee that each Fund's total fund
operating expenses will not exceed 0.89% through

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<PAGE> 5

December 31, 1996. After this date, the guarantee may be terminated, modified,
or continued. The industry average for total operating expenses of asset
allocation funds is 1.43%.*

[BAR GRAPH]

<TABLE>
<S> <C>
Schwab Asset Director(R) Funds 0.89%
Average Asset Allocation Fund 1.43%
</TABLE>

* Source: Morningstar Investment Services, Inc., April, 1995

You may be charged a fee for your Schwab account; please refer to footnote 3 on
page 2. For more detailed information, see "Investing in Our Funds" and
"Operating Fees and Expenses."

SHAREHOLDER SERVICES. Schwab's professional representatives are available
toll-free 24 hours a day at 800-2 NO-LOAD to service your account, or you can
visit or call your local Schwab office during regular business hours. Schwab
also enables you to execute your trading requests through electronic products
and services such as StreetSmart(TM), The Equalizer(R), and Telebroker(R). See
"Investing in Our Funds."

CONVENIENT REPORTING. You receive one consolidated account statement for all of
your account activity, including all of your SchwabFunds(R) activity.

FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in amounts and at intervals that you select. For
more information, see "Investing in Our Funds - Schwab Automatic Investment
Plan."

RETIREMENT PLANS. Schwab offers tax-advantaged retirement plans for which the
Funds may be a particularly appropriate investment. For more information, see
"Investing in Our Funds - Tax-Advantaged Retirement Plans."

MATCHING THE FUNDS TO YOUR

INVESTMENT NEEDS

This family of three asset allocation funds provides diversification among major
investment categories. Each Fund seeks to meet its investment objective by
investing in a different mix of stocks, bonds, and cash-equivalents. All three
Funds are designed to provide exposure to the growth potential of the stock
market with varying degrees of volatility due to the different asset
allocations. For more detailed information, see "Investment Objectives and
Policies."

An investor's strategy might include investing in one or a combination of these
Funds to match their investment time horizon and risk tolerance.

THE SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND may be appropriate for you if
you have a long-term investment horizon and want the growth potential from stock
investments. You should be comfortable with the risks of the stock market but do
not want the volatility of an all-stock investment.

THE SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND may be appropriate for you
if you have an intermediate-term investment horizon and want a more balanced
approach to your investment. You should want the growth potential from stock
investments but are willing to achieve it more slowly and with

5
<PAGE> 6

less volatility than that provided by the Schwab Asset Director - High Growth
Fund.

THE SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND may be appropriate for
you if you have a short-term investment horizon but still want some exposure to
the stock market. You should want returns that keep pace with inflation but want
to limit volatility to the extent possible.

RISKS CONSIDERATIONS: The Funds seek to reduce overall risk by diversifying
investments among major asset categories and sub-categories. However, depending
on the Investment Manager's asset allocation decisions with regard to the mix of
stocks, bonds, and cash-equivalents, shareholders in the Funds may be exposed to
the risks associated with each particular asset type. Stock risk is the
possibility that stock prices will decline over short or even extended periods.
Small-company and international stocks will typically be included in the mix and
pose special risks. Bond risk is the potential for decline in the market value
of bonds due to interest rate changes or the ability of an issuer to meet its
obligations. Diversification among asset categories will not necessarily protect
the Funds from loss.

You should pay special attention to the description of derivatives and foreign
securities on pages 11 through 14, for these investments carry more risk
potential than the Funds' other investments. The Funds may engage in futures
contracts, options, spot foreign currency exchange contracts, forward foreign
currency exchange contracts, and swap agreements. Foreign securities may present
unique investment opportunities; however, international investing involves risks
not associated with domestic investing. Foreign securities markets are not
always as efficient as those in the U.S. and are often less liquid and more
volatile.

Please refer to the "Investment Techniques Used by Our Funds" section in this
Prospectus and "Investment Securities" in the Statement of Additional
Information for a more detailed discussion of the risks associated with
particular types of investments.

INVESTING IN OUR FUNDS

SHAREHOLDER SERVICES

You may place Fund purchase and redemption orders as well as request exchanges
at any one of over 200 Schwab offices nationwide or by calling 800-2 NO-LOAD,
where trained representatives are available to answer questions about the Funds
and your account. The privilege to initiate transactions by telephone, as
discussed below, is automatically available through your Schwab account.

We will follow reasonable procedures to confirm that your telephone instructions
are genuine; otherwise, we may be liable for any losses you may suffer from
unauthorized or fraudulent orders. These procedures may include requiring a form
of personal identification, providing written confirmation of your telephone
instructions, and recording all telephone transactions. You should be aware that
telephone transactions may be difficult to implement during periods of drastic
economic or market changes. If you experience difficulties in reaching us by
telephone, you can mail your orders or place them in person as set forth on the
following pages.

HOW TO BUY SHARES

NEW INVESTORS TO SCHWAB need to open a Schwab account by completing and signing
an

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<PAGE> 7

account application. Mail it, together with your check, to the address indicated
on the application. You may also open your account in person as described in the
table on the following page.

EXISTING SCHWAB INVESTORS must have funds in their Schwab account in order to
buy shares in a Fund. Schwab will charge your Schwab brokerage account a $15
service fee for any check returned because of insufficient or uncollected funds
or because of a stop payment order.

Schwab also enables you to execute your trading requests through electronic
products and services such as StreetSmart(TM), The Equalizer(R), and
Telebroker(R).

Within your Schwab account, you have access to other investments available at
Schwab, such as stocks, bonds, and other mutual funds. The Securities Investor
Protection Corporation (known as "SIPC") will provide account protection, in an
amount up to $500,000, for securities, including Fund shares, that you hold in a
Schwab account. Of course, SIPC account protection does not protect you from
share price fluctuations.

<TABLE>
<CAPTION>
FUND MINIMUMS
<S> <C>
FUND INITIAL PURCHASE:
Brokerage account $1,000
Retirement account $ 500

FUND ADDITIONAL PURCHASE:
Brokerage account $ 100
Retirement account $ 100
Automatic investment plan $ 100

FUND MINIMUM BALANCE:
Brokerage account $1,000
Retirement account $ 500
</TABLE>

Schwab reserves the right to waive these minimums from time to time for clients
of Schwab Institutional, a division of Schwab.

SPECIAL SUBSCRIPTION OFFERING

The distributor, Charles Schwab & Co., Inc., is soliciting subscriptions for
shares of the Funds during an initial offering period, which is currently
scheduled to end November 17, 1995, subject to extension by the Funds and the
distributor. Shares are being offered at the initial net asset value of $10 per
share. The Funds and their distributor reserve the right to withdraw, cancel, or
modify the offering without prior notice and to refuse any order in whole or in
part. The Funds expect to commence continuous offerings of their shares
immediately following the close of the subscription offering.

Each Fund, in its sole discretion and without prior notice to you, reserves the
right to reject orders to buy shares, to change the minimum investment
requirements, and to withdraw or suspend any part of the offering made by this
Prospectus. All orders to buy shares must be accepted by the Fund, and orders
are not binding until the Fund confirms or accepts them in writing.

HOW TO BUY SHARES
- -------------------------------------------------------------------------------

Whether by phone, mail, electronically, or in person, the following information
is always needed:

- - your Schwab account number.

- - the name of the Fund you wish to buy.

- - the amount you wish to invest.

BY PHONE

- - Call 800-2 NO-LOAD.

- - Place a buy order for your account.

7
<PAGE> 8

BY MAIL
- - Include a letter of instruction with the information requested above, signed
by one of the registered account holders in the exact form specified on the
account.
- - Make your check payable to Charles Schwab & Co., Inc.
- - Mail to 101 Montgomery Street, San Francisco, CA 94104 or your local Schwab
office.
- - Once your letter is mailed, it is irrevocable and may not be modified or
canceled.

ELECTRONICALLY
- - Refer to product information on StreetSmart(TM), The Equalizer(R), and
Telebroker(R) for details.

IN PERSON
- - Deposit your check at your local Schwab office.
- - For the Schwab office nearest you, call 800-2 NO-LOAD.

BY WIRE
- - Contact your local Schwab office for instructions.

AUTOMATICALLY
- - Use Schwab Automatic Investment Plan.
- - Sign up for this service when opening your account.
- ------------------------------------------------------

SCHWAB'S AUTOMATIC INVESTMENT PLAN allows you to make periodic investments in
non-money market SchwabFunds(R) (and certain other funds available through
Schwab) automatically and conveniently. You can make automatic investments in
any amount, from $100 to $50,000, once you meet the Fund's investment minimum.
Automatic investments are made from your Schwab account, and you may select from
the following methods to make automatic investments: using the uninvested cash
in your Schwab account; using the proceeds of redemption of shares of the Schwab
Money Fund linked to your Schwab account; or using the Schwab MoneyLink(R)
Transfer Service. For more detailed information about this service, or to
establish your Automatic Investment Plan, call your local Schwab office or 800-2
NO-LOAD, 24 hours a day.

TAX-ADVANTAGED RETIREMENT PLANS. Schwab offers tax-advantaged retirement plans
for which the Funds may be a particularly appropriate investment. Schwab's
retirement plans allow participants to defer taxes while helping them build
their retirement savings. The Schwab IRA is a retirement plan with a wide choice
of investments offering individuals with earned income the opportunity to
compound earnings on a tax-deferred basis. The Schwab Keogh is a tax-advantaged
plan for self-employed individuals and their employees that permits the employer
to make annual tax-deductible contributions of up to $30,000. Schwab also offers
Corporate Retirement Plans to help a company attract and retain valuable
employees. Call your local Schwab office or 800-2 NO-LOAD, 24 hours a day for
more information.

HOW TO SELL OR EXCHANGE YOUR SHARES

You can sell your shares in the Fund at any time, in person, by telephone, or by
mail. When you sell your shares, you may receive more or less than the amount
you invested.

The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state if your purchase meets that Fund's eligibility requirements. Thus, you can
conveniently modify

8
<PAGE> 9

your investments if your goals or market conditions change. An exchange of
shares will be treated as a sale of the shares for federal income tax purposes.
Note that you must meet the minimum initial or subsequent investment
requirements applicable to the shares you wish to receive in an exchange. The
Funds reserve the right on 60 days' written notice to modify, limit, or
terminate the exchange privilege.

HOW TO SELL OR EXCHANGE SHARES
- -------------------------------------------------------------------------------

Whether by phone, mail, electronically, or in person, the following information
is always needed:

When Selling Shares:

- - your Schwab account number.

- - the name of the Fund from which you wish to sell shares.

- - the number of shares you wish to sell.

When Exchanging Shares:

- - your Schwab account number.

- - the number of shares you want to exchange.

- - the name of the Fund from which you wish to exchange shares.

- - the name of the Fund into which shares are to be exchanged.

- - the distribution option you select.

BY PHONE

- - Call 800-2 NO-LOAD.

- - Place a sell or exchange request for your account.

BY MAIL
- - Include a letter of instruction with the information requested above, signed
by one of the registered account holders in the exact form specified on the
account.

- - Mail to 101 Montgomery Street, San Francisco, CA 94104 or your local Schwab
office.

- - Once your letter is mailed, it is irrevocable and may not be modified or
canceled.

ELECTRONICALLY

- - Refer to product information on StreetSmart(TM), The Equalizer(R), and
Telebroker(R) for details.

IN PERSON
- - Place your sell or exchange request at your local Schwab office.
- - For the Schwab office nearest you, call 800-2 NO-LOAD.
- -------------------------------------------------------------------------------

Payment for redeemed shares will be credited directly to your Schwab account no
later than 7 days after Schwab's Mutual Fund Transfer Agency Department receives
your sell instructions in proper form. Proceeds will then be held in your Schwab
account or mailed to you depending on the account standing instructions you have
selected. For information on how to wire funds from your Schwab account to your
bank, contact your local Schwab office.

If you purchased shares by check, your sales proceeds may be held in your Schwab
account until your check clears (which may take up to 15 days). Depending on the
type of Schwab account you have, your money may earn interest during any holding
period.

The Funds may suspend redemption rights or postpone payments when trading on the
New York Stock Exchange is restricted, the Exchange is closed for any reason
other than its customary weekend or holiday closings, emergency circumstances as
determined by the SEC exist, or for such other circumstances as the SEC may
permit. Each Fund may also elect to invoke a 7 day period for cash

9
<PAGE> 10

settlement of individual redemption requests in excess of $250,000 or 1% of the
Fund's net assets, whichever is less. See "Purchase and Redemption of Shares" in
the Statement of Additional Information.

INVESTMENT OBJECTIVES AND POLICIES

THE SCHWAB ASSET DIRECTOR(R) FUNDS are a family of three asset allocation funds
which provide diversification among major investment categories. Each seeks to
meet its investment objective by investing in a different mix of stocks, bonds,
and cash-equivalents. Subject to regulatory approval, each Fund may also utilize
investments in affiliated investment companies to meet its investment objective.
All three Funds are designed to provide exposure to the growth potential of the
stock market in varying degrees.

A target mix and a defined range have been established for each asset category
in each of the Funds. Although there is a target mix for each of the stock
sub-categories, there are no defined ranges. The amount invested in each Fund's
stock sub-categories could vary widely from their targets, but not beyond the
defined range of the stock category as a whole. The Investment Manager will
allocate assets among stocks, bonds, and cash-equivalents, emphasizing
investment in the most attractive asset category. The Sub-Adviser uses a
Tactical Asset Allocation model to measure the relative value of each asset
category and make recommendations for allocations within the defined ranges. The
Funds may also make other investments that do not fall within the asset
categories. The investment objectives stated below are fundamental to each Fund
and may be changed only with shareholder approval. Because any investment
involves risk, we cannot guarantee achieving these objectives.

SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND

The investment objective of the Schwab Asset Director - High Growth Fund is to
provide you with high capital growth with less volatility than an all stock
portfolio. This Fund provides the greatest exposure to various stock categories,
including domestic large and small company stocks and international stocks.

The Schwab Asset Director - High Growth Fund's target mix as well as the defined
ranges for the different asset categories are as follows:

<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
------ ---------
<S> <C> <C>
STOCKS 80% 65%--95%
Large company stocks 40%
Small company stocks 20%
International stocks 20%
BONDS 15% 0%--30%
CASH-EQUIVALENTS 5% 0%--35%
</TABLE>

SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND

The investment objective of the Schwab Asset Director - Balanced Growth Fund is
to provide you with maximum total return, including both capital growth and
income. This Fund represents a more balanced approach to stocks and bonds.

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<PAGE> 11

The Schwab Asset Director - Balanced Growth Fund's target mix as well as the
defined ranges for the different asset categories are as follows:

<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
------ -------
<S> <C> <C>
STOCKS 60% 50%--70%
Large company stocks 30%
Small company stocks 15%
International stocks 15%
BONDS 35% 25%--45%
CASH-EQUIVALENTS 5% 0%--25%
</TABLE>

SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND

The investment objective of the Schwab Asset Director - Conservative Growth Fund
is to provide you with income and more growth potential than an all bond fund.
This Fund's stock component is designed to help offset inflation.

The Schwab Asset Director - Conservative Growth Fund's target mix as well as the
defined ranges for the different asset categories are as follows:

<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
------ -------
<S> <C> <C>
STOCKS 40% 30%--50%
Large company stocks 20%
Small company stocks 10%
International stocks 10%
BONDS 55% 45%--65%
CASH-EQUIVALENTS 5% 0%--25%
</TABLE>

INVESTMENT TECHNIQUES USED
BY OUR FUNDS

STOCKS, BONDS, AND CASH-EQUIVALENTS

Our Funds will invest in stocks, bonds, and cash-equivalents in varying
proportions, according to the Funds' target mixes and defined ranges.

STOCK ALLOCATION: The common stocks the Funds invest in will be a diversified
portfolio within each stock sub-category (large company, small company, and
international stocks). Common stocks represent an ownership, or equity interest,
in a company. Although common stocks have a history of long-term growth in
value, their prices tend to fluctuate in the short-term.

LARGE COMPANY STOCKS: The Funds' large company stock allocation will be invested
in all or a representative sample of the stocks which comprise the Standard &
Poor's 500 Index(R).

SMALL COMPANY STOCKS: The Funds' small company stock allocation will be invested
in all or a representative sample of stocks selected from a universe consisting
of the second 1,000 largest U.S. operating corporations, as measured by market
capitalization. Small company stocks have historically been characterized by
greater total returns, greater volatility of returns, and lower dividend yields
than large company stocks. As of August 31, 1995, the market capitalizations of
the corporations included in this universe ranged from $150 million to $750
million. This market capitalization range may fluctuate in the future.

INTERNATIONAL STOCKS: The Funds' international stock allocation will be invested
in all or a representative sample of stocks selected from a universe consisting
of 350 of the largest non-U.S. operating corporations, as measured by market
capitalization. These international stocks are issued by large, publicly traded
companies from countries around the world with major developed securities
markets, excluding the United States. Each Fund may also invest up to 5% of its
net assets in the stocks

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<PAGE> 12

and bonds of issuers in developing countries; see "Other Assets" for details.
These investments will be denominated in a foreign currency, and the value of
the Funds' investments will be affected by changes in currency exchange rates
versus the U.S. dollar in addition to normal market fluctuations. 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, by changes in
interest rates, as well as by political and economic factors. Other risks and
considerations of international investing include: differences in accounting,
auditing and financial reporting standards; generally higher transaction costs
on foreign portfolio transactions; small trading volumes and generally lower
liquidity of foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on the Funds' security holdings,
which may reduce dividend income payable to shareholders; the possibility of
expropriation, nationalization, or confiscatory taxation; adverse changes in
investment or exchange control regulations; political instability which could
affect U.S. investment in foreign countries; and potential restrictions on the
flow of international capital.

BOND ALLOCATION: Bond investments for the Funds will consist primarily of U.S.
Government obligations, highly rated corporate debt obligations, and highly
rated asset-backed securities. The debt securities in which the Funds invest are
obligations issued or guaranteed by the U.S. Government and its agencies and
instrumentalities, including bills, notes, bonds, discount notes, stripped
government securities, and other debt securities. Not all obligations issued or
guaranteed by U.S. Government agencies are backed by the full faith and credit
of the United States. The Funds may also buy domestic and foreign issues of
corporate debt obligations having floating or fixed rates of interest.
Asset-backed securities, including mortgage-related securities, may also be
included in the Funds' portfolios. Asset-backed securities are secured by
company receivables, home equity loans, truck and auto loans, leases, and credit
card receivables. The collateral backing asset-backed securities cannot be
foreclosed upon. Mortgage-backed securities are securities collateralized by
pools of mortgage loans and are assembled by various governmental agencies and
organizations, such as GNMA, FNMA, and FHLMC. When interest rates decline, there
is increased likelihood that the mortgages underlying a mortgage-backed security
will be pre-paid, resulting in the loss of any unamortized premium paid for the
securities and the probability of having to reinvest the proceeds at lower
rates. The bond category also includes repurchase agreements collateralized by
eligible investments.

The corporate debt obligations or the asset-backed obligations the Funds invest
in will be rated in one of the three highest categories ("A" or better) by a
nationally recognized statistical rating organization ("NRSRO").

The market value of the Funds' debt investments will change in response to
interest rate fluctuations and other factors. During periods of falling interest
rates, the values of outstanding debt securities generally rise; conversely,
during periods of rising interest rates, the values of such securities generally
decline. While securities with longer maturities tend to produce higher yields,
the prices of longer maturity securities are also subject to greater market
fluctuations as a result of changes in interest rates. Changes by NRSROs in the
rating of any debt security and in the ability of an issuer to make payments of
interest and

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<PAGE> 13

principal also affect the value of these investments. Except under condition of
default, changes in the value of portfolio securities will not affect cash
income derived from these securities but will affect the Funds' net asset
values.

CASH ALLOCATION: The Funds may invest in the following types of U.S. dollar
denominated short-term money market instruments that the Investment Manager has
determined to present moderate credit risk:

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

2. Commercial paper rated in one of the two highest rating categories by an
NRSRO, or commercial paper or notes of issuers with an unsecured debt issue
outstanding currently rated in one of the two highest rating categories by any
NRSRO where the obligation is on the same or a higher level of priority and
collateralized to the same extent as the rated issue.

3. Obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities.

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

OTHER ASSETS

The Funds may also make other investments that do not fall within the asset
classes described above. These may include warrants, convertible securities,
preferred stocks, real-estate related investments, precious metal related
investments, American and European Depository Receipts, and stocks and bonds of
issuers in developing countries. Each of these investments is limited to 5% of
each Fund's net assets. In addition, the Funds may invest in other securities,
in the future, not presently contemplated or which are not currently available.
These additional investments must be consistent with the Funds' investment
objective and must be legally permissible investments for the Funds.

THE FUNDS MAY USE FUTURES CONTRACTS AND OPTIONS in order to remain effectively
fully invested in proportions consistent with the Investment Manager's current
asset allocation strategy in an efficient and cost effective manner.
Specifically, each Fund may enter into futures contracts and options thereon
provided that the aggregate deposits required on these contracts do not exceed
5% of the Fund's total assets.

Futures contracts and options may be used for several reasons: to reallocate the
Funds' assets among stocks, bonds and money market instruments while minimizing
transaction costs; to maintain cash reserves while simulating full investment;
to facilitate trading; or to seek higher investment returns or simulate full
investment when a futures contract is priced more attractively or is otherwise
considered more advantageous than the underlying security or index.

Because the transaction costs of futures contracts and options may be lower than
the costs of investing in stocks or bonds directly, it is expected that the use
of futures contracts may reduce the Funds' total transaction costs. Also,
because futures contracts require only a small initial margin deposit, the Funds
would then be able to simultaneously maintain a cash reserve for potential
redemptions and simulate full investment. In the event of net redemp-

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<PAGE> 14

tions from the Funds, sufficient futures contracts would be sold to avoid any
leveraging of the Funds' assets.

Futures contracts and options pose certain risks. The primary risks associated
with the use of futures contracts and options include: imperfect correlation
between the change in market value of the securities held by the Funds and the
prices of futures contracts and options, and possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts whose behavior is expected to
resemble that of the Funds' underlying securities. The risk that the Funds will
be unable to close out a futures position will be minimized by entering into
such transactions on a national exchange with an active and liquid secondary
market. While futures contracts and options can be used as leveraged
instruments, the Funds may not use futures contracts or options to leverage
their portfolios.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (or gain) to the investor. When investing in futures contracts, the Funds
will segregate cash or cash-equivalents in the amount of the
underlying obligation.

ADJUSTING INVESTMENT EXPOSURE. In addition to futures and options, each Fund may
use a variety of techniques to increase or decrease its exposure to changing
security prices, interest rates, currency exchange rates, commodity prices, or
other factors that affect security values. These techniques may involve entering
into spot foreign currency exchange contracts, forward foreign currency exchange
contracts, and swap agreements. These techniques may be referred to as
derivative transactions. The Funds may also sell securities short if at the time
of the short sale the Fund owns or has the right to own securities equivalent in
kind and amount to the securities sold short at no additional cost. The
Investment Manager can use these practices to adjust the risk and return
characteristics of a Fund's portfolio. If the Investment Manager judges market
conditions incorrectly or employs a strategy that does not correlate well with
the Funds' investments, these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. These techniques may
increase the volatility of the Funds and may involve a small investment of cash
relative to the magnitude of the risk assumed. In addition, these techniques
could result in a loss if the counterparty to the transaction does not perform
as agreed. Each of these techniques will be limited to 5% of each Fund's net
assets. Please refer to the sections in the Statement of Additional Information
entitled "Investment Securities" and "Investment Restrictions" for a more
detailed discussion of these techniques and the risks associated with them.

ILLIQUID SECURITIES. Each Fund may purchase illiquid securities, provided that
no more than 10% of a Fund's net assets valued at the time of the transaction
are invested in such securities.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase securities
on a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are

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<PAGE> 15

securities purchased for future delivery at a stated price and yield. Generally,
a Fund will not pay for such securities or start earning interest on them until
the Fund receives them. Securities purchased on a when-issued or delayed
delivery basis are recorded as assets. During the period between the agreement
date and the settlement date, the value of such securities may change as the
prices of securities in the stock market increase or decrease, or as interest
rates change. Default by the other party to the agreement may result in a loss
to a Fund.

REPURCHASE AGREEMENTS. Each of our Funds may engage in repurchase agreements. By
entering into a repurchase agreement, a Fund acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price. The repurchase price is higher than the
purchase price, thereby determining the yield during the Fund's holding period.
In the event of a bankruptcy or other default of a repurchase agreement
counterparty, a Fund might have expenses in enforcing its rights, and could
experience losses, including a decline in the value of the underlying securities
and loss of income.

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

SECURITIES LENDING: Each Fund may lend up to 33 1/3% of its portfolio securities
to broker-dealers as a means of increasing income. These loans must be fully
collateralized at all times. As with any collateralized loan, there are risks of
delay in recovery or even losses of rights in the assets loaned should the
borrower fail financially.

INVESTMENT COMPANIES. Our Funds may also purchase shares of other no-load
investment companies, including those managed by the Investment Manager. These
purchases will be subject to the limitations imposed by the 1940 Act, and we
will only make these purchases after obtaining any required regulatory
approvals. Investment in other investment companies may cause you to bear
duplicative fees for certain services.

TURNOVER. The Investment Manager anticipates that each Fund's annual turnover
rates for the stock and bond categories of their portfolios will not exceed
100%.

IMPORTANT INFORMATION ABOUT YOUR INVESTMENT

DIVIDENDS AND OTHER DISTRIBUTIONS

DISTRIBUTION OPTIONS
When you first buy shares in our Funds, you may choose one of the three
following distribution options:

1. AUTOMATIC REINVESTMENT: We will reinvest all distributions in additional
shares of the Fund. This option will be selected automatically unless you
specify another option.

2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in
cash, and capital gains will be reinvested in additional shares of the Funds.

3. ALL CASH: Income dividends and any capital gains distributions will both be
paid in cash.

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<PAGE> 16

Distributions will be reinvested at the net asset value next determined after
their record date. Cash distributions will be credited to your Schwab account on
the date distributions are payable and will be held in your Schwab account or
mailed to you, depending on the standing instructions applicable to your
account.

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

The Funds intend to distribute substantially all of their net investment income
each year, as determined by the Board of Trustees. Dividends from net investment
income will be paid as follows: the Schwab Asset Director(R) - High Growth Fund
and the Schwab Asset Director - Balanced Growth Fund, annually in December; the
Schwab Asset Director - Conservative Growth Fund, quarterly in March, June,
September, and December. You should be aware that your per share equity in
undistributed net investment income may be diluted by the continuing purchases
and redemptions of each Fund's shares.

Net capital gains, if any, will be distributed annually in December by all three
Funds. All distributions will be automatically reinvested in additional shares
of the Funds unless you elect otherwise.

INCOME TAX INFORMATION

The following is only a very brief summary of some of the federal income tax
consequences that affect the Funds and their shareholders. Therefore, it is
important that you consult with a tax adviser about your own tax situation.

Each Fund intends to qualify as a regulated investment company under the Code.
In order to qualify, we will distribute to our shareholders on a current basis
substantially all of our investment company taxable income and our capital gain
net income (if any), and we will meet certain other requirements. As a regulated
investment company, we will pay no federal income taxes to the extent that we
distribute our earnings to our shareholders. Income received by the Funds from
sources within certain foreign countries, however, may be subject to foreign
income taxes withheld at the source.

We will provide you with a record of all dividends, distributions, purchases,
and sales on your regular Schwab brokerage account statement. At least once a
year we will notify you of the federal income tax consequences of all
distributions made that year to your account.

HOW WE DETERMINE THE PRICE OF YOUR SHARES

The price of a share of each Fund is its net asset value, which we determine
each Business Day at the close of trading on the New York Stock Exchange,
generally at 4:00 p.m., Eastern time. We determine the price of a share by
adding the total assets of each Fund, subtracting any liabilities attributable
to that Fund,

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<PAGE> 17

and then dividing the resulting number by the number of shares outstanding.
Purchase or redemption orders and exchange requests will be executed at the net
asset value next determined after receipt by Schwab's Mutual Fund Transfer
Agency Department.

The Funds value their portfolio securities based on their market value, where
quotations are readily available. The value of other assets for which no
quotations are readily available (including any restricted securities) are
valued at fair value as determined in good faith by the Investment Manager
pursuant to Board of Trustees guidelines. Securities may be valued on the basis
of prices provided by pricing services when such prices are believed to reflect
fair market value.

HOW THE FUNDS REPORT PERFORMANCE

From time to time the Funds may advertise their total return or yield.
Performance figures are based upon historical results and are not intended to
indicate future performance. The Funds may also compare their historical
performance figures to the performance of indices similar to their asset
categories and sub-categories, such as those indices named in the chart under
"Market Performance" on page 4.

A Fund's total return measures its overall change in value over a period,
including share price movements, and assumes all dividends and capital gains
have been reinvested. Average annual total return reflects the hypothetical
annually compounded return calculated as mandated by the SEC. Other reported
total return figures may differ in that they may report non-standard periods or
represent aggregate or cumulative return over a stated length of time.

A Fund's yield refers to the income generated by an investment in the Fund over
a given period of time, expressed as an annualized percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield may
not equal the income actually paid to shareholders.

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

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<PAGE> 18

ORGANIZATION AND

MANAGEMENT OF OUR FUNDS

MANAGEMENT FUNCTIONS AND RESPONSIBILITIES

GENERAL OVERSIGHT OF OUR FUNDS. The Board of Trustees and officers meet
regularly to review the Funds' investments, performance, expenses, and other
business affairs.

THE INVESTMENT MANAGER. The Investment Manager, Charles Schwab Investment
Management, Inc., is responsible for the overall management of the Funds'
business affairs, subject to the authority of the Trustees and officers of the
Trust. The Investment Manager makes all portfolio selection decisions, places
all orders for the Funds' securities transactions, and has primary
responsibility for the management of the Funds' investment portfolios. The
Investment Manager, founded in 1989, is a wholly owned subsidiary of The Charles
Schwab Corporation and is the investment adviser and administrator of the
SchwabFunds(R) mutual funds. As of August 31, 1995, the SchwabFunds(R) had
aggregate net assets in excess of $29 billion.

Geri Hom is the portfolio manager for the equity portions of the Asset
Director(R) Funds. She joined Schwab in March 1995 as Portfolio
Manager - Equities and currently manages the three Schwab index funds with
approximately $1 billion in assets. For four years prior to joining Schwab, she
was a Principal for Wells Fargo Nikko Investment Advisors. She was Vice
President and Manager of the Domestic Equity Portfolio Management Group for
Wells Fargo Nikko for seven years prior to that.

Andrea Regan is the portfolio manager for the bond portions of the Asset
Director Funds. She joined Schwab in January 1991 and is currently Portfolio
Manager - Fixed Income. She currently manages three money market funds and two
bond funds with combined assets of approximately $3 billion. Prior to joining
Schwab, she was Vice President and Manager of Trading for Merus Capital
Management, the investment management division of the Bank of California.

Stephen B. Ward, Schwab's Senior Vice President and Chief Investment Officer,
also participates in the management of each Funds' portfolios. Prior to April
1991, Mr. Ward was Vice President and Portfolio Manager for Federated Investors.

THE SUB-ADVISER. The Investment Manager has retained Symphony Asset Management,
Inc. to serve as Sub-Adviser to the Funds. As Sub-Adviser, Symphony will
recommend to the Investment Manager the asset mix within the defined ranges for
each Fund. Symphony employs a Tactical Asset Allocation model to measure
relative values among asset categories. Using this model, Symphony recommends
asset allocations it believes will provide the highest returns for a given level
of risk. Symphony does not recommend the purchase or sale of individual
securities.

Symphony was established in 1994 as a wholly-owned subsidiary of BARRA, Inc.
BARRA, founded in 1975, provides innovative analytical models, software, and
services that enable its more than 800 clients in 30 countries to make superior
investment decisions. BARRA's software and services analyze equity, fixed
income, currency, and other financial markets. Symphony presently serves as Sub-
Adviser to two other investment companies and manages directly and indirectly
over $700 million in institutional and private account assets.

TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as the Shareholder
Services

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<PAGE> 19

Agent and Transfer Agent for the Funds. Schwab was established in 1971 and is
America's largest discount broker. Schwab provides low-cost securities brokerage
and related financial services to approximately 2.5 million active customer
accounts and has over 200 branch offices. Schwab also offers convenient access
to financial information services and provides products and services that help
investors make investment decisions. Schwab is a wholly-owned subsidiary of The
Charles Schwab Corporation. Charles R. Schwab is the founder, Chairman and Chief
Executive Officer, and a director of The Charles Schwab Corporation and, as of
August 31, 1995, the beneficial owner of approximately 20.4% of the outstanding
shares of that corporation. Mr. Schwab may be deemed to be a controlling person
of Schwab and the Investment Manager.

OPERATING FEES AND EXPENSES

For investment management services, under the terms of its Investment Advisory
and Administration Agreement with the Trust, the Investment Manager receives a
graduated annual fee payable monthly from each Fund of 0.74% of each Funds'
average daily net assets not in excess of $1 billion, 0.69% of such net assets
over $1 billion, but not more than $2 billion, and 0.64% of such net assets over
$2 billion.

The Investment Manager pays the Sub-Adviser an annual fee, payable monthly,
ranging from 0.08% to 0.02% of the Funds' combined average daily net assets,
declining as assets increase. The Sub-Adviser does not receive compensation
directly from the Funds.

The Investment Manager and Schwab guarantee that, through at least December 31,
1996, the management fee for each of the Funds will not exceed 0.49% of its
average daily net assets, and total fund operating expenses will not exceed
0.89% of each Fund's average daily net assets. The following expenses are not
included as "operating expenses" for purposes of this guarantee: interest
expenses, taxes, foreign taxes withheld, and capital items such as costs of
purchase or sale of portfolio securities, including brokerage fees or
commissions. The effect of this voluntary expense limitation is to maintain or
increase the Funds' total return to shareholders.

For its services as Transfer Agent, Schwab receives an annual fee of 0.05% of
the average daily net assets of each Fund. In addition, for shareholder services
provided, Schwab receives an annual fee of 0.20% of the average daily net assets
of each Fund.

Schwab serves as the distributor for the Funds but receives no compensation for
this service.

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

The Trust generally allocates these expenses among the individual investment
portfolios or series ("Series") of the Trust, including the Funds. This
allocation is based on the relative net assets of each Series at the time the
expenses are incurred. However, expenses directly attributable to a particular
series are charged to that series.

PORTFOLIO BROKERAGE. When placing orders for the Funds' securities transactions,
the Investment Manager will use its judgment to obtain

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<PAGE> 20

the best price and execution. The full range and quality of brokerage services
available are considered in making these determinations. For securities
transactions in which Schwab is not a principal, the Investment Manager may use
Schwab to execute the Funds' 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.

OTHER INFORMATION ON THE OPERATION OF OUR FUNDS

The Trust was organized as a business trust under the laws of Massachusetts on
May 7, 1993, and may issue an unlimited number of shares of beneficial interest
in one or more Series or classes. Currently shares of five Series are offered.

The Board of Trustees may authorize the issuance of shares of additional Series
or classes, if it deems it desirable. Shares within each Series have equal,
noncumulative voting rights, and have equal rights as to dividends, assets, and
liquidation.

ANNUAL SHAREHOLDER MEETINGS. The Trust is not required to hold annual meetings
and does not intend to do so. It will, however, hold special meetings as
required or deemed desirable by the Board of Trustees for purposes such as a
change in a Fund's fundamental policies, election of Trustees, or approval of an
investment advisory agreement. In addition, a Trustee may be elected or removed
by shareholders at a special meeting called upon written request of shareholders
owning in the aggregate at least 10% of the outstanding shares of the Trust.

YOUR VOTING RIGHTS. If we were to make changes to a Fund's management or
fundamental policies, you would be asked to vote as a shareholder because
shareholders have voting rights on these matters. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the Fund will send you
proxy materials that explain the issues to be decided and include a voting card
for you to mail back. Shareholders are entitled to one vote for each share
owned.

Unless permitted by the 1940 Act, shareholders will vote by Series and not in
the aggregate. For example, when voting to approve an investment advisory
agreement for a Series, only shareholders of that Series may vote; when voting
to elect Trustees, shareholders of all the Series vote in the aggregate.

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<PAGE> 21

GLOSSARY OF IMPORTANT TERMS

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

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

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

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

CASH-EQUIVALENTS: securities convertible into cash in a very short time period.
See Money Market Instruments.

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

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

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

DIVERSIFIED: under the 1940 Act, a diversified fund generally may not invest
more than 5% of its assets in the securities of any one issuer and may not hold
more than 10% of the voting shares of any one issuer with respect to 75% of the
value of its total assets. Certain minor exceptions apply to this policy, which
are described in the Statement of Additional Information. This test is applied
to each of the Funds as a whole and to each of the Fund's stock sub-categories.

FHLMC: Federal Home Loan Mortgage Corporation.

FNMA: Federal National Mortgage Association.

FUNDAMENTAL: a policy which cannot be changed without the approval of a majority
of the shareholders of a Fund.

GNMA: Government National Mortgage Association.

INVESTMENT MANAGER: Charles Schwab Investment Management, Inc.

INTERNATIONAL STOCKS: stocks of 350 of the largest non-U.S. operating
corporations according to their market capitalization. Currently, the countries
in which these stocks are issued include Australia, Austria, Belgium, Canada,
Denmark, France, Germany, Hong Kong, Italy, Japan, the Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

LARGE COMPANY STOCKS: The stocks of companies with the largest market
capitalizations,

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i.e., market capitalizations of about $1.5 billion and up.

MSCI EAFE: Morgan Stanley Capital International Europe, Australia, Far East
stock index.

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

MONEY MARKET INSTRUMENT: Short-term liquid debt such as Treasury bills and
commercial paper. See Commercial Paper.

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

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

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

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

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

S&P 500 INDEX(R): an index of 500 stocks selected, calculated, and published by
Standard & Poor's, Inc.

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

SECURITIES AND EXCHANGE COMMISSION (SEC): established by Congress to administer
the Securities Act of 1933, the Investment Company Act of 1940, and other
securities-related laws.

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

SMALL COMPANY STOCKS: stocks of companies whose market capitalization is within
a dollar range usually well below that of large companies, or in the lower
portion of a list ranking companies by market capitalization (i.e., the second
1,000 largest companies according to their market capitalization).

SUB-ADVISER: Symphony Asset Management, Inc., 555 California Street, Suite
#2975, San Francisco, California 94104.

TACTICAL ASSET ALLOCATION MODEL: a value-oriented strategy created by Symphony
used to measure the relative values among asset categories to determine the
asset allocation which seeks the highest reward for a given level of risk. Risks
and correlations of the asset categories are measured from long-term return
histories.

T-BILLS: debt securities issued by the U.S. Government having a maturity of less
than one year.

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

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

TRUST: Schwab Capital Trust.

VOLATILITY: a measure of the magnitude and frequency of changes in securities
values. Statistically, volatility is the measure of the spread of the prices or
yields around the mean of the prices or yields.

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<PAGE> 23

- -------------------------------------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING NOT CONTAINED IN THIS PROSPECTUS. IF ANYONE GIVES ANY OTHER
INFORMATION OR MAKES ANY OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION
OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR.
- -------------------------------------------------------------------------------
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
LAWFULLY BE MADE.
- -------------------------------------------------------------------------------

23
<PAGE> 24

SCHWAB

ASSET DIRECTOR(R) FUNDS

PROSPECTUS September 25, 1995

Asset Director - High Growth
Asset Director - Balanced Growth
Asset Director - Conservative Growth

[SchwabFunds Logo]

2462 (10/95) CRS 6685 Printed on recycled paper

[SchwabFunds Logo]

101 Montgomery Street

San Francisco, California 94104

<PAGE> 25
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB CAPITAL TRUST
101 Montgomery Street, San Francisco, CA 94104

SEPTEMBER 25, 1995

This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Prospectuses, dated February 28, 1995, as
amended June 30, 1995, for Schwab International Index Fund(TM) (the
"International Index Fund"), and Schwab Small-Cap Index Fund(TM) (the "Small-Cap
Index Fund"), and the joint Prospectus dated September 25, 1995 for Schwab Asset
Director(R)-High Growth Fund, Schwab Asset Director(R)-Balanced Growth Fund and
Schwab Asset Director(R)-Conservative Growth Fund (the "Asset Director Funds"),
five separately managed investment portfolios (collectively the "Funds") of
Schwab Capital Trust (the "Trust"). To obtain a copy of any of these
Prospectuses, please contact Charles Schwab & Co., Inc. ("Schwab") at 800-2
NO-LOAD, 24 hours a day or 101 Montgomery Street, San Francisco, CA 94104.

SCHWABFunds(R)
800-2 NO-LOAD

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 25
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . 28
PORTFOLIO TRANSACTIONS AND TURNOVER . . . . . . . . . . . . . . . . . . . 36
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SHARE PRICE CALCULATION . . . . . . . . . . . . . . . . . . . . . . . . . 42
HOW THE FUNDS REFLECT PERFORMANCE . . . . . . . . . . . . . . . . . . . . 43
THE BENEFITS OF INTERNATIONAL INVESTING . . . . . . . . . . . . . . . . . 44
INDEXING AND THE SCHWAB INDEX FUNDS . . . . . . . . . . . . . . . . . . . 44
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . 51
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 53
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
</TABLE>

<PAGE> 26
INVESTMENT OBJECTIVES

SCHWAB INTERNATIONAL INDEX FUND(TM)

The investment objective of the International Index Fund is to track
the price and dividend performance (total return) of the Schwab International
Index(TM), (the "International Index"), an index created to represent the
performance of common stocks and other equity securities issued by large
publicly traded companies from countries around the world with major developed
securities markets, excluding the United States.

SCHWAB SMALL-CAP INDEX FUND(TM)

The investment objective of the Small-Cap Index Fund is to attempt to
track the price and dividend performance (total return) of the Schwab Small-Cap
Index(TM) (the "Small-Cap Index"), an index created to represent the performance
of the second 1,000 publicly traded common stocks issued by United States
companies, ranked by market capitalization (share price times the number of
shares outstanding).

SCHWAB ASSET DIRECTOR(R)-HIGH GROWTH FUND

The investment objective of the Schwab Asset Director-High Growth Fund
is to provide high capital growth with less volatility than an all-stock
portfolio. This Fund provides the greatest exposure to various stock
categories, including domestic large and small company stocks, and international
stocks.

SCHWAB ASSET DIRECTOR(R)-BALANCED GROWTH FUND

The investment objective of the Schwab Asset Director-Balanced Growth
Fund is to provide the shareholder with maximum total return, including both
capital growth and income. This Fund represents a more balanced approach to
stocks and bonds.

SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND

The investment objective of the Schwab Asset Director-Conservative
Growth Fund is to provide the shareholder with income and more growth potential
than an all-bond portfolio. This Fund's stock component is designed to help
offset inflation.

The investment objectives stated above for each of the Funds, along
with certain investment restrictions adopted by the Funds, are fundamental and
cannot be changed without approval by holders of a majority of the Funds'
outstanding voting shares, as defined in the Investment Company Act of 1940 (the
"1940 Act").

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<PAGE> 27
INVESTMENT SECURITIES

FOREIGN INVESTMENTS

The International Index Fund and the Asset Director Funds expect to
invest in stocks of foreign issuers. The International Index Fund will invest
primarily in such stocks. Investing in foreign issuers involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. issuers. Since investments in the securities
of foreign issuers are usually made and held in foreign currencies, and since
the International Index Fund and the Asset Director Funds may hold cash in
foreign currencies, they may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may 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.

Since foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. companies, there may be less publicly available
information about a foreign company than about a U.S. company. Volume and
liquidity in most markets are less than in the U.S. and securities of many
foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
International Index Fund and the Asset Director Funds endeavors to achieve the
most favorable net results on their portfolio transactions. There is generally
less government supervision and regulation of foreign securities exchanges,
brokers, dealers and listed companies than in the U.S., thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities.

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 the International Index
Fund and the Asset Director Funds are uninvested and no return is earned
thereon. The inability to make intended security purchases due to settlement
problems could cause the International Index Fund and the Asset Director Funds
to miss attractive investment opportunities. Losses to the International Index
Fund and the Asset Director Funds arising out of the inability to fulfill a
contract to sell such securities, could result in potential liability to the
International Index Fund and Asset Director Funds.

In addition, with respect to those countries in which the International
Index Fund and the Asset Director Funds may invest or other countries which may
have a significant impact on the companies in which the International Index Fund
and the Asset Director Funds

3
<PAGE> 28

may invest, there is the possibility of expropriation or confiscatory taxation,
political or social instability, diplomatic developments, change of government
or war which could affect the International Index Fund's and the Asset Director
Funds' 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.

Each of the Asset Director Funds may invest up to 5% of its total
assets in companies located in developing countries. Compared to the United
States and other developed countries, developing countries may have relatively
unstable governments, economies based on only a few industries, and securities
markets which trade a small number of securities. Prices on these exchanges
tend to be volatile and, in the past, securities in these countries have offered
greater potential for gain (as well as loss) than securities of companies
located in developed countries.

Hong Kong. In addition to the risks discussed above, it is impossible
to currently foresee what risk, if any, may exist to the International Index
Fund's and the Asset Director Funds' investments as a result of the planned 1997
incorporation of the British Crown Colony of Hong Kong into the People's
Republic of China. Shareholders should note that the risks discussed above may
increase depending on political and economic developments as the scheduled time
for the change in government in Hong Kong draws nearer.

DEPOSITORY RECEIPTS

Each of the Asset Director Funds may invest up to 5% of its total
assets in American Depository Receipts and European Depositary Receipts (ADRs
and EDRs) which are receipts representing ownership of share of a foreign-based
issuer held in trust by a bank or similar financial institution. These are
designed for U.S. and European securities markets as alternatives to purchasing
underlying securities in their corresponding national markets and currencies.
ADRs and EDRs can be sponsored or unsponsored. Sponsored ADRs and EDRs are
certificates in which a bank or financial institution participates with a
custodian. Issuers of unsponsored ADRs and EDRs 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 the
unsponsored ADR or EDR.

OPTIONS ON SECURITIES

Writing Covered Options. The Funds may write (sell) covered call and
put options on any securities in which they may invest. The Funds 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. All call options
written by the Funds are covered,

4
<PAGE> 29

which means that the Funds will own the securities subject to the option so long
as the option is outstanding. The purpose of writing covered call options is to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, the Funds may forego the opportunity to profit from an increase in the
market price of the underlying security.

All put options written by the Funds will be covered, which means that
each of the Funds will have deposited 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 Corporation ("S&P"), or, if unrated, determined by the Funds' Investment
Manager to be of comparable credit quality) with a value at least equal to the
exercise price of the put option. The purpose of writing such options is to
generate additional income for the Funds. However, in return for the option
premium, the Funds accept the risk that they may be required to purchase the
underlying securities at a price in excess of the securities market value at
the time of purchase.

The Funds 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."

Purchasing Options. The Funds may purchase put and call options on any
securities in which they may invest or options on any securities index based on
securities in which they may invest. The Funds would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options they have purchased.

The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option, since, with regard to certain options the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains
the amount of the premium. This amount may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer experiences
a profit or loss from the sale of the underlying security. If a put option is
exercised, the writer must fulfill its obligation to purchase the underlying
security at the exercise price, which will usually exceed the then market value
of the underlying security.

The purchase of a call option would entitle the Funds, in return for
the premium paid, to purchase specified securities at a specified price during
the option period. The Funds would ordinarily realize a gain if, during the
option period, the value of such securities exceeded the sum of the exercise
price, the premium paid and transaction costs, otherwise the Funds would realize
either no gain or a loss on the purchase of the call option.

5
<PAGE> 30

Risks Associated With Options Transactions. There is no assurance that
a liquid secondary market on a domestic or foreign options exchange will exist
for any particular exchange-traded option or at any particular time. If the
Funds are unable to effect a closing purchase transaction with respect to
covered options they have written, the Funds 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 the Funds are unable to
effect a closing sale transaction with respect to options they have purchased,
they 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: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transaction
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) 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 (vi) 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 Funds may purchase and sell both options that are traded on U.S.
and foreign exchanges and options traded over-the- counter with broker-dealers
who make markets in these options. 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, the Funds 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 the 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 approved by
the staff of the SEC. Each of the Funds will write or purchase an option only
where the market value of that option, when aggregated with the market value of
all other options transactions made on behalf of the Fund does not exceed 5% of
the Fund's total assets.

FOREIGN CURRENCY TRANSACTIONS

Forward Foreign Currency Exchange Contracts. The International Index
Fund and the Asset Director Funds may enter into forward foreign currency
exchange contracts in several

6
<PAGE> 31

circumstances. The International Index Fund and the Asset Director Funds may
engage in foreign currency exchange transactions to protect against uncertainty
in the level of future exchange rates. The International Index Fund and the
Asset Director Funds expect to engage in foreign currency exchange transactions
in connection with the purchase and sale of portfolio securities (so-called
"transaction hedging") and to protect the value of specific portfolio positions
("position hedging").

For transaction hedging purposes, the International Index Fund and the
Asset Director Funds enter into foreign currency transactions with respect to
specific receivables or payables of the funds arising in connection with the
purchase or sale of portfolio securities. By transaction hedging, the
International Index Fund and the Asset Director Funds will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, and the date on
which such payments are made or received. When engaging in position hedging,
the International Index Fund and the Asset Director Funds enter into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which portfolio securities are denominated (or against an
increase in the value of currency for securities which the International Index
Fund and the Asset Director Funds expect to purchase).

When engaging in portfolio and/or transaction hedging, the
International Index Fund and the Asset Director Funds may purchase or sell
foreign on a spot (or cash) basis at the prevailing spot rate, and may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts
("futures contracts"). The International Index Fund and the Asset Director
Funds may also purchase exchange-listed and over-the-counter call and put
options on futures contracts and on foreign currencies. A put option on a
futures contract gives the International Index Fund and the Asset Director Funds
the right to assume a short position in the futures contract until expiration of
the option. A put option on currency gives the International Index Fund and the
Asset Director Funds the right to sell a currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the
International Index Fund and the Asset Director Funds the right to assume a long
position in the futures contract until the expiration of the option. A call
option on currency gives the International Index Fund and the Asset Director
Funds the right to purchase a currency at the exercise price until the
expiration of the option.

Hedging transactions involve costs and may result in losses, and the
International Index Fund and the Asset Director Funds' ability to engage in
hedging transactions may be limited by tax considerations. Transaction and
position hedging do not eliminate

7
<PAGE> 32

fluctuations in the underlying prices of the securities which the fund owns or
expects to purchase or expects to purchase or sell. They simply establish a rate
of exchange which one can achieve at some future point in time. Additionally,
although these techniques tend to minimize the risk of loss due to decline in
the value of the hedged currency, they tend to limit any potential gain which
might result from an increase in the value of such currency.

Although the contracts are not presently regulated by the Commodity
Futures Trading Commission (the "CFTC"), the CFTC may in the future assert
authority to regulate these contracts. In such event, the International Index
Fund's and the Asset Director Funds' ability to utilize forward foreign currency
exchange contracts may be restricted.

Each of the Asset Director Funds will enter into a forward foreign
currency exchange contract only when the market value of such contract, when
aggregated with the market value of all other such contracts held by the Fund
does not exceed 5% of the Fund's total assets.

The International Index Fund and the Asset Director Funds generally
will not enter into a forward contract with a term of greater than one year.

While the International Index Fund and the Asset Director Funds will
enter into forward contracts to reduce currency exchange rate risks,
transactions in such contracts involve certain other risks. Thus, while the
International Index Fund and the Asset Director Funds may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the International Index Fund and the Asset Director
Funds than if it had not engaged in any such transactions. Moreover, there may
be imperfect correlation between the International Index Fund's and the Asset
Director Funds' portfolio holdings of securities denominated in a particular
currency and forward contracts entered into by the International Index Fund and
the Asset Director Funds. Such imperfect correlation may cause the
International Index Fund and the Asset Director Funds to sustain losses which
will prevent the International Index Fund and the Asset Director Funds from
achieving a complete hedge or expose the International Index Fund and the Asset
Director Funds to risk of foreign exchange loss.

Writing and Purchasing Currency Call and Put Options. The
International Index Fund and the Asset Director Funds may write covered put and
call options and purchase put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. A call option written by the International Index Fund and the Asset
Director Funds obligates the International Index Fund and the Asset Director
Funds to sell specified currency to the holder of the option at a specified
price at any time before the expiration date. A put option written by the
International Index Fund and the Asset Director Funds would obligate the

8
<PAGE> 33

International Index Fund and the Asset Director Funds to purchase specified
currency from the option holder at a specified time before the expiration date.
The writing of currency options involves a risk that the International Index
Fund and the Asset Director Funds will, upon exercise of the option, be required
to sell currency subject to a call at a price that is less than the currency's
market value or be required to purchase currency subject to a put at a price
that exceeds the currency's market value.

The International Index Fund and the Asset Director Funds may terminate
their obligations under a call or put option by purchasing an option identical
to the one it has written. Such purchases are referred to as "closing purchase
transactions." The International Index Fund and the Asset Director Funds would
also be able to enter into closing sale transactions in order to realize gains
or minimize losses on options purchased by the International Index Fund and the
Asset Director Funds.

The purchase of a call option would entitle the International Index
Fund and the Asset Director Funds, in return for the premium paid, to purchase
specified currency at a specified price during the option period. The
International Index Fund and the Asset Director Funds would ordinarily realize a
gain or a loss on the purchase of the call option.

The purchase of a put option would entitle the International Index Fund
and the Asset Director Funds, in exchange for the premium paid, to sell specific
currency at a specified price during the option period. The purchase of
protective puts is designed merely to offset or hedge against a decline in the
dollar value of the International Index Fund's and the Asset Director Funds'
portfolio securities due to currency exchange rate fluctuations. The
International Index Fund and the Asset Director Funds would ordinarily realize a
gain, if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs; otherwise the International Index Fund and the Asset
Director Funds would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put options would tend
to be offset by countervailing changes in the value of the underlying currency.

Special Risks Associated With Options on Foreign Currency. An exchange
traded option position may be closed out only on an options exchange which
provides a secondary market for an option of the same series. Although the
International Index Fund and the Asset Director Funds will generally 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 on an exchange will
exist for any particular option, or at any particular time. For some options, no
secondary market on an exchange may exist, In such event, it might not be
possible to effect closing transactions in particular options, with the result
that the International Index Fund and the Asset Director Funds would have to
exercise its options in order to realize any

9
<PAGE> 34

profit and would incur transaction costs upon the sale of underlying securities
pursuant to the exercise of put options. If the International Index Fund and
the Asset Director Funds as a covered call option writer is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying currency (or security denominated in that currency) until the
option expires or it delivers the underlying currency upon exercise.

There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the OCC inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.

The International Index Fund and the Asset Director Funds will purchase
and write over-the-counter options only to the extent consistent with its
limitations on investments in illiquid securities, as described in the
Prospectuses. Trading in over- the-counter options is subject to the risk that
the other party will be unable or unwilling to close-out purchasing and writing
activities.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

To hedge against changes in interest rates, securities prices or
currency exchange rates, the Funds may purchase and sell various kinds of
futures contracts. In addition, the Asset Director Funds may purchase and sell
futures contracts as a substitute for a comparable market position in the
underlying securities. The Funds may also enter into closing purchase and sale
transactions with respect to any such contracts and options. The futures
contracts may be based on various securities (such as U.S. government
securities), securities indices, foreign currencies and other financial
instruments and indices. The Small-Cap Index and International Index Funds will
engage in futures and related option transactions only for bona fide hedging or
other appropriate risk management purposes as defined below. All futures
contracts entered into by the Funds are traded on U.S. exchanges or boards of
trade that are licensed and regulated by the CFTC or on foreign exchanges.

Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed upon price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).

When interest rates are rising or securities prices are falling, the
Funds can 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, the Funds, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
they affect anticipated purchases. Similarly, the International Index Fund and
the Asset Director Funds can sell futures contracts

10
<PAGE> 35

on a specified currency to protect against a decline in the value of such
currency and its portfolio securities which are denominated in such currency.
The International Index Fund and the Asset Director Funds can purchase futures
contracts on foreign currency to fix the price in U.S. dollars of a security
denominated in such currency that the International Index Fund and the Asset
Director Funds have acquired or expect to acquire.

Although futures contracts by their terms generally call for the actual
delivery or acquisition of underlying securities or the cash value of the index,
in most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take such delivery. The contractual
obligation is offset by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities or the cash value of
the index underlying the contractual obligations. The Funds may incur brokerage
fees when they purchase or sell futures contracts.

Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While the Funds' futures contracts on securities
or currency will usually be liquidated in this manner, the Funds may instead
make or take delivery of the underlying securities or currency whenever it
appears economically advantageous for them to do so. A clearing corporation
associated with the exchange on which futures on securities or currency are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.

Hedging Strategies With Futures. Hedging by use of futures contracts
seeks to establish more certainty than would otherwise be possible with respect
to the effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Funds own or propose to acquire. Such futures
contracts may include contracts for the future delivery of securities held by
the Funds or securities with characteristics similar to those of the Funds'
portfolio securities. Similarly, the International Index Fund and the Asset
Director Funds may sell futures contracts on currency in which its portfolio
securities are denominated or in one currency to hedge against fluctuations in
the value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Funds' Investment Manager, there is a sufficient degree of
correlation between price trends for the Funds' portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Funds may also enter into such futures contracts as part of their
hedging strategy. Although under some circumstances, prices of securities in
the Funds' portfolio may be more or less volatile than prices of such futures
contracts, the Funds' Investment

11
<PAGE> 36

Manager will attempt to estimate the extent of this difference in volatility
based on historical patterns and to compensate for it by having the Funds enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a particular hedge against price changes affecting the Funds' portfolio
securities. When hedging of this character is successful, any depreciation in
the value of the portfolio securities will substantially be offset by
appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of the Funds' portfolio securities would
be substantially offset by a decline in the value of the futures position.

On other occasions, the Funds may take "long" positions by purchasing
such futures contracts. This would be done, for example, when the Funds
anticipate the subsequent purchase of particular securities when they have the
necessary cash, but expects the prices or currency exchange rates then available
in the applicable market to be less favorable than prices that are currently
available.

Options on Futures Contracts. The acquisition of put and call options
on futures contracts will give the Funds the right (but not the obligation), for
a specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Funds obtain the benefit of the futures position if
prices move in a favorable direction but limit their risk of loss in the event
of an unfavorable price movement to the loss of the premium and transaction
costs.

The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Funds' assets. By
writing a call option, the Funds become obligated, in exchange for the premium,
to sell a futures contract, which may have a value lower than the exercise
price. Thus, the loss incurred by the Funds in writing options on futures is
potentially unlimited and may exceed the amount of the premium received. The
Funds will incur transaction costs in connection with the writing of options on
futures.

The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. The
Funds' ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.

The Small-Cap Index and International Index Funds may use options on
futures contracts solely for bona fide hedging or other appropriate risk
management purposes as defined below. In addition, the Asset Director Funds may
use options on futures contracts as a substitute for a comparable market
position in the underlying securities.

Other Considerations. The Small-Cap Index and International Index
Funds

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<PAGE> 37

will engage in futures and related options transactions only for bona fide
hedging or other appropriate risk management purposes, and the Asset Director
Funds will engage in futures and related options transactions to meet asset
allocation targets, in accordance with CFTC regulations which permit principals
of an investment company registered under the 1940 Act to engage in such
transactions without registering as commodity pool operators. "Appropriate risk
management purposes" means activities in addition to bona fide hedging which the
CFTC deems appropriate for operators of entities, including registered
investment companies, that are excluded from the definition of commodity pool
operator. The Funds are not permitted to engage in speculative futures trading.
The Funds will determine that the price fluctuations in the futures contracts
and options on futures used for hedging purposes are substantially related to
price fluctuations in securities held by the Funds or which they expect to
purchase. Except as stated below, the Funds' futures transactions will be
entered into for traditional hedging purposes--i.e., futures contracts will be
sold to protect against a decline in the price of securities, or the currency
will be purchased to protect the Fund against an increase in the price of
securities, or the currency in which they are denominated. As evidence of this
hedging intent, the Small-Cap Index and International Index Funds expect that on
75% or more of the occasions on which it takes a long futures (or option)
position (involving the purchase of futures contracts), the Small-Cap Index and
International Index Funds will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash market at the time when the futures (or
option) position is closed out. However, in particular cases, when it is
economically advantageous for the Funds to do so, a long futures position may be
terminated (or an option may expire) without the corresponding purchase of
securities or other assets. As an alternative to literal compliance with the
bona fide hedging definition, a CFTC regulation permits the Funds to elect to
comply with a different test, under which (i) the Funds' futures positions will
be used as part of its portfolio management strategy and will be incidental to
its activities in the underlying cash market and (ii) the underlying commodity
value of such positions will not exceed the sum of (a) cash or cash equivalents
segregated for this purpose, (b) cash proceeds on existing investments due
within 30 days, and (c) accrued profits on such futures or options positions.

Each of the Funds will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code") for
maintaining its qualification as a regulated investment company for federal
income tax purposes.

Each Fund may not purchase or sell futures contracts or purchase or
sell related options, except for closing purchase or sale transactions, if
immediately thereafter the sum of the amount of margin deposits on the Fund's

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<PAGE> 38

outstanding futures and related options positions and the amount of premiums
paid for outstanding options on futures would exceed 5% of the market value of
the Fund's total assets. These transactions involve brokerage costs, require
margin deposits and, in the case of futures contracts and options obligating the
Funds to purchase securities or currencies, require the Funds to segregate
assets to cover such contracts and options.

While transactions in futures contracts and options on futures may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, while the Funds may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Funds than if
they had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Funds may be exposed to risk of loss.

Perfect correlation between the Funds' futures positions and portfolio
positions may be difficult to achieve. In addition, it is not possible to hedge
fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.

In addition to bona fide hedging and other risk management purposes as discussed
above, the Asset Director Funds may purchase and sell stock and bond futures
contracts, including stock index futures contracts, and options on such futures
contracts as a substitute for a comparable market position in the underlying
securities. To the extent the Asset Director Funds engage in the use of futures
and options on futures other than for hedging purposes, the Funds may be subject
to additional risk.

The price of stock index futures may not correlate perfectly with the movement
in the stock index because of certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
would distort the normal relationship between the index and futures markets.
Secondly, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
also may cause temporary price distortions.

SWAPS

Each of the Asset Director Funds may enter into swaps on various
securities (such as U.S. government securities), securities indexes, interest
rates, prepayment rates, foreign currencies or other financial instruments

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<PAGE> 39

or indexes, in order to protect the value of the Asset Director Funds from
interest rate fluctuations and to hedge against fluctuations in the floating
rate market in which the Asset Director Funds' investments are traded, for both
hedging and non-hedging purposes. While swaps are different from futures
contracts (and options on futures contracts) in that swap contracts are
individually negotiated with specific counterparties, the Asset Director Funds
will use swap contracts for purposes similar to the purposes for which they use
options, futures, and options on futures. Those uses of swap contracts (i.e.,
risk management and hedging) present the Funds with risks and opportunities
similar to those associated with options contracts, futures contracts, and
options on futures. See "Futures Contracts and Options on Futures Contracts" in
this Statement.

The Asset Director Funds may enter into these transactions to manage
their exposure to changing interest rates and other market factors. Some
transactions may reduce each Asset Director Funds' exposure to market
fluctuations while others may tend to increase market exposure.

The use of swaps involves investment techniques and risks different
from and potentially greater than those associated with ordinary fund securities
transactions. If the Investment Manager is incorrect in its expectations of
market values, interest rates, or currency exchange rates, the investment
performance of the Asset Director Funds would be less favorable than it would
have been if this investment technique were not used. The Asset Director Funds
will only invest in swaps up to 5% of each Fund's total assets.

PREFERRED STOCK

The Funds may invest in preferred stock. Preferred stock has priority
as to income and generally as to assets of the issuer, however, income is
usually limited to a definitive percentage regardless of the issuer's earnings.
Preferred stock usually has limited voting rights. The Asset Director Funds
will only invest in preferred stock up to 5% of each Fund's net assets.

CONVERTIBLE SECURITIES

Each of the Asset Director Funds may invest up to 5% of its net assets
in securities that are convertible into common stock, including convertible
bonds, convertible preferred stocks, and warrants.

Convertible bonds are issued with lower coupons than nonconvertible
bonds of the same quality and maturity, but they give holders the option to
exchange their bonds for a specific number of shares of the company's common
stock at a predetermined price. This structure allows the convertible bond
holder to participate in share price movements in the company's common stock.
The actual return on a convertible bond may exceed its stated yield if the
company's common stock appreciates in value, and the option to convert to common
shares becomes more valuable.

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<PAGE> 40

Convertible preferred stocks are nonvoting equity securities that pay a
fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.

The Funds may invest in warrants. Warrants entitle the holder to buy
the issuer's stock at a specific price for a specific period of time. The price
of a warrant tends to be more volatile than, and does not always track, the
prices of its underlying stock. Warrants are issued with expiration dates. Once
a warrant expires, it has no value in the market.

REAL ESTATE-RELATED INVESTMENTS

Each of the Asset Director Funds may invest up to 5% of its total
assets in real estate-related investments. Real estate- related instruments
include real estate investment trusts, commercial and residential
mortgage-backed securities, and real estate financings. Real estate-related
instruments are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, and the management skill and creditworthiness of the issuer. Real
estate-related instruments may also be affected by tax and regulatory
requirements, such as those relating to the environment.

PRECIOUS METAL-RELATED INVESTMENTS

Each of the Asset Director Funds may invest up to 5% of its total
assets in precious metal-related investments. The Asset Director Funds may
invest in common stocks of companies principally engaged in precious
metal-related activities which include companies principally engaged in the
extraction, processing, distribution, or marketing of precious metals industry
if at the time of investment the Investment Manager considers that at least 50%
of the company's assets, revenues or profits are derived from the precious metal
industry. The Asset Director Funds may also invest in securities of companies
principally engaged in the precious metals industry in which the Asset Director
may be foreign or domestic. For further disclosure on foreign securities, see
"Foreign Investments" in this Statement of Additional Information.

The Asset Director Funds may also invest in futures on precious metals,
such as gold futures, and options thereon. Such investments are subject to the
investment limitations for investments in futures and options for the Asset
Director Funds as set forth in "Futures Contracts and Options on Futures
Contracts" in this Statement of Additional Information.

Prices of precious metals can be expected to respond to changes in
rates of inflation and to perceptions of economic and political instability.
Historically, the

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<PAGE> 41

prices of precious metals and of securities of companies engaged in the precious
metal-related activities may be subject to extreme fluctuations, reflecting
wider economic or political instability or for other reasons.

U.S. GOVERNMENT SECURITIES

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

GOVERNMENT "MORTGAGE BACKED" SECURITIES

Among the U.S. Government securities in which the Funds may invest are
government "mortgage-backed" (or government guaranteed mortgage-related)
securities. Mortgages backing the securities purchased by the Funds include,
among others, conventional thirty year fixed rate mortgages, graduated payment
mortgages, fifteen year mortgages and adjustable rate mortgages. All of these
mortgages can be used to create pass-through securities. A pass-through
security is formed when mortgages are pooled together and undivided interest in
the pool or pools are sold. The cash flow from the mortgages is passed through
to the holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal then their
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates

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are important because of their effect on the yield and price of the securities.
Accelerated prepayments adversely impact yields for pass-throughs purchased at a
premium (i,e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. The Funds may purchase mortgage-related securities at
a premium or at a discount. Principal and interest payments on the
mortgage-related securities are government guaranteed to the extent described
below. Such guarantees do not extend to the value or yield of the
mortgage-related securities themselves or of a Fund's shares.

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

The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the United States. The GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.

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

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

GMCs also represent a pro rata interest in a pool of mortgages.
However,

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these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years. The FHLMC guarantee is not backed by the full faith
and credit of the United States.

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

OTHER ASSET-BACKED SECURITIES

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

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

Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such

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Asset-Backed Securities are pledged to a trustee or custodian for the benefit of
the holders thereof. Such issuers generally hold no assets other than those
underlying the Asset-Backed Securities and any credit support provided. As a
result, although payments on such Asset-Backed Securities are obligations of the
issuers, in the event of default on the underlying assets not covered by any
credit support, the issuing entities are unlikely to have sufficient assets to
satisfy their obligations on the related Asset-Backed Securities.

METHODS OF ALLOCATING CASH FLOWS

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

TYPES OF CREDIT SUPPORT

Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two classes: liquidity protection and protection against ultimate default
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate default ensures payment on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction, or through a combination of such
approaches. Examples of Asset-Backed Securities with credit support arising out
of the structure of the transaction include "senior-subordinated

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<PAGE> 45

securities" (multiple class Asset-Backed Securities with certain classes
subordinate to other classes as to the payment of principal thereon, with the
result that defaults on the underlying assets are borne first by the holders of
the subordinated class) and Asset- Backed Securities that have "reserve funds"
(where cash or investments, sometimes funded from a portion of the initial
payments on the underlying assets, are held in reserve against future losses) or
that have been "overcollateralized" (where the scheduled payments on, or the
principal amount of, the underlying assets substantially exceed that required to
make payment on the Asset- Backed Securities and pay any servicing or other
fees). The degree of credit support provided on each issue is based generally
on historical information respecting the level of credit risk associated with
such payments. Delinquency or loss in excess of that anticipated could
adversely affect the return on an investment in an Asset-Backed Security.

CREDIT CARD RECEIVABLE SECURITIES

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

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

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Accounts are unsecured obligations of the cardholder.

CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES

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

COMMERCIAL PAPER

The Funds may invest in Commercial paper which consists of short-term,
unsecured promissory notes issued to finance short- term credit needs. The
Funds will only invest in commercial paper that at the time of purchase is rated
Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, "Duff 2" or higher by Duff &
Phelps, Inc. ("Duff"), or "F2" or higher by Fitch Investors Services, Inc.
("Fitch") or if unrated by Moody's, S&P, Duff, or Fitch, is determined by the
Investment Manager, using guidelines approved by the Board of Trustees, to be at
least equal in quality to one or more of the above ratings.

OTHER INVESTMENT POLICIES

Securities which are acquired by the International Index Fund and the
Asset Director Funds outside the U.S. and which are publicly traded in the U.S.
or on a foreign securities exchange or in a foreign securities market are not
considered by the Funds to be illiquid assets so long as the Funds acquire and
hold the securities with the intention of reselling the securities in the
foreign trading market, the Funds reasonably believe they can readily dispose of
the securities in the foreign trading market, the Funds reasonably believe they
can readily dispose of the securities for cash in the U.S., or foreign market
and current market quotations are readily available. Investments may be in
securities of foreign issuers, whether located in developed or undeveloped
countries. Investments in foreign securities where delivery takes place outside
the U.S. will have to be made in compliance with any applicable U.S. and foreign
currency restrictions and tax laws (including laws imposing withholding taxes on
any dividend or interest income) and laws limiting the amount and types of
foreign investments. Changes of government administrations or of economic or
monetary policies, in the U.S. or abroad, or changed circumstances
convertibility or exchange rates could result in investment losses for the
Funds. Investments in foreign securities may also subject the Funds to losses
due to nationalization, expropriation or differing accounting practices and
treatments. Moreover, investors should recognize that foreign

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securities are often traded with less frequency and volume, and therefore may
have greater price volatility, than is the case with many U.S. securities.
Notwithstanding the fact that the Funds generally intend to acquire the
securities of foreign issuers where there are public trading markets,
investments by the Funds in the securities of foreign issuers may tend to
increase the risks with respect to the liquidity of the Funds' portfolio and the
Funds' ability to meet a large number of shareholder redemption requests should
there be economic or political turmoil in a country in which the Funds have a
substantial portion of their assets invested or should relations between the
U.S. and foreign countries deteriorate markedly. Furthermore, the reporting and
disclosure requirements applicable to foreign issuers may differ from those
applicable to domestic issuers, and there may be difficulties in obtaining or
enforcing judgments against foreign issuers.

Loans of Portfolio Securities. The Funds may loan securities to
qualified broker-dealers or other institutional investors provided that such
loans do not exceed one-third of the value of the Funds' total assets at the
time of the most recent loan, and that the borrower deposits and maintains with
the Funds cash collateral or U.S. government securities with a value equal to
102% of the value of the securities loaned. The lending of securities is a
common practice in the securities industry. The Funds will engage in security
lending arrangements with the primary objective of increasing the Funds' income
through investment of the cash collateral in short-term, interest-bearing
obligations, but will do so only to the extent that the Funds will not lose the
tax treatment available to regulated investment companies. The Funds will be
entitled to all dividends or interest on any loaned securities.

Repurchase Transactions. Repurchase agreements are instruments under
which a buyer acquires ownership of a security from a seller that agrees to
repurchase the security at a mutually agreed upon time and price (which price is
higher than the purchase price), thereby determining the yield during the
buyer's holding period. Under the 1940 Act, a repurchase agreement is deemed to
be the loan of money by a Fund to the seller, collateralized by the underlying
security. The interest rate is effective for the period of time in which the
Funds are invested in the agreement and is not related to the coupon rate on the
underlying security. Any repurchase agreements entered into by a Fund will
involve the Fund as the buyer and banks or broker-dealers as sellers (repurchase
agreements with broker-dealers will be limited to obligations of the U.S.
Government, its agencies or instrumentalities). The period of these repurchase
agreements will usually be short, from overnight to one week, and at no time
will the Funds invest in repurchase agreements for more than one year. However,
the securities which are subject to repurchase agreements may have maturity
dates in excess of one year from the effective date of the repurchase
agreements. The transaction requires the initial collateralization of the
seller's obligation with securities having a market value, including accrued
interest, equal to at

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least 102% of the dollar amount invested by the Funds, with the value
marked-to-market daily to maintain 100% coverage. A default by the seller might
cause the Funds to experience a loss or delay in the liquidation of the
collateral securing the repurchase agreement. The Funds might also incur
disposition costs in liquidating the collateral. The Funds will make payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of its custodian bank. The Funds may not enter into a
repurchase agreement of more than seven days duration if, as a result, the
market value of the Funds' net assets, together with investments in other
securities deemed to be not readily marketable, would be invested in excess of
the Funds' policy on investments in illiquid securities.

In the event of a bankruptcy or other default of a repurchase
agreement's seller, a Fund might incur expenses in enforcing its rights, and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Each Fund will not invest more than 10% of its
total assets at the time of purchase in repurchase agreements maturing in more
than seven days and other illiquid securities.

Illiquid Securities. Each Fund reserves the right to invest up to 10%
of its net assets in illiquid securities. Generally an "illiquid security" is
any security that cannot be disposed of promptly and in the ordinary course of
business at approximately the amount at which the Funds have valued the
instrument. Subject to this limitation, the Funds may invest in restricted
securities where such investment is consistent with the Funds' investment
objectives and such securities may be considered to be liquid to the extent the
Funds' Investment Manager determines that there is a liquid institutional or
other market for such securities. In determining whether a restricted security
is properly considered a liquid security, the Funds' Investment Manager, under
the direction of the Board of Trustees, will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to purchase or sell the security and the number of
potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the 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 the Funds
invest in restricted securities that are deemed liquid, the general level of
illiquidity in the Funds' portfolio may be increased if qualified institutional
buyers become uninterested in purchasing these securities contracts. The Funds
will limit their investments in liquid restricted securities to 5% of their net
assets.

24
<PAGE> 49

INVESTMENT RESTRICTIONS

Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act). Each of the Funds
may not:

1) As to 75% of its assets, purchase securities of any issuer
(other than obligations of, or guaranteed by, the United States Government, its
agencies or instrumentalities) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of such issuer.

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 (except that the International Index Fund and the Small-Cap Index
Funds may purchase securities under such circumstances only to the extent that
the Schwab International Index(TM) or the Schwab Small-Cap Index(TM) is also so
concentrated).

3) Invest more than 10% of the total value of its 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 Manager
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 (i)
purchase securities of companies that deal in real estate or interests therein,
(ii) purchase or sell futures contracts, options contracts, equity index
participations and index participation contracts, and (iii) for the Asset
Director Funds, purchase securities of companies that deal in precious metals or
interests therein.

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, including any exemptive relief granted by the
Securities and Exchange Commission.

8) Lend money to any person, except that each Fund may (i)
purchase a portion of an issue of short-term debt securities or similar
obligations (including repurchase

25
<PAGE> 50

agreements) that are publicly distributed or customarily purchased by
institutional investors, and (ii) 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 each 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
one-third of the value of its total 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.

In order to permit the sale of shares of each Fund in certain
jurisdictions, each Fund may make commitments more restrictive than the
fundamental operating restrictions described above. Should it do so and later
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders, it will revoke the commitment(s) by terminating sales
of its shares in the jurisdiction(s) involved.

The following restrictions are non-fundamental and may be changed by
the Trust's Board of Trustees. Each of the Funds 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 United States
Government, its agencies or instrumentalities) that with their predecessors have
a record of less than three years continuous operation.

3) 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.

4) 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.

26
<PAGE> 51

5) Make short sales, except for short sales against the box.

6) 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.

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

27
<PAGE> 52
MANAGEMENT OF THE TRUST

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

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

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

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

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

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

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

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

28
<PAGE> 53

<TABLE>
<S> <C> <C>
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
Age: 51 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).

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

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

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

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

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

PAMELA E. HERLICH Assistant Secretary Assistant Corporate Secretary, The Charles Schwab
Age: 41 Corporation and Charles Schwab & Co., Inc.;
Corporate Secretary, Charles Schwab Investment
Management, Inc., Mayer & Schweitzer and The
Charles Schwab Trust Company. Prior to 1993, Ms.
Herlich was Assistant Corporate Secretary for Mayer
& Schweitzer, Inc. and The Charles Schwab Trust
Company.
</TABLE>

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

29
<PAGE> 54

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

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

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

30
<PAGE> 55

COMPENSATION TABLE(1)

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

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

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

Donald F. Dorward, 16,000 N/A N/A 55,000
Trustee

Robert G. Holmes, 16,000 N/A N/A 55,000
Trustee

Donald R. Stephens, 16,000 N/A N/A 55,000
Trustee

Michael W. Wilsey, 16,000 N/A N/A 55,000
Trustee
</TABLE>

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

2. "Fund Complex" comprises all 19 funds of the Trust, The Charles
Schwab Family of Funds, Schwab Investments and Schwab Annuity
Portfolios.

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

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

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

31
<PAGE> 56
Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account"), as of the
date such fees would have been paid to such Trustee. The value of the Deferred
Fee Account as of any date will be equal to the value the Account would have had
as of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the SchwabFund(R) or SchwabFunds selected by the
participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, The Charles
Schwab Family of Funds, and Schwab Investments.

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

INVESTMENT MANAGER

The Investment Manager, a wholly-owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as
an investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds(R), a
family of 18 mutual funds with approximately $29 billion in assets as of July
31, 1995. The Investment Manager is an affiliate of Schwab, the Trust's
distributor and shareholder services and transfer agent. The Advisory Agreement
will continue in effect until July 21, 1996 with respect to the Schwab
International Index Fund, October 14, 1996 with respect to the Schwab Small-Cap
Index Fund, September 25, 1997 with respect to the Asset Director Funds, and
thereafter will continue for one year terms subject to annual approval by: (1)
the Trust's Board of Trustees or (2) a vote of a majority (as defined in the
1940 Act) of the outstanding voting securities of a Fund. In either event, the
continuance must also be approved by a majority of the Trust's Board of Trustees
who are not parties to the Agreement or interested persons (as defined in the
1940 Act) of any such party by vote cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement may be terminated at
any time upon 60 days notice by either party, or by a majority vote of the
outstanding shares of a Fund, and will terminate automatically upon assignment.

International Index Fund. For its advisory and administrative services
to the International Index Fund, the Investment Manager is entitled to receive a
graduated annual fee, payable monthly, of 0.70% of the Fund's average daily net

32
<PAGE> 57

assets not in excess of $300 million, and 0.60% of such assets over $300
million.

The Investment Manager and Schwab have guaranteed that, through at
least June 30, 1996, the total fund operating expenses for the International
Index Fund will not exceed 0.69% of that Fund's average daily net assets.

For the fiscal period from September 9, 1993 (commencement of
operations) to October 31, 1993, no investment advisory fees were paid by the
International Index Fund (fees were reduced by $97,986). For the fiscal year
ended October 31, 1994, the International Index Fund paid investment advisory
fees of $474,0000 (fees were reduced by $388,000).

Small-Cap Index Fund. For its advisory and administrative services to
the Small-Cap Index Fund, the Investment Manager is entitled to receive a
graduated annual fee, payable monthly, of 0.50% of the Fund's average daily net
assets not in excess of $300 million, and 0.45% of such assets over $300
million.

The Investment Manager and Schwab have guaranteed that, through June
30, 1996, the total fund operating expenses for the Small-Cap Index Fund will
not exceed 0.59% of that Fund's average daily net assets.

For the fiscal period from December 3, 1993 (commencement of
operations) to October 31, 1994, the Small-Cap Index Fund paid investment
advisory fees of $151,861 (fees were reduced by $106,533).

Asset Director Funds. For its advisory and administrative services to
the Asset Director Funds, the Investment Manager is entitled to receive a
graduated annual fee, payable monthly, of 0.74% of each Fund's average daily net
assets not in excess of $1 billion, and 0.69% of the next $1 billion; and 0.64%
of such net assets over $2 billion.

The Investment Manager and Schwab have guaranteed that, through at
least December 31, 1996, the total fund operating expenses for the International
Index Fund will not exceed 0.89% of each Fund's average daily net assets.

Additional Information. The Advisory Agreement provides that the fees
to be paid to the Investment Manager will be less than the amount that would
cause the aggregate operating expenses of a Fund (excluding interest, taxes, net
brokerage commissions and extraordinary expenses) in any year to exceed the most
stringent limits prescribed by any state in which shares of a Fund are offered
for sale. The most stringent current limit for such expenses is 2.5% of a
fund's first $30 million of average net assets, 2.0% of a fund's next $70
million of average net assets and 1.5% of a fund's average net assets in excess
of $100 million.

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

33
<PAGE> 58

SUB-ADVISER

The Investment Manager has entered into an investment sub-advisory
agreement (the "Sub-Advisory Agreement") with respect to the Asset Director
Funds with Symphony Asset Management, Inc. (the "Sub-Adviser"), pursuant to
which it will act as the Funds' sub- adviser. The Sub-Adviser is registered as
an investment adviser under the Investment Advisers Act of 1940 and currently
manages directly and indirectly approximately $700 million in institutional and
private account assets.

The Sub-Adviser furnishes investment advice through direct assistance
to the Investment Manager in the development and execution of quantitatively
based investment strategies. The Sub-Adviser uses a sophisticated optimization
technique known as "Tactical Asset Allocation" in evaluating the optimal
allocation of the Asset Director Funds' assets among asset categories: stocks,
bonds, and cash.

Tactical Asset Allocation is a value-oriented strategy which seeks the
highest reward for a given level of risk. Expected returns are measured for
each asset category; for stocks, the internal rate of return is measured on
forecasted dividend stream; for bonds, the yield to maturity is evaluated on
representative long corporate bonds; and for cash-equivalents, yield to maturity
is evaluated on representative money market instruments. Risks and correlations
of the asset categories are measured from long-term return histories.

The Investment Manager pays the Sub-Adviser an annual investment
sub-advisory fee, payable monthly, of 0.08% of the first $100 million of each of
the Asset Director Fund's average daily net assets, 0.06% of a Fund s next $150
million of average daily net assets, 0.04% of a Fund s next $600 million of
average daily net assets, and 0.02% of such assets over $850 million.

As of May 1, 1995 and June 30, 1995, Dimensional Fund Advisors Inc.
("Dimensional") no longer served as the sub-adviser to the Schwab Small-Cap
Index Fund and the Schwab International Index Fund, respectively. As of the
same dates, the Investment Manager became responsible for providing all
investment advisory services to the Funds.

Expenses. Under the Sub-Advisory Agreement between Dimensional and the
Investment Manager, the Investment Manager paid Dimensional the following
amounts for the fiscal periods indicated below.

International Index Fund: $20,999 and $185,000 for the fiscal period from
September 9, 1993 (commencement of operations) to October 31, 1993 and for the
fiscal year ended October 31, 1994, respectively.

Small-Cap Index Fund: $51,419 for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994.

34
<PAGE> 59

DISTRIBUTOR

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

CUSTODIAN AND FUND ACCOUNTANT

State Street Bank and Trust Company, at 1 Heritage Drive, North Quincy,
Massachusetts 02171-2197 serves as Custodian and as Fund Accountant for the
Trust.

ACCOUNTANTS AND REPORTS TO SHAREHOLDERS

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

LEGAL COUNSEL

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

35
<PAGE> 60
PORTTFOLIO TRANSACTIONS AND TURNOVER

PORTFOLIO TRANSACTIONS

In effecting securities transactions for the Funds, the Investment
Manager seeks to obtain best price and execution. Subject to the supervision of
the Board of Trustees, the Investment Manager will generally select brokers and
dealers for the Funds primarily on the basis of the quality and reliability of
brokerage services, including execution capability and financial responsibility.
In assessing these criteria, the Investment Manager will, among other things,
monitor the performance of brokers effecting transactions for the Funds to
determine the effect, if any, the Funds' transactions through those brokers have
on the market prices of the stocks involved. This may be of particular
importance for the Funds' investments in relatively smaller companies whose
stocks are not as actively traded as those of their larger counterparts. The
Funds will seek to buy and sell securities in a manner that causes the least
possible fluctuation in the prices of those stocks in view of the size of the
transactions.

In an attempt to obtain best execution for the Funds, the Investment
Manager may also place orders directly with market makers or with third market
brokers, Instinet or brokers on an agency basis. Placing orders with third
market brokers or through Instinet may enable the Funds to trade directly with
other institutional holders on a net basis. At times, this may allow the Funds
to trade larger blocks than would be possible trading through a single market
maker.

When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.

In determining when and to what extent to use Schwab as its broker for
executing orders for the Funds on securities exchanges, the Investment Manager
will consider (if relevant) whether the compensation to be paid Schwab will be
(i) fair and reasonable, (ii) at least as favorable to the Funds as commissions
that would be charged by other qualified brokers having comparable execution
capabilities, and (iii) at least as favorable as commissions contemporaneously
charged by Schwab on comparable transactions for its most favored unaffiliated
customers. The Funds do not consider it practicable or in the best interests of
their shareholders to solicit competitive bids for commission rates on each
transaction. However, the Board of Trustees, including a majority of the
trustees who are not "interested persons" of Schwab within the meaning of

36
<PAGE> 61

the 1940 Act, (i) has prescribed procedures designed to provide that the Funds
do not pay commissions that do not meet the standards described above, (ii)
reviews those procedures annually to determine whether they remain adequate, and
(iii) considers quarterly whether or not the commissions charged by Schwab have
met the standards.

Schwab's brokerage services to the Funds are also subject to Rule
11a2-2(T) under the Securities Exchange Act of 1934, as amended. Rule 11a2-2(T)
permits the Funds to use Schwab as a broker provided certain conditions are met.
Among these requirements are that the floor brokerage element of portfolio
transactions (that is, execution on the exchange floor or through use of
exchange facilities) be performed by members of the exchange not associated with
Schwab, that the orders to such members be transmitted from off the exchange
floor and that neither Schwab nor an associated person of Schwab participates in
the execution of the transaction after the order has been so transmitted. In
connection with transactions in which Schwab acts as broker for the Funds,
Schwab, while not permitted to perform floor brokerage (which is undertaken by
members selected by Schwab who are not associated with that firm), still
continues to bear principal responsibility for determining important elements of
overall execution such as timing and order size, and also clears and settles
such transactions. Schwab pays the fees charged by those persons performing the
described floor brokerage elements. Schwab will not trade directly with the
Funds in any transactions in which Schwab or an affiliate acts as principal.

Brokerage Commissions. For the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994, the Small-Cap Index Fund paid
brokerage commissions of $165,997. For the fiscal period from September 9, 1993
(commencement of operations) to October 31, 1993 and for the fiscal year ended
October 31, 1994, the International Index Fund paid brokerage commissions of
$170,195 and $86,127, respectively.

PORTFOLIO TURNOVER

For reporting purposes, each Fund's turnover rate is calculated by
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
owned by the Fund 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.

A 100% portfolio turnover rate would occur, for example, if all
portfolio securities (aside from short-term securities) were sold and either
repurchased or replaced once during the fiscal year. The Funds expect that their
portfolio turnover rate will not exceed 100% in any given year, a turnover rate
lower than that of most non-index mutual funds. In the case of the Asset
Director Funds, this 100% portfolio turnover rate applies to the Funds' stock
and bond categories separately. A high portfolio

37
<PAGE> 62

turnover rate may increase a Fund's transaction costs. The International Index
Fund's portfolio turnover rate for the fiscal period from September 9, 1993
(commencement of operations) to October 31, 1993 and for the fiscal year ended
October 31, 1994 was 2% and 6%, respectively. The Small-Cap Index Fund's
portfolio turnover rate for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994 was 16%.

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

38
<PAGE> 63
TAXES

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

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

The Code imposes a non-deductible excise tax on regulated investment
companies that do not distribute in a calendar year (regardless of whether they
otherwise have a non-calendar taxable year) an amount equal to 98% of their
"ordinary income" (as defined in the Code) for the calendar year plus 98% of
their capital gain net income for the one year period ending on October 31 of
such calendar year. The balance of such income must be distributed during the

39
<PAGE> 64

next calendar year. For the foregoing purposes, a Fund is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year. If the distributions during a calendar year were
less than the required amount, the Fund is subject to a non-deductible excise
tax equal to 4% of the deficiency.

A Fund's transactions in futures contracts, forward contracts, foreign
currency transactions, options, and certain other investment and hedging
activities is subject to special tax rules. In a given case, these rules may
accelerate income to a Fund, defer its losses, cause adjustments in the holding
periods of the Fund's assets, convert short-term capital losses into long-term
capital losses or otherwise affect the character of the Fund's income. These
rules could therefore affect the amount, timing and character of distributions
to shareholders. The Funds will endeavor to make any available elections
pertaining to these transactions in a manner believed to be in the best interest
of the Funds and their shareholders.

INCOME TAX INFORMATION

Any dividends declared by the Funds in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year declared.

Dividends paid by the Funds from net investment income and
distributions from the Funds' net short-term capital gains in excess of any net
long-term capital losses, whether received in cash or reinvested, generally will
be taxable to shareholders as ordinary income. For corporate investors in the
Funds, dividend distributions designated by the Funds to be from dividends
received from qualifying domestic corporations will be eligible for the 70%
corporate dividends-received deduction to the extent they would qualify if the
Funds were regular corporations. Distributions received from the Funds
designated as long-term capital gains (net of capital losses), whether received
in cash or reinvested, will be taxable as long-term capital gains without regard
to the length of time a shareholder owned shares in the Funds. However, if a
shareholder receives a long-term capital gain distribution with respect to
Funds' 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 gain distribution, be
treated as a long-term capital loss. If a shareholder is not subject to income
tax, generally the shareholder will not be taxed on amounts distributed by the
Funds.

A Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends paid to any shareholder (1) who
fails to provide a correct taxpayer identification number certified under
penalty of perjury; (2) who is subject to withholding by the Internal Revenue
Service for failure to properly report all payments of interest or dividends; or
(3) who fails to provide a certified statement that he or she is not subject to
"backup withholding." This "backup withholding" is not an additional

40
<PAGE> 65

tax and any amounts withheld may be credited against the shareholder's ultimate
U.S. tax liability.

The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) generally are subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from net investment income and
short-term capital gains. Distributions to foreign shareholders of long-term
capital gains 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 meets the Code's definition of "resident alien." Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above. Distributions by a Fund may also be
subject to state, local and foreign taxes, and its treatment under applicable
tax laws may differ from the federal income tax treatment.

Although the International Index Fund and the Asset Director Funds will
attempt not to invest in any non-U.S. corporation which could be treated as a
passive Foreign investment company ("PFIC"), or become a PFIC, under the Code,
it might inadvertently do so. This could result in adverse tax consequences upon
the disposition of, or the receipt of "excess distributions" with respect to,
such equity investments. To the extent the International Index Fund and the
Asset Director Funds do invest in PFIC, they may adopt certain tax strategies to
reduce or eliminate the adverse effects of certain federal tax provisions
governing PFIC investments. Many non-U.S. banks and insurance companies may not
be treated as PFICs if they satisfy certain technical requirements under the
Code. To the extent that the International Index Fund and the Asset Director
Funds do invest in foreign securities which are determined to be PFIC securities
and are required to pay a tax on such investments, a credit for this tax would
not be allowed to be passed through to the International Index Fund's and the
Asset Director Funds' shareholders. Therefore, the payment of this tax would
reduce the International Index Fund's and the Asset Director Funds' economic
return from their PFIC shares and excess distributions received with respect to
such shares are treated as ordinary income rather than capital gains.

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

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<PAGE> 66

SHARE PRICE CALCULATION

Each Fund's net asset value per share is determined each day the New
York Stock Exchange is open for trading as of 4:00 p.m., Eastern time. The net
asset value of the International Index Fund is expressed in U.S. dollars by
translating the Fund's assets using the bid price for the U.S. dollar as quoted
by generally recognized, reliable sources. Currently, the New York Stock
Exchange is closed on the following holidays: New Year's Day (observed),
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The Funds value their portfolio securities
based on their market value. Each security held by the Funds which is listed on
a securities exchange and for which market quotations are available is valued at
the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices. Price
information on each listed security is taken from the exchange where the
security is primarily traded. Unlisted securities for which market quotations
are readily available are valued at the mean between the most recent bid and
asked prices. The value of other assets for which no quotations are readily
available (including any restricted securities) are valued at fair value as
determined in good faith by the Investment Manager pursuant to Board of Trustees
guidelines. Securities may be valued on the basis of prices provided by pricing
services when such prices are believed to reflect fair market value.

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<PAGE> 67

HOW THE FUNDS REFLECT PERFORMANCE

STANDARDIZED TOTAL RETURN

Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in the Fund
made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, the Fund
assumes the reinvestment of all distributions at net asset value on applicable
reinvestment dates. For the fiscal period from September 9, 1993 (commencement
of operations) to October 31, 1993 and for the fiscal year ended October 31,
1994, the International Index Fund's total return was 1.5% and 7.9%,
respectively. For the fiscal period from December 3, 1993 (commencement of
operations) to October 31, 1994, the Small-Cap Index Fund's total return was
0.63%.

NONSTANDARDIZED TOTAL RETURN

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

In addition, an after-tax total return for each Fund may be calculated
by taking that Fund's standardized or non-standardized total return and
subtracting applicable federal taxes from the portions of each Fund's total
return attributable to capital gains distributions and ordinary income. This
after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.

Each Fund may also report the percentage of that Fund's standardized or
non-standardized total return which would be paid to taxes annually (at the
applicable federal personal income and capital gains tax rates) before
redemption of Fund shares. This proportion may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.

YIELD

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

COMPARING THE PERFORMANCE OF THE FUNDS WITH OTHER FUNDS AND INDICES

The performance of the Funds may be compared with the performance of
other mutual funds by comparing the ratings of mutual fund rating services,
various indices of investment

43
<PAGE> 68

performance, United States government obligations, bank certificates of deposit,
the consumer price index, and other investments for which reliable data is
available.

The Asset Director Funds may also compare thei histocial performance figures to
the performance of indices similar to their asset categories and sub-categories,
such as those indices names in the Funds' Prospectus under "Market Performance."

THE BENEFITS OF INTERNATIONAL INVESTING

INCREASED DIVERSIFICATION CAN LOWER RISK

To some extent, all U.S.-based investments -- stocks, bonds, mutual
funds and CDs -- are affected by the same economic forces. Tax cuts, interest
rate changes and the performance of the U.S. stock market can all influence U.S.
investments. Adding international (or overseas) investments to a U.S.-based
portfolio has historically reduced the portfolio's overall volatility. Although
U.S. and international markets may be interrelated, they do not move in tandem
- -- so losses in one market can be offset by gains in another.

POTENTIALLY HIGHER OVERALL PERFORMANCE

During the past 10 years ending December 31, 1994, international equity
markets outperformed the U.S. equity market and most other U.S. securities
investments -- corporate bonds, CDs and U.S. Treasuries. The returns produced by
the international markets have also kept investors well ahead of inflation. This
historical performance means that investors diversified overseas earned a higher
level of return.

BROADER GROWTH OPPORTUNITIES

Investors who limit their portfolios to U.S. securities are missing
these investment opportunities. Ten years ago, the United States made up more
than half of the world's equity investments. As of December 31, 1993, it
represented just over one-third.

INDEXING AND THE SCHWAB INDEX FUNDS

Because the unmanaged performance of a broad-based equity index has
often proven superior to that of many individually selected stock portfolios, a
growing percentage of assets invested in the equity markets are being placed in
"index" portfolios. Institutional investors often devote a substantial
percentage of their assets to indexed strategies.

An index typically tracks the performance of a group of securities

44
<PAGE> 69

selected to represent a particular market, and is most often used to gauge that
market's performance. The Dow Jones Industrial Average ("DJIA") and Standard &
Poor's 500 Index(R) ("S&P 500") are two indices designed to measure the
performance of United States stocks. When investment managers invest indexed
separate accounts or index fund assets, they attempt to replicate the
performance of the applicable target index by holding all or a representative
sample of the securities included in the index.

The Funds performance data assume the reinvestment of dividends, but do
not reflect deductions for administrative and management expenses. The Funds
will be subject to these costs and expenses. In addition, various factors may
cause the Funds' performance to be higher or lower than that of the Index.

THE SCHWAB INTERNATIONAL INDEX(TM)

The Schwab International Index(TM) is a broad-based stock market index
which contains the common stocks of the 350 largest operating companies (i.e.,
non-investment companies) incorporated outside the United States. To reduce
undue risk, the Index represents equities only from countries that are
considered to have developed markets and economies. By tracking the largest
companies in developed markets, the Index represents the performance of the
"blue chips" of international markets. The Index is also designed to provide a
broad representation of the international market, by limiting each country to no
more than 35% of the total market capitalization of the Index. As the stocks
contained in the Index represent about 35% of the total market capitalization of
international companies, the Index provides a reliable measure of market
performance. The Schwab International Index(TM) was first made available to the
public on July 29, 1993.

THE SCHWAB SMALL-CAP INDEX(TM)

To be included in the Schwab Small-Cap Index, a company must satisfy
all of the following criteria: (1) it must be an "operating company" (i.e., not
an investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange, American Stock Exchange or the NASDAQ/NMS, and (3) its
market value must place it among the second 1000 such companies as measured by
market capitalization (i.e., from the company with a rank of 1001 through the
company with a rank of 2000). Shareholders generally avoid exposure to the
smallest companies, whose shares are often thinly traded and very volatile,
because these stocks are not included in the Index.

A particular stock's weighting in the Schwab Small-Cap Index is based
on its relative total market value (i.e., its market price per share times the
number of shares outstanding), divided by the total market capitalization of the
Schwab Small-Cap Index. The returns produced by the United States stock market
during the 25 years ending December 31, 1990 have been exceeded by those of very
few types of securities investments. Because the unmanaged performance of the
U.S. stock market has often proven superior to that of

45
<PAGE> 70

many individually selected stock portfolios, a growing percentage of assets
invested in the equity markets are being placed in "index" portfolios. From less
than $9 billion in 1980, indexed institutional holdings have grown to over $280
billion, a figure equal to approximately one-quarter of all institutional
assets. (Source: Callan Associates Survey, reported in Fall 1990 edition of The
Journal of Portfolio Management).

Historically a long-term investment in a group of common stocks
representative of the stock market as a whole as well as a group of common
stocks representative of small-cap stocks has significantly exceeded that of
U.S. Treasury Bills, CDs, corporate bonds and inflation.

ASSET ALLOCATION STRATEGIES USING SCHWABFUNDS(R)

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

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

With Schwab's Mutual Fund OneSource Service(TM) ("OneSource"), a
shareholder can invest in over 200 mutual funds from many fund companies,
subject to the following. If a shareholder makes five or more short-term
redemptions of OneSource mutual funds (other than the SchwabFunds) within any
12-month period, a fee will be charged on all future trades. A short-term
redemption in this context refers to the sale of mutual fund shares held for six
months or less. Some mutual funds available through OneSource may charge fees
permitted under Rule 12b-1 in excess of one quarter of one percent per year.
Schwab reserves the right to modify OneSource's terms and conditions at any
time. For more information, a shareholder should contact their Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day.

From time to time, the Funds may include discussions in advertisements
of the income tax savings shareholders may experience as a result of their
policy of limiting portfolio trading in order to reduce capital gains. This
information may be supplemented by presentations of statistical data
illustrating the extent of such income tax savings and the impact of such
savings on the yield and/or total return of the Funds. In addition, such
advertisements may include comparisons of the Funds' performance against that of

46
<PAGE> 71

investment products that do not employ the Funds' policy of seeking to limit
capital gains. The Funds are intended to make indexed investing easily available
to Schwab customers with the highest level of convenience and economy thereby
facilitating their ability to participate in the long-term performance of the
United States stock market.

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<PAGE> 72

SCHWABFUNDS(R).

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

EQUITY FUNDS
Schwab 1000 Fund(R)1
Schwab International Index Fund(TM)2
Schwab Small-Cap Index Fund(TM)2

Schwab Asset Director(R)-High Growth Fund3

Schwab Asset Director(R)-Balanced Growth Fund3

Schwab Asset Director(R)-Conservative Growth Fund3

FIXED INCOME FUNDS1
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund

Schwab California Short/Intermediate Tax-Free Bond Fund4

Schwab California Long-Term Tax-Free Bond Fund4

MONEY MARKET FUNDS4
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(TM)
Schwab Tax-Exempt Money Fund--Sweep Shares

Schwab Tax-Exempt Money Fund--Value Advantage Shares6

Schwab California Tax-Exempt Money Fund--Sweep Shares4

Schwab California Tax-Exempt Money Fund--Value Advantage Shares4,6

Schwab Retirement Money Fund(TM)7

Schwab Institutional Advantage Money Fund(TM)7

Schwab New York Tax-Exempt Money Fund--Sweep Shares8

Schwab New York Tax-Exempt Money Fund--Value Advantage Shares6,8

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

2 The Schwab International Index Fund, the Schwab Small-Cap Index Fund
and the Asset Director Funds are separate investment portfolios of the
Trust.

3 Through approximately November 17, these Funds will be offered through
a special subscription period. This subscription period may be
extended. See the Funds' Prospectus for details.

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

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

6 As of June 30, 1995, the Schwab Tax-Exempt Money Fund--Value Advantage
Shares, Schwab California Tax-Exempt Money Fund--Value Advantage
Shares, and the Schwab New York Tax-Exempt Money Fund--Value Advantage
Shares had not yet commenced operations.

7 Designed for institutional investors only.

8 Available only to New York residents and residents of selected other
states.

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<PAGE> 73

OTHER INFORMATION

From time to time, the International Index Fund and the Small-Cap Index
Fund may compare the historical performance of the Schwab International
Index(TM) and the Schwab Small-Cap Index(TM), respectively, to the historical
performance of various other indices, including the S&P 500, as reported by
independent sources.

Each Fund is managed to offset capital gains with capital losses in
order to minimize that Fund's capital gains tax liability. This special feature
can make a real difference in an investor's after-tax return, especially if the
investor is in a high tax bracket. In addition, each Fund has adopted a number
of policies that should cause its portfolio turnover rate to be below the
portfolio turnover rate of many other mutual funds. A lower portfolio turnover
rate acts to minimize associated transaction costs as well as the level of
realized capital gains. By avoiding, where possible, the distribution of capital
gains to shareholders, the Funds help to build the value of a shareholders
shares and defer payment of capital gains taxes until shares are redeemed. A
shareholder's current tax liability for capital gains should be reduced and the
shareholder's total return increased by these policies.

Each Fund may, from time to time, refer to recent studies that analyze
certain techniques and strategies which either Fund may use. In addition, each
Fund may, from time to time, promote the advantages of investing in a series
that is part of a large, diverse mutual fund complex.

From time to time, either Fund may include discussions in
advertisements of the income tax savings shareholders may experience as a result
of that Fund's policy of limiting portfolio trading in order to reduce capital
gains. This information may be supplemented by presentations of statistical data
illustrating the extent of such income tax savings and the impact of such
savings on the yield and/or total return of either Fund. In addition, such
advertisements may include comparisons of each Fund's performance against that
of investment products that do not employ each Fund's policy of seeking to limit
capital gains.

GENERAL INFORMATION

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

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<PAGE> 74

law, the Declaration of Trust, the Bylaws or any registration of the Trust with
the SEC or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to a Fund's fundamental investment
objective, policies or restrictions.

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

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

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

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

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<PAGE> 75

inoperative and the Trust itself is unable to meet its obligations.

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

PRINCIPAL HOLDERS OF SECURITIES

As of September 25, Charles Schwab and Co., Inc., 101 Montgomer St.,
San Francisco, CA 94104 directly owned 100% of the outstanding shares of each of
the Asset Director Funds.

In addition, as of September 1, 1995, the officers and trustees of the
Trust, as a group, owned less than 1% of the outstanding voting securities of
the Small-Cap Index and International Index Funds.

PURCHASE AND REDEMPTION OF SHARES

Each Fund's minimum initial investment requirement is $1,000 ($500 for
Custodial Accounts, Individual Retirement Accounts and certain other retirement
plans). Subsequent investments of $100 or more may be made. These minimum
investment requirements may be changed at any time and are not applicable to
certain types of investors. The Trust may waive the minimums for purchases by
trustees, directors, officers or employees of the Trust, Schwab, the Investment
Manager, or the Sub-Adviser.

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

OTHER INFORMATION

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

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<PAGE> 76

at the office of the SEC in Washington, D.C.

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

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SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
COMMON STOCK--97.2%
AUSTRALIA--2.6%
Australia & New Zealand
Banking Group 49,700 $ 144
BTR Nylex 116,332 207
Broken Hill Proprietary Co. 70,134 1,075
CRA 24,700 351
Coles Myer 50,456 157
Commonwealth Bank 37,577 208
National Australia Bank 58,769 464
News Corp. 78,390 483
Western Mining Corp. 47,000 293
Westpac Banking Corp. 79,986 268
-------
3,650
-------

BELGIUM--0.6%
Electrabel 1,800 320
Electrabel, AFV1 300 54
Petrofina SA 1,000 307
Societe Generale de Belgique 2,640 184
-------
865
-------

CANADA--3.1%
Alcan Aluminum 8,845 237
American Barrick
Resources Corp. 14,800 353
BCE Inc. 13,564 474
Bank of Montreal 9,793 182
Bank of Nova Scotia 8,185 166
Canadian Imperial Bank
of Commerce 8,161 193
Canadian Pacific Ltd. 14,600 233
Imperial Oil 8,563 307
Newbridge Networks Corp. 3,300 92
Northern
Telecom 10,700 386
Nova Corp. 19,200 192
PanCanadian Petroleum 5,000 158
Placer Dome Inc. 9,200 199
Royal Bank of Canada 13,200 277
Seagram Co. 16,300 502
Thomson Corp. 23,700 285
Toronto-Dominion Bank 11,600 176
-------
4,412
-------

DENMARK--0.4%
D/S 1912 Series B 10 173
D/S Svendborg Series B 5 125
Tele Danmark AS Series B 5,290 305
-------
603
-------

FRANCE--7.4%
AXA Groupe SA 13,100 608
Alcatel Cable 1,723 201
Assurances Generales
de France 15,800 646
Banque Nationale de Paris 10,018 496
Canal Plus 819 135
Carrefour 1,100 485
Cie Financiere de
Paribas (Bearer) 4,681 312
Cie Generale des Eaux 4,803 440
Compagnie de
Saint-Gobain SA 3,273 415
Compagnie de Suez 6,400 306
Credit Lyonnais 1,800 163
Danone Groupe 3,000 423
GAN Group 1,900 105
L'Air Liquide 2,784 393
L'Air Liquide (Rights -
exp. 11/04/94)* 2,384 33
L'Oreal SA 2,650 576
LVMH Moet-Hennessy
Louis Vuitton 7,100 1,145
Lafarge Coppee SA 3,500 278
Lyonnaise des
Eaux-Dumez 2,430 221
Michelin Class B (Reg.) 4,450 186
Peugeot Citroen 2,200 330
Rhone-Poulenc SA
A Shares 13,500 333
Schneider SA 2,650 199
Societe Generale 3,473 392
Societe Nationale
Elf Aquitaine 11,256 832
TOTAL Compagnie
Francaise des Petroles
Class B 9,300 603
Union des Assurances
de Paris 12,650 334
-------
10,590
-------

GERMANY--7.5%
BASF AG 2,500 529
Bankgesellschaft Berlin 1,029 246
Bayer AG 2,866 671
Bayerische Hypotheken &
Wechsel Bank 913 240
Bayerische Hypotheken &
Wechsel Bank (New)* 91 23
Bayerische Motoren Werke AG 820 423
Bayerische Vereinsbank AG 924 274
Commerzbank AG 1,345 283
Daimler-Benz AG 2,721 1,399
Deutsche Bank AG 2,016 994
Dresdner Bank AG 1,897 508
Hoechst AG 2,550 559
Mannesmann AG 1,561 417
Muenchener
Rueckversicherung 11 18
Muenchener
Rueckversicherung (Reg.) 311 573
Preussag AG 615 180
RWE AG 1,370 420
SAP AG 242 156
Siemens AG 2,356 985
Thyssen AG 1,189 227
VEBA AG 2,018 676
VIAG AG 873 275
Vereinigte Elektrizitat
Westfalen Series B 807 203
Volkswagen AG 1,129 332
-------
10,611
-------

HONG KONG--4.3%
CITIC Pacific 85,000 256
Cathay Pacific
Airways 118,000 175
China Light & Power 77,400 403
Hang Seng Bank 81,100 588
Henderson Land
Development Co. 68,000 444
Hong Kong
Telecom 469,200 1,005
Hongkong Electric Holdings 84,000 264
</TABLE>

See accompanying Notes to Financial Statements.

<PAGE> 78

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

<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Hongkong Land Holdings 111,000 $284
Hutchison Whampoa 154,000 711
Jardine Matheson
Holdings (Reg.) 29,811 248
New World
Development Co. 69,709 222
Sun Hung Kai Properties 86,500 660
Swire Pacific Class A 68,000 519
Wharf Holdings 89,000 351
-------
6,130
-------

ITALY--2.4%
Alleanza Assicurazioni 22,500 235
Alleanza Assicurazioni
(Non-Convertible) 3,750 35
Assicurazioni Generali 35,200 882
Banco di Roma SpA 141,900 151
Fiat Finance SpA 65,000 266
Fiat Finance SpA
(Non-Convertible) 14,000 32
First Bank San Paolo
di Torino 27,700 165
IMI 24,800 162
INA* 161,000 233
RAS Assicurazioni 6,310 79
RAS Assicurazioni
(Non-Convertible) 2,790 19
STET 137,000 414
STET (Non-Convertible) 66,000 163
Telecom Italia 200,000 549
Telecom Italia
(Non-Convertible) 42,000 93
-------
3,478
-------

JAPAN--32.7%
Ajinomoto Co., Inc. 11,000 151
All Nippon Airways Co. 28,000 332
Asahi Bank 45,000 497
Asahi Breweries 8,000 88
Asahi Chemical
Industry Co. 28,000 227
Asahi Glass Co. 21,000 271
Ashikaga Bank 8,000 59
Bank of Fukuoka 11,000 103
Bank of Tokyo 39,000 600
Bank of Yokohama 20,000 184
Bridgestone Corp. 15,000 248
Canon Inc. 16,000 297
Chiba Bank 13,000 123
Chubu Electric Power Co. 14,300 366
Chugoku Electric
Power Co., Inc. 5,900 147
Cosmo Oil Co. 11,000 88
Dai Nippon Printing Co. 15,000 279
Dai-Ichi Kangyo Bank 54,000 987
Daiei Inc. 14,000 210
Daiichi Pharmaceutical Co. 5,000 76
Daiwa Bank 29,000 305
Daiwa House Industry Co. 9,000 125
Daiwa Securities Co. 26,000 378
East Japan Railway Co. 100 499
Ebara Corp. 5,000 91
Eisai Co. 5,000 86
FamilyMart Co. 1,000 65
Fanuc 5,000 243
Fuji Bank 50,000 1,110
Fuji Photo Film Co. 9,000 215
Fujitsu Ltd. 35,000 401
Furukawa Electric Co. 13,000 90
Gunma Bank 10,000 114
Hachijuni Bank 10,000 126
Hankyu Corp. 17,000 103
Hanwa Co. 5,000 20
Hiroshima Bank 13,000 83
Hitachi Ltd. 57,000 594
Hitachi Zosen 19,000 111
Hokkaido Electric Power Co. 4,000 100
Hokkaido Takushoku Bank 12,000 58
Hokuriku Bank 13,000 98
Hokuriku Electric Power Co. 4,000 99
Honda Motor Co. 18,000 314
Industrial Bank of Japan 46,000 1,425
Ishikawajima-Harima
Heavy Industries 25,000 120
Isuzu Motors 20,000 107
Ito-Yokado Co. 8,000 437
Itochu Corp. 28,000 218
Japan Airlines Co. 35,000 271
Japan Energy Co. 21,000 93
Joyo Bank 14,000 123
Jusco Co. 6,000 135
Kajima Corp. 16,000 152
Kandenko Co. 5,000 91
Kansai Electric Power Co. 18,800 474
Kao Corp. 12,000 142
Kawasaki Heavy Industries 25,000 123
Kawasaki Steel Co. 52,000 244
Keio Teito Railway Co. 8,000 46
Kinden Co. 3,000 49
Kinki Nippon Railway Co. 31,000 268
Kirin Brewery Co. 19,000 228
Kobe Steel 48,000 166
Kokusai Denki 1,100 113
Komatsu Ltd. 18,000 171
Kubota Co. 23,000 177
Kyocera Corp. 4,000 305
Kyowa Hakko Kogyo 6,000 61
Kyushu Electric Power Co. 8,500 214
Kyushu Matsushita
Electric Co. 3,000 76
Long-Term Credit Bank
of Japan 42,000 503
Marubeni Corp. 27,000 156
Marui Co. 7,000 128
Matsushita Communication
Industrial 4,000 111
Matsushita Electric
Industrial Co. 41,000 681
Matsushita Electric Works 12,000 133
Matsushita-Kotokuki
Electronics 3,000 85
Mazda Motor Corp. 21,000 125
Mitsubishi Bank 51,000 1,279
Mitsubishi Chemical Corp. 28,000 165
Mitsubishi Corp. 30,000 409
Mitsubishi Electric Corp. 39,000 292
Mitsubishi Estate Co. 25,000 294
Mitsubishi Heavy Industries 59,000 481
Mitsubishi Materials Co. 21,000 119
Mitsubishi Motors Co. 17,000 159
Mitsubishi Oil Co. 8,000 87
</TABLE>

See accompanying Notes to Financial Statements.

54
<PAGE> 79

SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994

<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Mitsubishi Trust &
Banking Corp. 25,000 $ 387
Mitsui & Co. 30,000 269
Mitsui Fudosan Co. 16,000 180
Mitsui Marine & Fire
Insurance Co. 14,000 106
Mitsui O.S.K. Lines 14,000 61
Mitsui Trust & Banking Co. 22,000 254
Mitsukoshi 6,000 62
Murata Manufacturing Co. 4,400 180
NEC Corp. 28,000 358
NGK Insulators 5,000 53
NKK Corp. 57,000 176
Nagoya Railroad Co. 10,000 52
New Oji Paper Co. 12,000 134
Nichii Co. 4,000 56
Nikko Securities Co. 29,000 341
Nintendo Co. 3,000 168
Nippon Credit Bank 34,000 226
Nippon Express Co. 21,000 228
Nippon Fire & Marine
Insurance Co. 7,000 52
Nippon Oil Co. 21,000 152
Nippon Paper
Industries Co. 39,000 308
Nippon Steel Corp. 121,000 500
Nippon Telegraph &
Telephone Corp. 303 2,831
Nippon Yusen 21,000 143

Nippondenso Co. 15,000 321
Nissan Motor Co. 49,000 418
Nisshin Steel Co. 20,000 105
Nomura Securities Co. 38,000 796
Obayashi Corp. 10,000 71
Odakyu Electric
Railway Co. 14,000 103
Oki Electric Industry Co. 12,000 96
Ono Pharmaceutical Co. 2,000 94
Osaka Gas Co. 45,000 193
Pioneer Electronic Co. 4,000 104
Ricoh Co. 13,000 130
Sakura Bank 58,000 796
Sankyo Co. 7,000 182
Sanwa Bank 50,000 1,048
Sanyo Electric Co. 33,000 199
Secom Co. 2,000 134
Sega Enterprises 2,000 104
Seibu Railway Co. 11,000 477
Sekisui Chemical Co. 11,000 113
Sekisui House 11,000 125
Seven-Eleven Japan Co. 7,000 574
Sharp Co. 22,000 411
Shikoku Electric Power Co. 4,800 118
Shimizu Corp. 14,000 145
Shin-Etsu Chemical Co. 6,000 128
Shiseido Co. 8,000 97
Shizuoka Bank 16,000 218
Showa Shell Sekiyu 7,000 93
Sony Corp. 7,000 427
Sony Music Entertainment
(Japan) 2,100 119
Sumitomo Bank 56,000 1,052
Sumitomo Chemical Co. 29,000 171
Sumitomo Corp. 21,000 217
Sumitomo Electric Industries 12,000 180
Sumitomo Marine & Fire
Insurance Co. 13,000 118
Sumitomo Metal Industries 51,000 193
Sumitomo Metal Mining Co. 11,000 109
Sumitomo Trust &
Banking Co. 22,000 320
Suzuki Motor Co. 10,000 127
TDK 3,000 147
Taisei Corp. 19,000 127
Taisho Pharmaceutical Co. 6,000 110
Takeda Chemical Industries 17,000 211
Teijin Ltd. 19,000 113
Tobu Railway Co. 16,000 102
Tohoku Electric Power Co. 8,900 228
Tokai Bank 39,000 483
Tokio Marine & Fire
Insurance Co. 30,000 356
Tokyo Electric Power Co. 26,000 762
Tokyo Electron 3,000 100
Tokyo Gas Co. 50,000 236
Tokyo Steel Manufacturing 2,000 50
Tokyu Corp. 18,000 126
Tonen 13,000 207
Toppan Printing Co. 12,000 177
Toray Industries 24,000 190
Toshiba Corp. 56,000 442
Tostem Corp. 4,000 114
Toto 6,000 94
Toyo Seikan 4,000 134
Toyo Trust & Banking Co. 13,000 152
Toyoda Automatic Loom 4,000 84
Toyota Motor Corp. 66,000 1,458
Yamaichi Securities Co. 20,000 159
Yamanouchi
Pharmaceutical Co. 6,000 118
Yamazaki Baking Co. 5,000 104
Yasuda Fire & Marine
Insurance Co. 15,000 110
Yasuda Trust & Banking Co. 18,000 160
-------
46,554
-------

NETHERLANDS--5.1%
ABN-Amro Holding NV 12,240 435
AEGON NV 4,400 272
Akzo Nobel NV 3,000 379
Elsevier NV 29,000 296
Heineken NV 1,600 234
Internationale
Nederlanden Groep 11,582 542
Koninklijke PTT Nederland 19,700 628
Philips Electronics NV 13,300 441
PolyGram NV 7,900 352
Royal Dutch Petroleum Co.
(Bearer) 23,200 2,702
Unilever NV 6,700 798
Wolters Kluwer CVA 2,700 195
-------
7,274
-------

SINGAPORE--1.8%
OCBC Bank 35,833 386
Singapore Airlines 52,000 499
Singapore Telecom 640,000 1,395
United Overseas Bank 30,000 329
-------
2,609
-------
</TABLE>

See accompanying Notes to Financial Statements.

55
<PAGE> 80

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

<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
SPAIN--1.7%
Argentaria 5,700 $220
Banco Central SA (Reg.) 5,500 132
Banco de Bilbao Vizcaya
SA (Reg.) 7,400 194
Banco de Santander 1,200 48
Banco de Santander
SA (Reg.) 5,600 228
Empresa Nacional
de Electricidad 10,000 458
Iberdrola SA 39,600 261
Repsol, SA 12,800 409
Telefonica de Espana, SA 35,800 484
-------
2,434
-------

SWEDEN--1.6%
ASEA AB Series A
Free shares 2,100 153
ASEA AB Series B
Free shares 800 58
Astra AB Series A
Free shares 19,400 524
Astra AB Series B
Free shares 3,400 91
BCP Branded Consumer
Products Series A
Free shares 5,300 57
BCP Branded Consumer
Products Series B
Free shares 2,800 31
L.M. Ericsson Series B
Free shares 9,300 565
Pharmacia AB Series A
Free shares 5,300 100
Pharmacia AB Series B
Free shares 2,800 52
Sandvik AB Series A
Free shares 8,600 146
Volvo AB Series A
Free shares 5,000 98
Volvo AB Series B
Free shares 20,700 408
-------
2,283
-------

SWITZERLAND--5.8%
BBC Brown
Boveri 331 284
BBC Brown Boveri (Reg.) 189 31
CS Holding (Bearer) 1,014 444
CS Holding (Reg.) 1,745 148
Ciba-Geigy AG (Bearer) 170 100
Ciba-Geigy AG (Reg.) 1,080 630
Cie Financiere Richemont
Series A (Bearer) 232 228
Nestle SA (Reg.) 1,669 1,562
Roche Holding AG 295 1,313
Roche Holding AG (Bearer) 70 631
SMH AG (Bearer) 156 87
SMH AG (Reg.) 682 90
Sandoz AG (Bearer) 91 48
Sandoz AG (Reg.) 1,673 835
Schweiz Bankgesellschaft
(Bearer) 886 831
Schweiz Bankgesellschaft
(Reg.) 950 202
Schweiz Bankverein (Bearer) 940 271
Schweiz Bankverein (Reg.) 1,030 142
Zurich Versicherung (Bearer) 150 137
Zurich Versicherung (Reg.) 206 189
-------
8,203
-------

UNITED KINGDOM--20.2%
Abbey National 56,600 385
Allied-Lyons PLC 43,900 429
Argyll Group PLC 44,593 190
BAA PLC 42,200 355
BAT Industries PLC 127,800 916
BOC Group 18,525 204
BTR PLC 148,712 746
Barclays PLC 70,097 667
Bass PLC 37,200 338
Boots Co. PLC 42,448 368
British Airways PLC 40,000 230
British Gas PLC 181,600 870
British Petroleum PLC 236,575 1,683
British Steel 80,800 212
Cable & Wireless PLC 146,900 1,009
Cadbury Schweppes PLC 33,655 239
Commercial Union 23,500 211
General Accident 17,300 166
General Electric Co. PLC 115,800 523
Glaxo Holdings PLC 133,126 1,303
Grand Metropolitan PLC 92,103 625
Great Universal Stores 43,000 394
Guinness PLC 84,200 643
HSBC Holdings PLC 36,191 430
HSBC Holdings PLC
(Hong Kong) 66,146 788
Hanson PLC 206,153 779
Imperial Chemical
Industries PLC 29,100 380
Inchcape 21,300 152
J. Sainsbury PLC 74,732 488
Kingfisher 28,500 221
Lloyds Abbey Life 26,700 153
Lloyds Bank 56,554 530
Marks & Spencer PLC 117,900 801
National Power 52,800 428
National Westminster
Bank PLC 73,299 603
New Rothmans (units) 62,400 428
Pearson PLC 21,837 226
Peninsular & Oriental
Steam Navigation 25,546 266
Powergen PLC 33,400 310
Prudential Corp. 82,019 428
RTZ Corp. PLC (Reg.) 44,900 631
Rank Organisation PLC 35,800 237
Redland 21,300 162
Reed International PLC 23,400 288
Reuters Holdings PLC 86,500 679
Royal Bank of
Scotland Group 30,100 216
Scot & Newcastle 20,100 170
Scottish Power 31,400 185
Shell Transport &
Trading Co. (Reg.) 143,700 1,723
SmithKline Beecham PLC
Series A 56,063 373
SmithKline Beecham units 54,100 329
Standard Chartered PLC 9,900 48
</TABLE>

See accompanying Notes to Financial Statements.

56
<PAGE> 81

SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Sun Alliance Group 31,988 $172
TSB Group PLC 68,100 253
Tesco 83,900 322
Thorn-EMI PLC 17,500 278
Tomkins 46,100 159
Unilever PLC 34,600 644
Vendome (units) 29,850 253
Vodafone Group PLC 124,968 433
Waste Management
International* 16,000 133
Wellcome PLC 34,900 367
Zeneca Group 38,900 547
--------
28,719
--------

TOTAL COMMON STOCK
(Cost $128,564) 138,415
--------

PREFERRED STOCK--0.4%
GERMANY--0.4%
Henkel KGaA 542 213
RWE AG (Non Voting) 700 172
SAP AG (Non Voting) 161 93
Volkswagen AG (Non Voting) 201 47
--------
525
--------

ITALY--0.0%
Fiat Finance SpA 18,300 44
--------

TOTAL PREFERRED STOCK
(Cost $511) 569
--------

WARRANTS--0.0%
SWITZERLAND--0.0%
CS Holding expire 12/16/94* 2,759 11
--------

UNITED KINGDOM--0.0%
BTR Nylex expire 11/26/98* 4,019 3
--------

TOTAL WARRANTS
(Cost $16) 14
--------

Maturity Value
(000)s (000s)
-------- ------
<S> <C> <C>
REPURCHASE AGREEMENT--1.1%
UNITED STATES--1.1%
State Street Bank & Trust 4.25%
Dated 10/31/94
Due 11/01/94
Collateralized By:
U.S. Treasury Bill
$1,550,000 Par;
Due 4/30/95 $1,478 $ 1,478
--------

TOTAL REPURCHASE AGREEMENT
(Cost $1,478) 1,478
--------

TOTAL INVESTMENTS -- 98.7%
(Cost $130,569) 140,476
--------

OTHER ASSETS AND LIABILITIES -- 1.3%
Other Assets 4,564
Liabilities (2,685)
--------
1,879
--------

NET ASSETS -- 100.0%
Applicable to 13,066,324
outstanding $0.00001
par value shares
(unlimited shares authorized) $142,355
========

NET ASSET VALUE PER SHARE $10.89
======
</TABLE>

- ------------------
*Non-Income Producing Security

See accompanying Notes to Financial Statements.

57
<PAGE> 82

SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF OPERATIONS (in thousands)
For the year ended October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax withheld of $350) $2,394
Interest 125
------
Total investment income 2,519
------
Expenses:
Investment advisory and administration fee 862
Transfer agency and shareholder service fees 308
Custodian fees 196
Registration fees 43
Professional fees 45
Shareholder reports 72
Trustees' fees 50
Amortization of deferred organization costs 24
Insurance and other expenses 6
------
1,606
Less expenses reduced (499)
------
Total expenses incurred by Fund 1,107
------
Net investment income 1,412
------

Net realized gain (loss) on investments and foreign currency transactions:
Proceeds from sales of investments 7,690
Cost of investments sold (8,384)
------
Net realized loss on investments from changes in market value (694)
Net realized gain on investments from changes in foreign
exchange rates 99
------
Net realized loss on investments sold (595)
Net realized gain on foreign currency transactions 15
------
Net realized loss on investments sold and foreign
currency transactions (580)
------
Change in net unrealized gain (loss) on investments and foreign
currency translation:
Changes in market value:
Beginning of period unrealized gain 4,200
End of period unrealized gain 413
------
Decrease in net unrealized gain in market value (3,787)
------
Changes in foreign exchange rates:
Beginning of period unrealized loss (3,131)
End of period unrealized gain 9,494
------
Increase in net unrealized gain in foreign exchange rates 12,625
------
Net increase in unrealized gain on investments from
changes in market value and foreign exchange rates 8,838
Net increase in unrealized gain on translating assets and
liabilities into the reporting currency 51
------
Net increase in unrealized gain on investments and
foreign currency translation 8,889
------
Net gain on investments 8,309
------
Net increase in net assets resulting from operations $9,721
======
</TABLE>

See accompanying Notes to Financial Statements.

58
<PAGE> 83

SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF CHANGES IN NET ASSETS (in thousands)

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

<TABLE>
<CAPTION>
For the period
September 9, 1993
For the (commencement
year ended of operations) to
October 31, October 31,
1994 1993
------------ -----------------
<S> <C> <C>
Operations:
Net investment income $ 1,412 $ 301
Net realized gain (loss) on investments sold
and foreign currency transactions (580) 188
Net increase in unrealized gain on investments
and foreign currency translation 8,889 1,053
-------- --------
Net increase in net assets resulting from
operations 9,721 1,542
-------- --------

Distributions to Shareholders From:
Net investment income (433) --
Capital gains (188) --
-------- --------
Total distributions to shareholders (621) --
-------- --------

Capital Share Transactions:
Proceeds from shares sold 61,237 106,336
Net asset value of shares issued in
reinvestment of distributions 560 --
Early withdrawal fees 129 --
Less payments for shares redeemed (34,756) (1,793)
-------- --------
Increase in net assets from capital share
transactions 27,170 104,543
-------- --------

Total increase in net assets 36,270 106,085

Net Assets:
Beginning of period 106,085 --
-------- --------
End of period (including undistributed net invest-
ment income of $1,280 and $301, respectively) $142,355 $106,085
======== ========

Number of Fund Shares:
Sold 5,947 10,637
Reinvested 56 --
Redeemed (3,392) (182)
-------- --------
Net increase in shares outstanding 2,611 10,455
Shares Outstanding:
Beginning of period 10,455 --
-------- --------
End of period 13,066 10,455
======== ========
</TABLE>

See accompanying Notes to Financial Statements.

59
<PAGE> 84

SCHWABFUNDS(R) 8
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1994
- --------------------------------------------------------------------------------

1. DESCRIPTION OF THE FUND

The Schwab International Index Fund (the "Fund") is a series of Schwab Capital
Trust (the "Trust"), an open-end, management investment company organized as a
Massachusetts business trust on May 7, 1993 and registered under the Investment
Company Act of 1940, as amended.

In addition to the Fund, the Trust also offers the Schwab Small-Cap Index
Fund(TM). The assets of each series are segregated and accounted for separately.

The investment objective of the Fund is to attempt to track the price and
dividend performance (total return) of the Schwab International Index(TM), an
index created to represent the performance of common stocks and other equity
securities issued by large, publicly traded companies from countries around the
world with major developed securities markets (excluding the United States and
South Africa).

2. SIGNIFICANT ACCOUNTING POLICIES

Security valuation -- Investments in securities traded on an exchange are valued
at the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Fund's sub-advisor pursuant to Board of Trustees guidelines.
Short-term securities with 60 days or less to maturity are stated at amortized
cost, which approximates market value.

Security transactions and investment income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Dividend income and distributions to
shareholders are recorded on the ex-dividend date; interest income is recorded
on the accrual basis. Realized gains and losses from security transactions are
determined on an identified cost basis.

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

Foreign currency translation -- The accounting records of the Fund are
maintained in U.S. dollars. Investment securities and all other assets and
liabilities of the Fund denominated in a foreign currency are translated into
U.S. dollars at the exchange rates on October 31. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the exchange rate in effect on the dates of the respective
transactions.

The Fund separates within its statement of operations the portion of realized
and unrealized gains and losses resulting from changes in foreign exchange rates
from that arising from changes in securities' market values.

Forward currency contracts -- A forward currency contract ("Forward") is an
agreement between two parties to buy and sell a currency at a set price on a
future date. The value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in value is
recorded by the Fund as an unrealized gain or loss. When the Forward is closed,
the Fund records a realized gain or loss equal to the difference between the
value at the time the

60
<PAGE> 85

SCHWABFUNDS(R) 9
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1994
- --------------------------------------------------------------------------------

contract was opened and the value at the time the contract was closed. The Fund
engages in Forwards in connection with the purchase and sale of portfolio
securities to minimize the uncertainty of changes in future exchange rates (see
Note 9).

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

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

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

At October 31, 1994, (for financial reporting and federal income tax purposes),
net unrealized gain aggregated $9,907,000, of which $13,741,000 related to
appreciated securities and $3,834,000 related to depreciated securities.

3. TRANSACTIONS WITH AFFILIATES

Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of .70% of the first $300 million
of average daily net assets and .60% of such assets over $300 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$862,000 during the year ended October 31, 1994, before the Investment Manager
reduced its fee (see Note 5).

Sub-advisory agreement -- The Investment Manager has a sub-advisory agreement
with Dimensional Fund Advisors Inc. ("Dimensional") to perform day-to-day
portfolio management for the Fund. Dimensional does not receive compensation
directly from the Fund. However, the Investment Manager pays Dimensional an
annual fee, payable monthly, of .15% of the first $300 million of average daily
net assets and .05% of such assets over $300 million.

Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets for transfer
agency services and .20% of such assets for shareholder services. For the year
ended October 31, 1994, the Fund incurred transfer agency and shareholder
service fees of $308,000, before Schwab reduced its fees (see Note 5).

Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers or directors of the Investment Manager, Schwab or
Dimensional. During the year ended October 31, 1994, the Trust made no direct
payments to its officers or trustees who were "interested persons" within the
meaning of the Investment Company Act of 1940, as amended. The Fund incurred
fees of $50,000 related to the Trust's unaffiliated trustees.

61
<PAGE> 86

SCHWABFUNDS(R) 10
- --------------------------------------------------------------------------------

4. BORROWING AGREEMENT

The Trust has an arrangement with State Street Bank and Trust Company, the
Fund's custodian, whereby the Fund may borrow up to $10,000,000, on a temporary
basis, to fund redemptions. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the year ended October 31, 1994, no borrowings were
made under this arrangement.

5. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB

The Investment Manager and Schwab reduced a portion of their fees in
order to limit the Fund's ratio of operating expenses to average net
assets. During the year ended October 31, 1994, the total of such fees
reduced by the Investment Manager was $388,000 and the total of such
fees reduced by Schwab was $111,000.

6. INVESTMENT TRANSACTIONS

Purchases and sales of investment securities, other than short-term obligations,
aggregated $36,420,000 and $7,690,000, respectively, during the year ended
October 31, 1994.

7. EARLY WITHDRAWAL FEES PAID TO THE FUND

The Fund assesses a .75% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended October 31, 1994, total early withdrawal fees
retained by the Fund amounted to $129,000.

8. COMPOSITION OF NET ASSETS

At October 31, 1994, net assets consisted of:

<TABLE>
<S> <C>
Capital paid in $131,687,000
Accumulated undistributed net investment income 1,306,000
Accumulated net realized loss on investments sold
and foreign currency transactions (580,000)
Net unrealized gain on investments 9,907,000
Net unrealized gain on translating assets and liabilities
into the reporting currency 35,000
------------
Total $142,355,000
============
</TABLE>

The Fund adopted Statement of Position 93-2 Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies, which will generally present
undistributed income and realized gains on a tax basis. As a result of adoption,
certain reclassifications to increase undistributed net investment income and
decrease capital paid in by $26,000 have occurred. These reclassifications have
no impact on the net asset value of the Fund.

At October 31, 1994, the Fund's Statement of Net Assets included liabilities of
$896,000 for securities purchased, $280,000 for Fund shares redeemed, $52,000
for investment advisory and administration fee payable and $25,000 for transfer
agency and shareholder service fees payable.

62
<PAGE> 87

SCHWABFUNDS(R) 11
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1994
- --------------------------------------------------------------------------------

9. COMMITMENTS

At October 31, 1994, the Fund had an open Forward contract which obligated the
Fund to deliver foreign currency in exchange for U.S. dollars at a specified
future date as follows:

<TABLE>
<CAPTION>
Contract In Exchange Settlement Unrealized
Currency Amount For Date Value Loss
-------- -------- ----------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
British pound 770,000 $1,257,872 11/4/94 $1,259,405 $1,533
</TABLE>

10. FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
For the period
September 9, 1993
For the (commencement of
year ended operations) to
October 31, 1994 October 31, 1993
---------------- -----------------
<S> <C> <C>
Net asset value at beginning of period $ 10.15 $ 10.00
Income from Investment Operations
Net investment income .11 .03
Net realized and unrealized gain on investments
and foreign currency transactions .69 .12
-------- --------
Total from investment operations .80 .15
Less Distributions
Dividends from net investment income (.04) --
Distributions from net realized gain
on investments (.02) --
-------- --------
Total distributions (.06) --
-------- --------
Net asset value at end of period $ 10.89 $ 10.15
======== ========
Total return (%) 7.9 1.5
Ratios/Supplemental Data
Net assets, end of period (000s) $142,355 $106,085
Ratio of expenses to average net
assets (%) .90 .60*
Ratio of net investment income to
average net assets (%) 1.14 2.15*
Portfolio turnover rate (%) 6 2
</TABLE>

The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
October 31, 1994 and 1993, would have been 1.30% and 2.10%*, respectively, and
the ratio of net investment income to average net assets would have been .74%
and .65%*, respectively.

63
<PAGE> 88

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

To the Board of Trustees
and Shareholders of the Schwab International Index Fund(TM)

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

PRICE WATERHOUSE LLP
San Francisco, California
November 30, 1994

64
<PAGE> 89

SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
COMMON STOCK--96.0%
A.L. Laboratories, Inc.
Class A 2,300 $41,113
AAR Corp. 2,600 32,175
ABM Industries, Inc. 1,800 37,800
ABT Building Products Corp.* 1,900 29,450
ACX Technologies, Inc.* 2,300 80,788
ADAC Laboratories 3,000 25,500
AGCO Corp. 2,500 137,500
AMC Entertainment Inc.* 500 5,750
AMCORE Financial, Inc. 1,500 28,688
AMETEK, Inc. 6,500 117,813
APS Holding Corp. Class A* 2,100 61,163
AST Research, Inc.* 10,400 131,950
Acclaim Entertainment, Inc. 6,800 118,575
Acordia, Inc. 2,500 70,625
Acuson Corp.* 4,900 90,038
Acxiom Corp.* 1,600 47,400
Addington Resources, Inc.* 3,100 32,550
Adelphia Communications
Corp. Class A* 2,000 24,500
Adesa Corp.* 1,800 24,300
Adia Personnel Services, Inc. 1,000 36,000
Adobe Systems Inc. 1,600 57,900
Advanced Technology
Laboratories, Inc.* 2,200 35,750
Advanced Tissue
Sciences, Inc.* 5,000 37,500
ADVO, Inc. 3,300 58,575
Air & Water Technologies
Corp. Class A* 9,500 66,500
Air Express
International Corp. 2,200 61,600
Airborne Freight Corp. 1,700 32,513
Airgas, Inc. 2,700 78,300
Alaska Air Group, Inc.* 2,100 36,750
ALBANK Financial Corp. 2,200 48,813
Albany International Corp.
Class A 3,800 75,050
Alberto-Culver Co. Class A 1,800 42,525
Alberto-Culver Co. Class B
(Convertible) 2,100 53,288
Aldila, Inc. 3,900 50,213
Alex. Brown Inc. 2,400 66,300
Alfa Farmers
Federation Corp. 6,900 75,900
Allen Group Inc. 3,700 89,725
Alliance Pharmaceutical Corp.* 3,600 27,675
Alliant Techsystems Inc.* 1,700 58,438
Allied Group, Inc. 1,500 43,313
Allwaste, Inc.* 5,600 35,700
Alpha-Beta Technology, Inc.* 400 3,750
Altera Corp.* 3,400 134,088
Amax Gold Inc. 14,500 97,875
Amcast Industrial Corp. 1,500 30,188
America Online, Inc. 1,300 92,300
American Annuity Group, Inc. 7,500 71,250
American Bankers
Insurance Group, Inc. 3,400 67,575
American Business
Information, Inc.* 5,100 89,250
American Business
Products, Inc. 1,300 28,925
American Classic Voyages 1,900 32,775
American Colloid Co. 3,400 53,550
American Freightways Corp. 1,600 33,800
American Heritage Life
Investment Corp. 5,200 91,650
American Income
Holding Inc. 2,500 87,344
American Maize-Products Co. 1,000 22,625
American Management
Systems, Inc. 4,500 71,156
American Medical
Response, Inc.* 2,600 70,525
American President
Companies, Ltd. 4,600 111,550
American Savings Bank of
Florida (New)* 4,800 96,300
Americredit Corp.* 5,300 35,113
Ameridata Technologies Inc.* 2,600 34,775
Amphenol Corp. Class A* 3,100 67,813
Amsco International, Inc.* 10,700 102,988
Amtech Corp. 2,300 23,000
Analogic Corp.* 2,100 36,750
Anchor Bancorp, Inc.* 3,800 56,525
Andrew Corp. 950 49,519
Angelica Corp. 1,100 29,150
AnnTaylor Stores Corp.* 700 29,050
Antec Corp.* 3,800 107,350
Anthem Electronics, Inc.* 2,300 75,613
Anthony Industries, Inc. 2,400 41,100
Apogee Enterprises, Inc. 2,300 41,113
Apple South, Inc. 4,650 74,981
Applebee's International, Inc. 3,300 60,638
Applied Magnetics Corp.* 2,600 9,425
Applied Power Inc. Class A 1,500 36,938
Aptargroup, Inc. 2,700 73,575
Aquarion Co. 900 21,150
Aquila Gas Pipeline Corp. 4,800 36,600
Arbor Drugs, Inc. 2,800 59,150
Arctco, Inc. 4,650 95,325
Argosy Gaming Corp.* 3,900 67,275
Arkansas Best Corp. 4,100 53,044
Armco Inc.* 17,000 121,125
Armor All Products Corp. 3,600 80,100
Arnold Industries Inc. 4,300 99,438
Arrow International, Inc. 4,100 114,288
Arthur J. Gallagher & Co. 2,300 75,325
Artisoft, Inc.* 2,000 19,500
Arvin Industries, Inc. 3,700 90,188
Ashland Coal, Inc. 2,500 76,250
Aspect
Telecommunications Corp.* 1,800 62,100
Associated Banc-Corp 2,200 74,250
Associated Natural
Gas Corp. 2,000 76,250
Atari Corp.* 18,600 125,550
Atmos Energy Corp. 2,400 39,300
Au Bon Pain Co., Inc.
Class A* 1,700 33,575
Augat Inc. 3,500 69,563
Aura Systems, Inc.* 5,700 26,363
Authentic Fitness Corp. 5,500 83,188
AutoFinance Group, Inc.* 3,100 31,388
Automotive Industries
Holding, Inc.* 2,800 68,600
Autotote Corp. Class A 5,000 87,500
</TABLE>

See accompanying Notes to Financial Statements.

65
<PAGE> 90

SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Avatar Holdings, Inc.* 1,500 $52,688
Aviall, Inc. 7,275 72,750
Avid Technology, Inc.* 1,700 64,175
Aztar Corp.* 7,400 44,400
BWIP Holding, Inc. Class A 4,100 72,775
BET Holdings, Inc. Class A* 1,500 24,750
BISYS Group, Inc.* 2,600 57,200
BJ Services Co.* 2,700 55,013
BMC West Corp. 1,400 23,800
Baldor Electric Co. 2,860 74,360
Baldwin & Lyons, Inc.
Class A 100 1,550
Baldwin & Lyons, Inc.
Class B 1,800 27,000
Ballard Medical Products 9,900 96,525
Bally Entertainment Corp.* 7,600 53,200
Baltimore Bancorp 2,800 57,050
BancTec, Inc.* 1,800 36,000
Bancorpsouth, Inc. 1,300 41,600
Bank of Montreal 1,180 21,919
Bankers Corp. 240 3,465
Banyan Systems, Inc.* 2,800 49,000
Barefoot Inc. 2,800 39,550
Barnes Group Inc. 700 26,250
Barr Laboratories, Inc.* 1,000 25,250
Barrett Resources Corp.* 1,900 37,288
Bassett Furniture
Industries, Inc. 2,500 67,500
Bay State Gas Co. 2,100 50,925
Bay View Capital Corp. 1,200 27,000
Bearings, Inc. 900 29,363
Belden Inc. 2,800 56,000
Bell Bancorp, Inc. 1,800 47,250
Bell Sports Corp.* 1,300 27,300
Benton Oil & Gas Co.* 4,500 35,156
Bergen Brunswig Corp.
Class A 6,175 101,888
Berkley (W.R.) Corp. 600 21,525
Berry Petroleum Co. Class A 2,900 27,550
Best Power Technology, Inc.* 1,100 15,538
Big B, Inc. 2,900 35,525
Bio-Technology
General Corp.* 3,800 7,363
Biocraft Laboratories, Inc. 1,700 30,388
Birmingham Steel Corp. 1,500 38,813
Black Box Corp. 3,000 42,000
Black Hills Corp. 2,300 47,150
Blair Corp. 1,400 58,800
Blanch (E.W.) Holdings, Inc. 2,200 44,825
Block Drug Co., Inc. Class A 1,900 67,450
Blount, Inc. Class A 1,300 55,413
Blount, Inc. Class B 500 21,750
Bolt Beranek and
Newman Inc.* 2,200 39,050
Bombay Company, Inc. 5,950 71,400
Books-A-Million, Inc. 3,000 42,563
Borg-Warner
Security Corp.* 3,400 35,275
Borland International, Inc.* 9,300 99,975
Boston Bancorp 1,000 30,750
Boston Technology, Inc.* 8,400 138,600
Bowne & Co., Inc. 2,800 44,800
Box Energy Corp. Class A* 500 6,000
Box Energy Corp. Class B
(Non Voting)* 3,000 27,000
Breed Technologies, Inc. 1,100 38,913
BroadBand
Technologies, Inc.* 1,900 49,400
Broadway Stores Inc.* 8,500 95,625
Broderbund Software, Inc. 1,400 89,950
Brown (Tom), Inc.* 3,000 38,250
Brown Group, Inc. 500 16,938
Bruno's, Inc. 14,200 135,788
Brush Wellman Inc. 2,700 45,225
Buffets, Inc. 5,000 51,563
Bush Industries, Inc. 800 20,900
C-TEC Corp.* 1,300 35,750
CCB Financial Corp. 1,500 60,750
CCP Insurance, Inc. 5,400 83,700
CDI Corp.* 3,400 57,800
CILCORP Inc. 2,400 73,200
CKE Restaurants Inc. 2,600 21,450
CLARCOR Inc. 2,400 48,300
CMAC Investment Corp. 2,100 57,750
CML Group, Inc. 8,250 81,469
CNB Bancshares, Inc. 2,200 75,625
COR Therapeutics, Inc.* 4,400 57,200
CPI Corp. 1,700 36,975
Cross (A.T.) Co. Class A 2,800 42,350
CSF Holdings, Inc.* 1,600 41,600
CSS Industries, Inc. 1,700 28,263
Cabot Oil & Gas Corp.
Class A 3,300 61,050
Cadence Design
Systems, Inc.* 1,800 36,000
CalMat Co. 4,300 89,225
Caldor Corp.* 3,000 85,875
Calgene, Inc.* 4,600 39,963
Calgon Carbon Corp. 6,600 74,250
California Energy Co., Inc.* 6,800 115,600
California Federal Bank 3,000 34,500
California Microwave, Inc.* 1,900 59,138
California Water Service Co. 800 25,100
Camco International, Inc. 4,600 94,875
Canandaigua Wine Co.,
Inc. Class A* 2,100 68,775
Canandaigua Wine Co.,
Inc. Class B* 400 13,500
Capital Re Corp. 5,400 118,800
Capitol American
Financial Corp. 6,500 144,625
Capsure Holdings Corp.* 2,800 37,100
Caraustar Industries, Inc. 4,200 82,950
Carlisle Companies Inc. 2,800 91,350
Carpenter Technology Corp. 1,200 67,800
Carr-Gottstein Food Co.* 2,000 13,750
Casey's General Stores, Inc. 4,700 62,275
Cash America
Investments, Inc. 3,400 28,050
Casino America, Inc. 850 9,350
Castle & Cooke Homes, Inc.* 9,300 145,313
Catalina Marketing Corp.* 1,500 76,313
Catellus Development Corp.* 13,300 88,113
Cato Corp. (New) Class A 4,500 42,750
Cell Genesys, Inc.* 2,300 17,250
CellPro, Inc.* 2,300 38,525
Cellular Communications
Class A (Redeemable)* 4,500 239,063
Centennial Cellular Corp. 4,100 70,725
</TABLE>

See accompanying Notes to Financial Statements.

66
<PAGE> 91

SchwabFunds(R) 3
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Centerbank Waterbury
Connecticut* 2,200 $27,775
Centocor, Inc.* 9,300 165,075
Central Hudson Gas &
Electric Corp. 3,100 75,950
Central Jersey Bancorp 1,500 48,750
Central Louisiana Electric
Co., Inc. (New) 4,100 88,663
Central Maine Power Co. 5,200 59,800
Central Vermont Public
Service Corp. 2,100 27,825
Centura Banks, Inc. 2,700 59,400
Century Communications
Corp. Class A 3,900 33,150
Cerner Corp.* 2,400 98,700
Chambers Development
Co., Inc.* 1,900 3,800
Chambers Development
Co., Inc. Class A* 9,400 18,800
Champion Enterprises, Inc.* 1,400 49,700
Chaparral Steel Co. 6,000 48,000
Charter Medical Corp.* 4,900 121,275
Charter One Financial, Inc. 4,000 81,000
Checkers Drive-In
Restaurants, Inc. 8,800 29,975
Checkpoint Systems, Inc.* 2,100 39,375
Cheesecake Factory, Inc. 1,600 30,600
Chemed Corp. 1,500 51,188
Chemical Financial Corp. 1,330 52,535
Chesapeake Corp. 4,300 133,300
Cheyenne Software, Inc. 6,250 69,531
Chipcom Corp. 1,800 108,450
Chiquita Brands
International, Inc. 8,200 101,475
Church & Dwight Co., Inc. 3,600 81,000
Circa Pharmaceuticals, Inc.* 3,500 52,063
Citizens Bancorp 2,100 59,325
Citizens Banking Corp. 2,400 63,600
Citizens First Bancorp, Inc. 7,500 72,656
City National Corp. 8,200 90,200
Claire's Stores, Inc. 3,300 38,363
Clear Channel
Communications, Inc. 575 28,966
Cleveland-Cliffs Inc. 1,800 68,625
Coast Savings
Financial, Inc.* 2,300 32,775
Coastal Healthcare
Group, Inc.* 3,400 106,250
Cobra Golf, Inc. 3,400 126,225
Coca-Cola Bottling Co.
Consolidated 1,300 34,288
Coeur d'Alene Mines Corp. 2,600 48,425
Cognex Corp. 2,700 66,825
Collagen Corp. 1,800 39,600
Collective Bancorp, Inc. 3,600 64,125
Colonial BancGroup, Inc. 1,600 36,800
Colonial Gas Co. 900 17,438
Colonial Group, Inc. Class A 1,300 44,688
Comair Holdings, Inc. 3,800 81,700
Commerce Clearing
House, Inc. Class A 2,800 49,350
Commerce Clearing
House, Inc. Class B
(Non Voting) 2,900 49,663
Commercial Federal Corp.* 2,200 46,338
Commercial Intertech Corp. 2,850 54,863
Commercial Metals Co. 2,733 74,474
Commonwealth Energy
System 1,900 71,725
Community Health
Systems, Inc. 1,800 47,250
Community Psychiatric
Centers 7,300 72,088
Comnet Cellular Inc.* 1,900 53,913
CompUSA, Inc.* 2,700 31,388
Comverse Technology Inc.* 3,000 37,125
Concord EFS Inc. 2,700 66,825
Cone Mills Corp.* 3,600 42,750
Connecticut Energy Corp. 900 19,125
Connecticut Natural
Gas Corp. 1,400 33,075
Conner Peripherals, Inc.* 4,500 51,750
Consolidated
Freightways, Inc.* 2,000 44,750
Consolidated Stores Corp.* 8,700 157,688
Consorcio G Grupo Dina* 4,202 42,545
Continental Airlines, Inc.
Class A* 800 13,300
Continental Airlines, Inc.
Class B* 3,600 59,400
Continental Medical
Systems, Inc.* 15,000 106,875
Continuum Company, Inc.* 3,500 94,063
Copley Pharmaceutical, Inc. 3,064 54,003
CopyTele, Inc.* 3,900 19,378
Coram Healthcare Corp.* 4,662 76,923
Cordis Corp.* 1,200 69,375
Coventry Corp. 4,600 114,425
Crawford & Co. Class A 2,300 35,650
Crawford & Co. Class B 2,100 32,813
Cray Research, Inc.* 4,300 82,238
Credence Systems Corp.* 4,500 113,625
Credit Acceptance Corp. 3,500 131,688
Cross Timbers Oil Co. 4,900 78,400
CrossComm Corp.* 1,000 10,250
Crown Central
Petroleum Corp.* 600 10,200
Cullen/Frost Bankers, Inc. 1,900 63,175
Cypress Semiconductor Corp.* 6,200 129,425
Cyrix Corp.* 3,100 127,681
Cyrk, Inc.* 1,500 58,875
Cytec Industries, Inc.* 2,100 86,100
CytRx Corp.* 3,200 7,700
Dallas Semiconductor Corp.* 9,500 133,000
Dames & Moore, Inc. 4,700 69,325
Daniel Industries, Inc. 1,400 18,900
Data General Corp.* 5,900 57,525
Datascope Corp.* 2,700 46,238
DeVRY Inc.* 3,500 101,938
Dell Computer Corp.* 3,150 140,569
Delphi Financial Group, Inc.
Class A* 700 13,738
Delta Woodside
Industries, Inc. 8,100 84,038
Department 56, Inc.* 400 14,650
Deposit Guaranty Corp. 3,000 86,250
Destec Energy, Inc.* 11,500 126,500
Detroit Diesel Corp.* 4,700 116,325
Devon Energy Corp. 3,400 74,375
Dexter Corp. 4,500 92,813
</TABLE>

See accompanying Notes to Financial Statements.

67
<PAGE> 92

SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Diagnostek, Inc.* 4,000 $63,000
Diagnostic Products Corp. 1,600 38,400
Dial Page, Inc.* 1,600 34,800
Dibrell Brothers, Inc. 2,000 44,000
Digi International, Inc.* 2,300 38,813
Digital Microwave Corp.* 800 11,900
Dime Bancorp Inc.* 10,400 91,000
Dionex Corp.* 1,500 56,063
Discount Auto Parts, Inc.* 2,600 39,650
Discovery Zone, Inc. 6,800 130,900
Donaldson Co., Inc. 4,800 110,400
Downey Savings and
Loan Association 1,900 35,863
Dress Barn, Inc.* 3,800 37,050
Dreyer's Grand Ice
Cream, Inc. 2,600 66,625
Dual Drilling Co.* 1,900 24,819
Duff & Phelps Corp. 4,200 74,025
Duriron Co., Inc. 3,000 53,625
Duty Free International, Inc. 5,300 70,888
Dynatech Corp.* 1,700 49,300
E'town Corp. 700 18,200
E-Z Serve Corp.* 4,300 7,659
ENVOY Corp.* 2,000 40,750
Eagle Hardware &
Garden, Inc.* 3,400 33,150
Eastern Enterprises 3,900 101,400
Eastern Utilities Associates 3,600 78,750
Eaton Vance Corp.
(Non Voting) 1,400 44,275
Edison Brothers Stores, Inc. 3,500 83,125
Education Alternatives, Inc.* 2,000 42,750
Elcor Corp.* 1,000 16,875
Electroglas Inc.* 1,400 55,825
Electronics for Imaging, Inc.* 2,300 60,375
Empire District Electric Co. 2,200 35,475
Energen Corp. 1,300 29,575
Energy Service Co., Inc. 2,275 32,988
Energy Ventures, Inc.* 1,400 20,300
Enhance Financial
Services Group, Inc. 3,100 56,188
Ennis Business Forms, Inc. 2,700 36,450
Enquirer/Star Group, Inc.
Class A 3,300 55,275
Enterra Corp.* 2,700 61,763
Envirotest Systems Corp.
Class A* 2,500 31,563
Ethan Allen Interiors, Inc.* 2,200 53,900
Evergreen Media Corp.
Class A* 700 12,600
Exabyte Corp.* 3,900 86,044
Exar Corp. 1,200 24,750
Excel Industries, Inc. 1,900 28,500
Expeditors International of
Washington, Inc. 2,300 47,438
Express Scripts, Inc. Class A 1,200 40,800
F & M National Corp. 2,255 36,644
FHP International Corp.* 1,056 30,624
FHP International Corp. 3,520 96,360
FMC Gold Co. 17,500 72,188
FTP Software Inc.* 3,600 90,000
Fab Industries, Inc. 900 27,788
Fair, Issac & Co. Inc. 1,000 40,250
Farmer Bros. Co. 300 38,400
Fastenal Co. 800 35,900
Fidelity National
Financial, Inc. 2,900 32,988
Fieldcrest Cannon, Inc.* 1,300 33,150
Figgie International Inc.
Class A 4,600 35,938
Figgie International Inc.
Class B 600 5,025
FileNet Corp.* 1,500 37,875
Filene's Basement Corp.* 3,900 29,738
Financial Trust Corp. 1,200 34,200
First Alert Inc. 3,800 80,275
First American
Financial Corp. 3,600 67,050
First Bancorporation of Ohio 900 21,713
First Citizens BancShares,
Inc. Class A 1,300 58,825
First Colonial Bankshares Corp.
Class A 1,500 34,031
First Commerce Corp. 1,162 30,793
First Commercial Corp. 2,800 58,450
First Commonwealth
Financial Corp. 3,000 42,750
First Financial Bancorp 1,600 61,400
First Financial Corp. 4,000 56,000
First Michigan Bank Corp. 2,959 69,537
First Midwest Bancorp, Inc. 2,100 57,488
First Mississippi Corp. 3,200 67,200
First National Bancorp 2,700 52,650
First Pacific Networks, Inc.* 1,100 7,425
FirstFed Financial Corp.* 200 2,850
FirstFed Michigan Corp. 3,300 68,888
Firstbank of Illinois Co. 1,000 38,250
Fisher Scientific
International, Inc. 2,600 72,475
Flagstar Companies, Inc.* 7,200 59,400
Florida East Coast
Industries, Inc. 1,400 106,575
Florida Rock Industries, Inc. 1,400 37,275
Fluke Corp. 1,100 32,588
Foamex International Inc.* 4,300 38,431
Foodmaker, Inc. (New)* 11,100 59,663
Foote, Cone & Belding
Communications, Inc. 1,900 85,025
Foothill Group, Inc. Class A 2,400 36,000
Foremost Corp. of America 1,800 58,500
Forest City Enterprises, Inc.
Class A 900 27,338
Forest City Enterprises, Inc.
Class B (Convertible) 500 17,781
Fort Wayne National Corp. 1,800 49,725
Fossil, Inc.* 2,200 61,325
FoxMeyer Health Corp.* 5,473 90,989
Franklin Electric Co., Inc. 1,100 34,650
Franklin Quest Co.* 1,700 60,138
Fremont General Corp. 2,800 68,950
Fritz Companies, Inc.* 1,800 69,750
Frontier Insurance
Group, Inc. 2,350 64,331
Frozen Food Express
Industries, Inc. 2,100 34,650
Fuller (H.B.) Co. 2,400 79,200
Fulton Financial Corp. 3,300 62,700
G&K Services, Inc. Class A 2,950 47,938
GAINSCO, Inc. 2,315 20,256
GC Companies, Inc.* 1,280 36,160
</TABLE>

See accompanying Notes to Financial Statements.

68
<PAGE> 93

SchwabFunds(R) 5
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Galey & Lord, Inc.* 1,800 $28,350
Gartner Group Inc. Class A 4,000 128,500
Gaylord Container Corp.
Class A* 8,700 73,950
GenCare Health Systems, Inc.* 1,700 78,838
GenCorp Inc. 5,800 69,600
General Binding Corp. 2,900 62,350
General DataComm
Industries, Inc.* 3,100 103,463
Genesco Inc.* 2,800 6,300
Genesis Health
Ventures, Inc.* 2,100 61,950
Genetic Therapy, Inc.* 2,400 16,200
Geneva Steel Class A* 2,200 38,775
Gensia Pharmaceuticals, Inc.* 5,400 25,650
Gentex Corp. 2,900 70,325
Geon Co. 700 21,000
Geotek Communications Inc.* 10,300 88,838
Gerber Scientific, Inc. 3,900 52,163
Germantown Savings Bank 500 30,500
Gerrity Oil & Gas Corp.* 1,600 9,400
Getty Petroleum Corp.* 1,800 20,475
Gibson Greetings, Inc. 2,600 39,000
Giddings & Lewis, Inc. 6,200 95,325
Gilead Sciences, Inc.* 1,200 10,500
Glendale Federal Bank (New) 5,400 58,725
Global Natural
Resources Inc.* 4,400 33,000
Good Guys, Inc., The* 2,300 26,306
Goody's Family
Clothing, Inc.* 2,700 28,688
Goulds Pumps, Inc. 3,600 78,075
Graco Inc. 1,350 24,975
GranCare, Inc.* 5,000 77,500
Grand Casinos, Inc.* 3,800 51,300
Granite Construction Inc. 1,900 41,563
Greenfield Industries, Inc. 2,700 64,125
Grenada Sunburst
System Corp. 1,300 40,300
Grey Advertising Inc. 100 15,450
Grow Group, Inc. 2,000 28,750
Guaranty National
Corp. (New) 1,500 25,125
Guilford Mills, Inc. 1,600 33,000
Gupta Corp.* 600 6,675
Gymboree Corp. 4,000 131,000
HBO & Co. 2,600 84,825
HS Resources, Inc.* 2,100 43,050
Hach Co. 2,075 28,531
Haemonetics Corp.* 5,300 106,000
Haggar Corp. 1,200 28,500
Hancock Fabrics, Inc. 4,000 30,500
Hancock Holding Co. 1,300 37,700
Handleman Co. 6,300 70,875
Handy & Harman 1,700 28,263
Hanover Direct, Inc.* 13,300 54,031
Harleysville Group Inc. 4,600 111,550
Harman International
Industries, Inc. 2,200 78,650
Harnischfeger
Industries Corp. 5,100 127,500
Harper Group, Inc. 2,800 37,800
Harry's Farmers Market, Inc.
Class A* 400 3,550
Hartmarx Corp.* 5,300 30,475
Haverty Furniture
Companies, Inc. 3,000 36,750
Hawkeye Bancorporation 2,000 40,750
Hayes Wheels International, Inc. 3,200 75,200
Health Care and
Retirement Corp.* 2,500 67,188
Health Systems
International Inc.* 4,700 126,313
HealthCare Compare Corp.* 5,600 155,400
Healthsouth
Rehabilitation Corp.* 2,500 95,000
Heart Technology, Inc.* 2,900 68,875
Heartland Express, Inc. 2,000 58,500
Hechinger Co. Class A 4,900 55,125
Hechinger Co. Class B
(Convertible) 2,300 26,163
Hecla Mining Co.* 7,800 87,750
Helene Curtis Industries, Inc. 1,800 63,675
Herbalife International, Inc. 1,000 16,625
Heritage Media Corp.
Class A* 1,900 46,075
Hibernia Corp. Class A 2,900 23,200
Hilb, Rogal and Hamilton Co. 2,700 32,063
Hillhaven Corp. 12,500 278,125
Holly Corp. 1,000 24,625
Home Beneficial Corp.
Class B 1,700 35,063
Homedco Group, Inc.* 2,300 82,800
Hometown Buffet, Inc. 2,800 31,850
Horizon Healthcare Corp.* 4,100 113,263
Hornbeck Offshore
Services, Inc.* 2,200 33,000
Houghton Mifflin Co. 900 41,400
Hovnanian Enterprises,
Inc. Class A* 1,400 8,400
Hudson Foods, Inc. 1,300 28,600
Huffy Corp. 2,200 33,000
Hunt Manufacturing Co. 3,000 48,375
Huntco, Inc. Class A 700 15,400
ICN Pharmceuticals, Inc.* 3,900 45,338
IDEX Corp.* 2,300 100,050
IDEXX Laboratories, Inc. 2,600 72,800
IHOP Corp.* 1,500 41,250
INDRESCO, Inc.* 3,800 47,500
INTERCO Inc. (New)* 2,100 30,450
IVAX Corp. 2,092 40,010
Immunex Corp. (New)* 7,100 96,738
Immunomedics, Inc.* 3,600 15,525
Imperial Bancorp 2,000 32,000
Independent Insurance
Group, Inc. (Non Voting) 800 9,400
Indiana Energy, Inc. 4,100 79,950
Information Resources, Inc.* 4,200 61,950
Ingles Markets Inc. 1,100 12,100
Input/Output, Inc. 2,800 60,550
Insignia Financial Group
Class A (New)* 1,700 34,213
Insilco Corp.* 1,500 39,750
Insituform Technologies, Inc.
Class A* 2,600 33,800
Instrument Systems Corp.* 5,300 39,750
Insurance Auto Auctions, Inc.* 1,600 51,800
Integon Corp. 2,800 42,000
</TABLE>

See accompanying Notes to Financial Statements.

69
<PAGE> 94

SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Integrated Device
Technology, Inc.* 1,000 $28,500
Integrated Health
Services, Inc.* 3,200 130,400
Intelligent Electronics, Inc. 6,400 99,200
Inter-Regional Financial
Group, Inc. 1,400 32,900
Interface Systems, Inc.
Class A 2,400 27,750
Intergraph Corp.* 11,900 102,638
Intergroup Healthcare Corp.* 1,600 101,200
Intermet Corp. 9,200 63,250
International Dairy Queen,
Inc. Class A* 2,600 43,225
International Dairy Queen,
Inc. Class B* 1,800 30,825
International Family
Entertainment, Inc.
Class B* 5,700 74,813
International Multifoods Corp. 2,900 52,200
International Rectifier Corp.* 3,500 81,375
Interneuron
Pharmaceuticals, Inc.* 500 2,813
Interpool, Inc.* 2,100 28,875
Interstate Bakeries Corp. 4,000 51,500
Interstate Power Co. 1,500 33,375
Intuit, Inc.* 600 42,225
Invacare Corp. 1,600 48,600
Ionics, Inc.* 1,000 53,750
Iowa-Illinois Gas &
Electric Co. 4,800 98,400
J. Baker, Inc. 2,200 37,400
JSB Financial, Inc. 1,800 44,775
Jacobs Engineering
Group Inc.* 4,500 96,188
Jacor Communications,
Inc. Class A* 3,700 51,800
Jan Bell Marketing, Inc.* 10,100 55,550
Jason Inc. 3,125 28,516
Jefferies Group, Inc. 1,000 34,250
Jefferson Bankshares, Inc. 2,500 47,969
John Wiley & Sons, Inc.
Class A 1,600 70,000
Johnson Worldwide
Associates, Inc. Class A* 1,200 27,450
Johnstown America
Industries, Inc.* 1,500 29,813
Jones Intercable, Inc.* 1,300 18,200
Jones Intercable, Inc.
Class A* 2,300 31,769
Joslyn Corp. 1,200 32,400
Joy Technologies Inc.* 7,200 99,900
Juno Lighting, Inc. 2,900 54,738
Justin Industries, Inc. 4,300 56,975
K N Energy, Inc. 4,268 105,100
KCS Energy, Inc. 1,900 31,825
KLA Instruments Corp.* 700 36,750
Kaiser Aluminum Corp.* 10,600 119,250
Kaman Corp. Class A 3,200 31,000
Kasler Corp. 1,300 6,663
Kaufman & Broad
Home Corp. 5,700 74,100
Kaydon Corp. 2,700 63,113
Keane, Inc. 4,500 92,250
Kelley Oil Corp.* 700 4,375
Kellwood Co. 3,300 66,413
Kemet Corp.* 2,700 58,050
Kendall Square
Research Corp.* 1,700 186
Kennametal Inc. 800 22,500
Keystone Financial, Inc. 3,500 96,688
Kimball International, Inc.
Class B 2,200 52,800
Kinder-Care Learning
Centers, Inc. (New)* 3,400 45,050
Kirby Corp.* 3,900 65,325
Komag, Inc.* 3,700 92,038
L.A. Gear, Inc.* 2,700 18,900
LCI International, Inc. 2,400 58,200
La Quinta Inns, Inc. 2,700 67,838
La-Z-Boy Chair Co. 3,000 90,750
LabOne, Inc. 2,100 36,225
Laclede Gas Co. 2,500 52,188
Lance Inc. 5,100 90,525
Landmark Graphics Corp.* 2,100 43,050
Landstar Systems, Inc.* 2,200 72,600
Lattice Semiconductor Corp. 2,900 49,119
Lawson Products, Inc. 2,300 59,513
Lawter International, Inc. 7,600 95,950
Leader Financial Corp.* 2,000 47,750
Lechters, Inc.* 2,900 51,113
Legg Mason, Inc. 1,900 39,900
Lennar Corp. 4,800 72,600
Level One
Communications, Inc. 2,150 38,700
Levitz Furniture Inc.* 11,000 96,250
Libbey, Inc. 2,400 38,100
Liberty Bancorp, Inc. 1,200 38,100
Liberty Corp. 3,600 94,950
Life Partners Group, Inc. 3,800 82,650
Life Re Corp. 2,000 36,500
Life Technologies, Inc. 2,500 46,875
Life USA Holding, Inc.* 2,900 23,744
Lilly Industries, Inc. Class A 3,750 50,625
Lincare Holdings, Inc. 4,800 129,600
Lincoln
Telecommunications Co. 5,500 90,750
Liposome Technology, Inc.* 2,200 14,300
Liqui-Box Corp. 1,000 34,500
Littelfuse, Inc.* 3,400 88,400
Living Centers of
America, Inc.* 1,900 57,238
Logicon, Inc. 1,100 33,825
Lone Star Industries Inc.* 2,300 44,563
Lone Star Steakhouse &
Saloon, Inc.* 6,100 156,313
Lottery Enterprises, Inc. 45 293
Louis Dreyfus Natural
Gas Corp.* 7,400 108,225
Loyola Capital Corp. 2,800 56,000
Luby's Cafeterias, Inc. 4,700 108,688
Lukens Inc. 2,450 77,481
M.S. Carriers, Inc.* 2,100 49,088
M/A-COM., Inc.* 3,000 21,000
MAXXAM Inc.* 1,500 50,438
MDU Resources Group, Inc. 3,200 86,800
MICROS Systems, Inc. 1,100 40,975
Mac Frugal's
Bargains-Close-outs, Inc.* 4,800 99,000
</TABLE>

See accompanying Notes to Financial Statements.

<PAGE> 95

SchwabFunds(R) 7
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Madison Gas and Electric Co. 1,500 $49,875
Magma Copper Co. (New)* 1,900 33,963
Magna Group, Inc. 4,600 95,163
MagneTek, Inc.* 4,100 60,988
Manitowoc Co., Inc. 1,600 41,200
Marcus Corp. 1,200 31,500
Marine Drilling
Companies, Inc.* 12,400 50,375
Mariner Health Group, Inc.* 3,100 69,944
Mark Twain Bancshares, Inc. 2,500 67,813
Markel Corp.* 900 37,013
Marquette Electronics, Inc.
Class A* 1,900 36,575
Marsam
Pharmaceuticals Inc.* 2,300 30,619
Marshall Industries 2,700 70,538
Masland Corp. 2,100 33,731
Material Sciences Corp. 1,800 28,575
Maxim Integrated
Products, Inc.* 1,200 80,700
Maybelline, Inc. 2,500 45,313
McClatchy Newspapers,
Inc. Class A 600 13,950
Measurex Corp. 2,900 62,713
Medaphis Corp.* 2,500 95,625
Medicine Shoppe
International, Inc. 900 21,150
Medusa Corp. 2,800 63,700
Men's Wearhouse, Inc. 2,300 57,213
Mentor Graphics Corp. 8,000 107,500
Meredith Corp. 1,200 58,800
Merisel, Inc.* 5,500 50,188
Merrill Corp. 900 16,650
Mesa Airlines, Inc.* 6,000 49,500
MESA Inc.* 10,300 52,788
Methode Electronics, Inc.
Class A 4,000 75,000
Methode Electronics, Inc.
Class B (Convertible) 200 4,175
Metricom, Inc.* 2,100 27,300
Metropolitan Financial Corp. 5,600 134,400
Michael Foods, Inc. 2,300 23,000
Michaels Stores, Inc.* 3,900 158,438
Micom Communications* 1,599 22,986
Micro Warehouse, Inc. 6,300 219,713
MicroAge Computer
Centers, Inc. 1,950 24,131
Microchip Technology, Inc. 1,700 79,900
Mid Atlantic Medical
Services Inc. 2,000 46,250
Mid-Am, Inc. 2,200 32,450
Midwest Grain Products, Inc. 1,600 42,200
Mine Safety Appliances Co. 1,200 54,150
Minerals Technologies, Inc. 800 23,800
Mohawk Industries, Inc. 5,300 85,463
Molten Metal Technology, Inc.* 3,800 84,550
Money-Store Inc., The 2,300 47,150
Monk-Austin, Inc. 2,900 42,413
Moorco International, Inc. 1,800 26,325
Morgan Keegan, Inc. 2,100 26,775
Mosinee Paper Corp. 900 24,413
Mueller Industries, Inc.* 1,500 47,438
Multicare Companies, Inc.* 3,200 65,800
Musicland Group, Inc.* 6,200 84,475
Mutual Assurance, Inc. 1,550 45,144
Mycogen Corp.* 3,200 32,800
Myers Industries, Inc. 2,500 42,500
N.S. Bancorp, Inc. 1,300 35,994
NAC Re Corp. 3,200 83,200
NACCO Industries, Inc.
Class A 1,300 76,700
NBB Bancorp, Inc. 1,300 62,075
NCH Corp. 1,400 93,275
NL Industries, Inc.* 8,700 110,925
NUI Corp. 1,500 23,063
NYMAGIC, Inc. 1,400 23,450
Nabors Industries, Inc.* 11,900 87,763
Nash Finch Co. 2,000 32,000
Nashua Corp. 700 15,925
National Auto Credit Inc.* 4,100 49,969
National Bancorp of
Alaska, Inc. 1,400 72,100
National Commerce Bancorp 4,100 95,325
National Computer
Systems, Inc. 1,800 25,650
National Data Corp. 2,400 49,800
National Gypsum Co. (New)* 3,500 118,125
National Penn
Bancshares, Inc. 1,155 31,329
National Presto
Industries, Inc. 1,100 43,313
National RE Holdings Corp. 3,100 75,950
National Steel Corp. Class B* 2,300 40,825
Nautica Enterprises, Inc. 2,300 66,700
Navigators Group, Inc. 600 9,750
Neiman Marcus Group, Inc. 6,400 92,000
Nellcor Inc.* 3,000 93,000
Netmanage, Inc. 5,400 152,550
Network General Corp.* 3,000 64,313
Network Systems Corp.* 4,800 33,300
New England Business
Service, Inc. 2,400 45,300
New Jersey
Resources Corp. 3,200 69,600
Noble Drilling Corp.* 18,975 138,755
Noise Cancellation
Technologies, Inc.* 15,400 20,213
Norand Corp.* 1,200 47,100
North American
Mortgage Co. 2,800 50,400
North Carolina Natural
Gas Corp. 700 15,750
North Fork Bancorp, Inc. 3,000 45,750
Northwest Natural Gas Co. 2,000 60,750
Northwestern Public
Service Co. 900 23,400
Northwestern Steel & Wire* 3,900 23,888
NovaCare, Inc.* 4,280 42,800
Novellus Systems, Inc.* 2,800 152,950
Noven Pharmaceuticals, Inc.* 2,600 39,325
Nuevo Energy Co.* 1,300 29,088
O'Reilly Automotive, Inc.* 1,400 35,350
O'Sullivan Corp. 2,000 19,000
OEA, Inc. 3,500 86,188
OM Group, Inc. 2,000 39,875
OMI Corp. 3,600 23,400
ONBANCorp, Inc. 2,100 55,125
Oak Industries Inc.* 2,900 74,675
</TABLE>

See accompanying Notes to Financial Statements.

<PAGE> 96
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -------
<S> <C> <C>
Oakwood Homes Corp. 3,700 $87,875
Oceaneering International, Inc.* 3,600 46,350
Octel Communications Corp.* 4,400 95,150
Offshore Logistics, Inc.* 2,800 36,225
Offshore Pipelines, Inc.* 2,100 42,788
Ogden Projects, Inc.* 600 10,500
Omega Environmental, Inc.* 5,000 30,000
Omnicare, Inc. 1,100 40,150
One Valley Bancorp of West Virginia, Inc. 2,800 83,650
Oneok Inc. 4,300 75,788
OrNda Heathcorp* 6,660 106,560
Orange & Rockland Utilities, Inc. 2,500 75,938
Orbital Sciences Corp.* 2,500 53,438
Oregon Steel Mills, Inc. 6,300 107,888
Orion Capital Corp. 2,300 70,438
Oshkosh B'Gosh, Inc. Class A 2,400 35,700
Oshkosh B'Gosh, Inc. Class B 200 2,975
Otter Tail Power Co. 1,600 52,200
Outboard Marine Corp. 3,400 70,125
Owens & Minor, Inc. 5,100 75,863
Oxford Health Plans, Inc. 1,300 107,250
Oxford Industries, Inc. 1,600 40,800
PAXAR Corp. 2,750 29,219
PLATINUM technology, inc.* 3,200 71,200
PXRE Corp. 1,100 27,225
Pacific Crest Capital, Inc.* 126 725
Papa John's International* 1,900 60,563
Paragon Trade Brands* 1,800 43,200
Park Communications, Inc.* 3,100 87,188
Park National Corp. 800 31,600
Parker Drilling Co.* 11,100 67,988
Patterson Dental Co. 3,850 72,669
Penn Traffic Co.* 1,900 78,375
PennCorp Financial Group, Inc. 2,900 45,675
Pentair, Inc. 700 29,488
People's Bank Bridgeport Connecticut 5,200 67,925
PeopleSoft, Inc.* 1,900 117,800
Peoples Choice TV Corp.* 1,100 21,725
Peoples Heritage Financial Group, Inc. 2,800 39,550
PerSeptive Biosystems, Inc.* 2,000 22,125
Petroleum Heat and Power Co., Inc. Class A 3,200 28,400
Petrolite Corp. 1,900 56,525
Pharmaceutical Resources, Inc.* 1,800 17,100
Philadelpia Suburban Corp. 1,300 23,075
PhyCor, Inc.* 1,600 54,800
Physicians Health Services, Inc.* 600 15,225
PictureTel Corp.* 2,300 44,850
Piedmont Natural Gas Co., Inc. 4,800 96,600
Pier 1 Imports, Inc. 5,600 43,400
Pikeville National Corp. 1,200 27,600
Pilgrim's Pride Corp. 4,500 45,000
Pillowtex Corp.* 2,100 25,725
Pioneer Group, Inc. 2,000 94,000
Pioneer-Standard Electronics, Inc. 2,550 46,219
Piper Jaffray Inc. 4,600 53,475
Pittston Minerals Group 900 21,600
Pittway Corp. 300 11,213
Pittway Corp. Class A 1,400 51,100
Plains Petroleum Co. 1,200 32,400
Platinum Software Corp. 1,500 17,906
Playboy Enterprises, Inc. Class B* 2,100 17,325
Players International, Inc.* 2,800 62,825
Ply-Gem Industries, Inc. 2,200 47,300
Poe & Brown, Inc. 1,500 32,063
Pogo Producing Co. 700 15,663
Policy Management Systems Corp.* 2,000 94,000
Pope & Talbot, Inc. 1,800 31,950
Powersoft Corp.* 1,500 95,250
Precision Castparts Corp. 3,300 75,488
Premier Bancorp, Inc. 4,600 75,325
President Riverboat Casinos, Inc. 4,700 38,188
Presidential Life Corp. 6,800 40,375
Presstek, Inc. 1,125 37,898
Primark Corp.* 3,500 45,500
Prime Hospitality Corp.* 5,500 42,625
Production Operators Corp. 1,600 41,000
Proffitt's, Inc.* 1,600 28,800
Progress Software Corp.* 900 28,238
Protective Life Corp. 2,200 99,000
Protein Design Labs, Inc.* 2,500 43,438
Provident Bancorp, Inc. 2,800 94,850
Public Service Co. of New Mexico* 6,300 77,963
Public Service Co. of North Carolina, Inc. 3,300 48,263
Pulitzer Publishing Co. 2,100 75,075
Puritan-Bennett Corp. 4,200 108,938
Purolator Products Co. 1,600 39,800
Quaker State Corp. 4,100 55,863
Quality Food Centers, Inc. 3,100 66,650
Quanex Corp. 2,100 52,238
Quantum Corp.* 8,100 123,525
Quantum Health Resources, Inc.* 2,600 94,900
Queens County Bancorp 1,200 31,200
Quick & Reilly Group, Inc. 1,680 43,260
REN Corporation-USA* 2,200 27,500
Raymond James Financial, Inc. 2,800 42,000
Read-Rite Corp.* 5,900 102,144
Reading & Bates Corp. (New)* 10,600 71,550
Recognition International, Inc.* 1,800 13,275
Recoton Corp. 1,900 35,625
Regal-Beloit Corp. 2,800 39,200
Regency Health Services* 3,300 37,538
Reinsurance Group of America, Inc. 3,000 66,750
Reliance Group Holdings, Inc. 18,600 113,925
Republic Bancorp Inc. 2,750 33,000
Rexall Sundown, Inc. 2,700 28,181
Richfood Holdings, Inc. 3,500 56,000
</TABLE>

See accompanying Notes to Financial Statements.

72
<PAGE> 97

SchwabFunds(R) 9
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -------
<S> <C> <C>
Riggs National Corp.* 11,100 $101,288
Rio Hotel and Casino, Inc.* 3,900 50,700
Rival Co. 1,500 38,250
River Forest Bancorp, Inc. 1,200 40,350
RoTech Medical Corp.* 1,800 46,125
Robert Half International Inc. 4,600 98,900
Roberts Pharmaceutical Corp.* 3,100 82,538
Rochester Community Savings Bank 2,300 42,263
Rohr Inc.* 6,600 60,225
Rollins Environmental Services, Inc. 11,500 67,563
Rollins Leasing Corp. 8,400 98,700
Roosevelt Financial Group, Inc. 3,300 49,913
Roper Industries, Inc. 2,600 63,050
Ross Stores, Inc. 4,000 56,000
Ruddick Corp. 4,200 81,900
Russ & Berrie Co., Inc. 3,500 47,688
Ryan's Family Steak Houses, Inc.* 21,100 134,513
Ryland Group, Inc. 2,900 46,763
S & T Bancorp, Inc. 2,000 40,250
S.E. Rykoff & Co.* 1,400 28,175
S3, Inc. 2,500 35,625
SCI Systems, Inc.* 4,800 87,000
SCIMED Life Systems, Inc.* 2,800 134,050
SCOR Reinsurance U.S. Corp. 2,200 24,475
SEI Corp. 2,900 60,175
SFFed Corp. 1,400 24,150
SLM Interational, Inc. 3,350 20,519
SPI Pharmaceuticals, Inc. 3,107 71,461
SPX Corp. 2,300 39,963
SafeCard Services, Inc. 3,700 59,200
Safeskin Corp.* 2,200 35,750
Sanifill, Inc.* 2,500 56,875
Santa Cruz Operation, Inc.* 5,500 59,813
Savannah Foods & Industries, Inc. 4,900 61,250
Savoy Pictures Entertainment, Inc.* 4,200 37,275
Sbarro, Inc. 3,000 74,625
Scholastic Corp.* 2,800 128,100
Schuler Homes, Inc.* 3,300 51,563
Scios Nova, Inc.* 5,200 34,450
Scotts Co. Class A* 7,400 114,700
Seabord Corp. 200 36,250
Seafield Capital Corp. 1,100 39,188
Sealed Air Corp.* 3,700 126,263
Sealright Co., Inc. 1,300 22,100
Security Capital Bancorp 2,100 32,550
Seitel, Inc.* 1,000 28,000
Selective Insurance Group, Inc. 4,400 110,550
Sequa Corp. Class A 1,100 26,950
Sequa Corp. Class B 700 19,600
Sequent Computer Systems, Inc.* 5,400 103,275
Shared Medical Systems Corp. 3,900 115,294
Shoe Carnival, Inc. 500 3,250
ShopKo Stores, Inc. 8,800 86,900
Shorewood Packaging Corp.* 2,800 56,350
Showboat, Inc. 2,400 28,800
Sierra Health Services, Inc.* 2,000 65,000
Sierra Pacific Resources 5,400 103,950
Silicon Valley Group, Inc.* 1,000 19,500
Simpson Industries, Inc. 3,000 39,000
Sizzler International, Inc. 11,500 69,000
SkyWest Airlines, Inc. 1,900 38,950
Skyline Corp. 1,300 25,675
Smart & Final Inc. 3,800 56,525
Smith (A.O.) Corp. Class A 1,000 24,500
Smith (A.O.) Corp. Class B 2,600 63,375
Smith International, Inc.* 7,100 118,925
Smith's Food & Drug Centers, Inc. Class B 3,200 82,800
Smithfield Foods, Inc.* 2,600 75,400
Smucker (J.M.) Co. Class B 500 10,688
Snyder Oil Corp. 4,300 74,175
Sodak Gaming Inc.* 1,700 24,013
Sofamor Danek Group, Inc.* 4,600 77,050
Sonat Inc. 5,200 103,350
Sotheby's Holdings, Inc. Class A 700 8,488
South Jersey Industries, Inc. 1,200 20,850
Southdown, Inc.* 6,400 111,200
Southeastern Michigan Gas Enterprises, Inc. 1,890 35,201
Southern California Water Co. 900 14,063
Southern Indiana Gas & Electric Co. 2,866 76,666
Southern Union Co. (New) 2,000 33,750
Southwest Gas Corp. 3,400 58,225
Southwestern Energy Co. 4,200 72,450
Southwestern Life Insurance Co.* 7,200 31,500
Sovereign Bancorp, Inc. 6,280 57,305
SpaceLabs Medical Inc.* 1,700 35,913
Spectravision, Inc.* 1,300 1,381
Spectrum Information Technologies, Inc.* 8,100 13,542
Spelling Entertainment Group, Inc. 12,300 147,600
Sports & Recreation, Inc. 3,000 84,750
Springs Industries, Inc. 3,200 129,200
St. John's Knits, Inc. 1,300 39,650
St. Paul Bancorp, Inc. 3,500 71,969
Standard Microsystems Corp.* 1,900 46,669
Standard Motor Products, Inc. 2,500 45,625
Standard Pacific Corp. 5,800 39,875
Standard Products Co. 2,700 65,138
Standard Register Co. 4,800 85,200
Standex International Corp. 1,800 58,275
Stanhome Inc. 400 13,450
Stant Corp. 2,600 29,250
Starbucks Corp. 1,100 29,838
Starter Corp.* 4,900 36,138
State Auto Financial Corp. 2,100 29,925
Station Casinos Inc.* 4,800 63,600
Steel Technologies Inc. 2,100 25,988
Stein Mart, Inc. 3,600 63,900
Sterling Chemicals, Inc. 10,100 122,463
Sterling Software, Inc.* 3,700 115,625
Stewart Enterprises, Inc. Class A 3,700 89,725
</TABLE>

See accompanying Notes to Financial Statements.

73
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SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -------
<S> <C> <C>
Stone & Webster, Inc. 2,700 $87,413
Stone Container Corp.* 6,112 102,376
Stratacom Inc.* 3,100 175,150
Stratus Computer, Inc.* 2,000 74,500
Strawbridge & Clothier Class A 1,700 36,975
Structural Dynamics Research Corp.* 4,300 20,694
Student Loan Corp. 2,800 53,550
Sturm, Ruger & Co., Inc. 2,000 53,000
Summa Four, Inc.* 500 10,375
Summit Bancorp 4,600 96,888
Summit Technology, Inc.* 2,800 79,800
Sun Healthcare Group, Inc.* 3,608 82,984
Sunglass Hut International, Inc.* 1,600 66,600
Sunrise Medical Inc.* 3,300 85,800
Sunshine Mining Co. 23,000 48,875
Supercuts, Inc.* 1,200 13,200
Surgical Care Affiliates, Inc. 7,150 140,319
Susquehanna Bancshares, Inc. 1,700 39,525
Swift Transportation Co. 2,100 90,825
SyStemix, Inc.* 1,200 18,750
Sybron Corp.* 1,900 65,788
Symantec Corp.* 6,000 107,250
Symbol Technologies, Inc.* 4,300 145,125
Symmetricom, Inc.* 1,600 19,300
Syncor International Corp.* 700 5,950
Synergen, Inc.* 6,800 36,975
Synetic, Inc.* 3,300 54,038
Synopsys, Inc.* 300 13,838
Syratech Corp.* 1,600 29,400
System Software Associates, Inc. 4,600 57,213
Systems & Computer Technology Corp.* 1,700 33,788
TBC Corp.* 4,300 41,656
TCA Cable TV, Inc. 4,000 94,000
TCF Financial Corp. 2,000 78,000
TJ International 3,100 55,800
TNP Enterprises, Inc. 1,300 18,038
TNT Freightways Corp. 3,500 89,688
Taco Cabana Class A 2,500 19,844
Tandycrafts, Inc.* 1,900 22,800
Tech Data Corp. 9,000 176,625
Tecnol Inc.* 3,200 50,800
Tejas Gas Corp.* 1,800 81,450
Tejon Ranch Co. 1,900 25,888
Teleflex Inc. 2,450 94,938
Telxon Corp. 2,500 33,125
Tencor Instruments* 1,900 83,600
Tennant Co. 900 41,063
Terra Industries, Inc. 25,800 274,125
Tesoro Petroleum Corp.* 4,600 43,125
Tetra Tech, Inc. (New) 3,125 60,156
Texas Industries, Inc. 1,800 57,600
Thermedics Inc. 4,800 72,600
Thermo Cardiosystems Inc. 3,300 58,163
Thermo Fibertek, Inc.* 10,700 164,513
Thermotrex Corp. 2,700 41,175
Thiokol Corp. 3,000 73,875
Thomas Nelson, Inc. 2,100 40,163
Thor Industries, Inc. 1,200 24,600
Tiffany & Co. (New) 2,700 105,300
Timberland Co. Class A* 1,400 47,425
Titan Wheel International, Inc. 200 5,750
Toll Brothers, Inc.* 5,700 62,700
Topps Co., Inc. 7,500 43,594
Toro Co. 2,100 58,275
Transco Energy Co. 1,100 15,813
Trenwick Group Inc. 1,100 40,563
TriMas Corp. 2,500 57,813
Triarc Cos., Inc. Class A* 3,900 45,338
Trident NGL Holding, Inc. 6,000 63,750
Trimble Navigation Ltd.* 3,100 44,369
Trust Co. of New Jersey (New) 3,900 57,525
TrustCo Bank Corp NY 2,420 47,190
Trustmark Corp. 5,300 94,075
Tuscon Electric Power Co.* 26,000 91,000
Tyco Toys, Inc. 5,900 38,350
U.S. Bioscience, Inc.* 7,600 55,100
U.S. Can Corp.* 1,800 29,025
U.S. Home Corp. (New)* 1,200 19,050
U.S. Robotics, Inc.* 2,100 83,738
U.S. Trust Corp. 1,500 90,750
UMB Financial Corp. 3,240 104,895
UNR Industries, Inc. 9,700 58,806
USAir Group, Inc.* 9,800 42,875
USLICO Corp. 2,800 56,000
UST Corp.* 3,200 36,400
UniFirst Corp. 3,000 35,625
Unilab Corp. (New)* 6,600 32,588
Union Planters Corp. 2,700 62,100
Union Switch & Signal* 2,600 41,275
United Bankshares, Inc. 1,900 46,550
United Carolina Bancshares Corp. 2,400 62,100
United Companies Financial Corp. 2,200 72,325
United Fire & Casualty Co. 700 29,400
United Illuminating Co. 2,300 70,150
United Insurance Companies, Inc.* 1,500 46,125
United International Holdings Inc. 1,600 24,200
United Meridian Corp.* 3,900 57,038
United States Shoe Corp. 4,000 71,500
United Stationers Inc. 6,000 59,250
United Television, Inc.* 1,500 79,313
United Waste Systems, Inc.* 3,400 81,175
United Water Resources Inc. 6,000 82,500
United Wisconsin Services, Inc. 2,200 80,850
Unitog Co. 1,650 30,319
Unitrode Corp.* 1,600 30,800
Univar Corp. 2,300 31,913
Universal Health Services, Inc. Class B* 1,800 47,925
VISX, Inc.* 1,800 21,825
VLSI Technology, Inc.* 5,900 76,331
Valassis Communications, Inc. 2,900 44,225
Valence Technology, Inc.* 2,700 8,775
Valhi, Inc. 21,000 141,750
Valmont Industries, Inc. 1,600 27,400
</TABLE>

See accompanying Notes to Financial Statements.

74
<PAGE> 99

SchwabFunds(R) 11
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -------
<S> <C> <C>
Value City Department Stores, Inc.* 5,900 $67,113
Value Health, Inc.* 1,232 47,740
Value Line, Inc. 1,700 53,550
Varco International, Inc.* 9,900 69,300
Vencor, Inc. 4,650 138,919
Ventritex, Inc.* 3,700 96,200
Venture Stores, Inc. 2,900 44,950
VeriFone, Inc.* 4,300 95,675
Vertex Pharmaceuticals, Inc.* 2,500 33,438
Vesta Insurance Group 1,500 39,563
Vicor Corp.* 3,600 100,800
Victoria Bankshares, Inc. 1,000 25,750
ViewLogic Systems, Inc.* 2,300 50,600
Vigoro Corp. 3,300 101,475
Vintage Petroleum, Inc. 3,700 71,688
Viratek, Inc. 2,295 26,679
Vivra Inc. 2,800 79,100
W.H. Brady Co. Class A 900 2,975
WD-40 Co. 1,200 51,450
WHX Corp.* 11,000 165,000
WICOR, Inc. 2,300 65,838
WLR Foods, Inc. 1,800 47,250
WMS Industries Inc.* 4,000 70,500
Waban, Inc.* 6,000 106,500
Wabash National Corp. 3,000 104,250
Walbro Corp. 1,400 25,025
Wall Data, Inc.* 1,500 54,938
Wallace Computer Services, Inc. 1,400 38,850
Washington Energy Co. 3,800 51,775
Washington National Corp. 4,900 105,963
Waterhouse Securities, Inc. 1,600 25,800
Watson Pharmaceuticals, Inc.* 2,600 68,250
Watts Industries, Inc. Class A 3,100 74,400
Weatherford International Inc.* 3,500 39,813
Webb (Del) Corp. 2,100 33,863
Weirton Steel Corp.* 4,300 37,088
Welbilt Corp.* 1,500 37,313
Wellman, Inc. 500 16,438
Werner Enterprises, Inc. 500 12,688
WesBanco, Inc. 1,400 38,325
West Company, Inc. 3,000 84,375
Westamerica Bank 1,000 32,000
Westcorp Financial Services 4,130 39,235
Westcott Communications, Inc. 2,900 39,875
Western Co. of North America* 2,900 51,475
Western Digital Corp.* 8,200 139,400
Western Waste Industries* 2,400 42,000
WestPoint Stevens, Inc.* 5,600 82,600
Westwood One, Inc.* 5,000 47,813
White River Corp.* 1,000 32,875
Whitney Holding Corp. 2,400 54,300
Whole Foods Market, Inc. 1,900 29,213
Williams-Sonoma, Inc. 4,200 145,950
Winnebago Industries, Inc. 4,100 36,388
Wisconsin Central Transportation Corp. 2,800 129,150
Wolverine Tube, Inc.* 2,000 50,250
Wolverine World Wide, Inc. 1,700 41,650
Worthen Bank & Trust Co. 2,500 71,563
Wyle Laboratories 2,300 42,550
X-Rite, Inc. 1,600 58,600
XCL Limited* 20,500 28,188
Xircom, Inc.* 2,500 43,438
Yankee Energy System, Inc. 1,900 42,513
Yellow Corp. 5,100 99,131
Younkers, Inc.* 1,000 19,625
Zebra Technologies Corp. Class A* 900 36,563
Zenith Electronics Corp.* 7,700 107,800
Zenith Laboratories, Inc. (New) 2,400 57,000
Zenith National Insurance Corp. 3,100 73,238
Zero Corp. 1,900 24,463
Zilog, Inc.* 400 11,600
Zions Bancorp 2,300 86,408
Zurn Industries, Inc. 2,000 36,500
1st Source Corp. 1,145 28,482
3DO Co.* 3,200 53,200
-----------
TOTAL COMMON STOCK(Cost $64,786,151) 65,383,543
Maturity -----------
--------
REPURCHASE AGREEMENT--4.0%
State Street Bank & Trust 4.25%
Dated 10/31/94
Due 11/01/94
Collateralized By:
U.S. Treasury Bill
$2,860,000 Par;
Due 4/30/95 $2,730,000 2,730,000
-----------
TOTAL REPURCHASE AGREEMENT
(Cost $2,730,000) 2,730,000
-----------
TOTAL INVESTMENTS -- 100.0%
(Cost $67,516,151) 68,113,543
-----------
OTHER ASSETS AND LIABILITIES -- 0.0%
Other Assets 230,704
Liabilities (216,246)
-----------
14,458
-----------
NET ASSETS -- 100.0%
Applicable to 6,779,517
outstanding $0.00001
par value shares
(unlimited shares authorized) $68,128,001
===========
NET ASSET VALUE PER SHARE $ 10.05
===========
</TABLE>

- ---------------
*Non-Income Producing Security

See accompanying Notes to Financial Statements.

75
<PAGE> 100

SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF OPERATIONS
For the period December 3, 1993 (commencement of operations) to October 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Investment income:
Dividends $ 588,017
Interest 112,525
-----------
Total investment income 700,542
-----------
Expenses:
Investment advisory and administration fee 258,394
Transfer agency and shareholder service fees 129,197
Custodian fees 82,467
Registration fees 32,217
Professional fees 28,173
Shareholder reports 48,377
Trustees' fees 18,495
Amortization of deferred organization costs 13,320
Insurance and other expenses 4,609
-----------
615,249
Less expenses reduced and absorbed (267,476)
-----------
Total expenses incurred by Fund 347,773
-----------
Net investment income 352,769
-----------

Net realized gain (loss) on investments:
Proceeds from sales of investments 8,478,561
Cost of investments sold (9,006,296)
-----------
Net realized loss on investments sold (527,735)
-----------

Net unrealized appreciation on investments:
Beginning of period --
End of period 597,392
-----------
Net unrealized appreciation on investments 597,392
-----------
Net gain on investments 69,657
-----------
Net increase in net assets resulting from operations $ 422,426
===========
</TABLE>

See accompanying Notes to Financial Statements.

76
<PAGE> 101

SchwabFunds(R) 13
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF CHANGES IN NET ASSETS
For the period December 3, 1993 (commencement of operations) to October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Operations:
Net investment income $ 352,769
Net realized loss on investments sold (527,735)
Net unrealized appreciation on investments 597,392
------------
Net increase in net assets resulting from operations 422,426
------------
Dividends to shareholders from net investment income (56,830)

Capital Share Transactions:
Proceeds from shares sold 78,645,543
Net asset value of shares issued in reinvestment of dividends 52,690
Early withdrawal fees 27,385
Less payments for shares redeemed (10,963,213)
------------
Increase in net assets from capital share transactions 67,762,405
------------
Total increase in net assets $ 68,128,001

Net Assets:
Beginning of period --
------------
End of period (including undistributed net
Investment income of $295,939) $ 68,128,001
============
Number of Fund Shares:
Sold 7,883,827
Reinvested 5,322
Redeemed (1,109,632)
------------
Net increase in shares outstanding 6,779,517
Shares Outstanding:
Beginning of period --
------------
End of period 6,779,517
============
</TABLE>

See accompanying Notes to Financial Statements.

77
<PAGE> 102

SchwabFunds(R) 14
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the period December 3, 1993 (commencement of operations) to October 31, 1994
- --------------------------------------------------------------------------------

1. DESCRIPTION OF THE FUND

The Schwab Small-Cap Index Fund (the "Fund") is a series of Schwab Capital Trust
(the "Trust"), an open-end, management investment company organized as a
Massachusetts business trust on May 7, 1993 and registered under the Investment
Company Act of 1940, as amended. The Fund commenced operations on December 3,
1993.

In addition to the Fund, the Trust also offers the Schwab International Index
Fund(TM). The assets of each series are segregated and accounted for separately.

The investment objective of the Fund is to attempt to track the price and
dividend performance (total return) of the Schwab Small-Cap Index(TM), an index
created to represent the performance of the second 1,000 largest publicly traded
common stocks issued by United States companies.

2. SIGNIFICANT ACCOUNTING POLICIES

78
<PAGE> 103

SchwabFunds(R) 15
- --------------------------------------------------------------------------------

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

At October 31, 1994, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $597,392 of which $7,021,886 related to
appreciated securities and $6,424,494 related to depreciated securities.

3. TRANSACTIONS WITH AFFILIATES

Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of .50% of the first $300 million
of average daily net assets and .45% of such assets over $300 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$258,394 during the period from December 3, 1993 (commencement of operations) to
October 31, 1994, before the Investment Manager reduced its fee (see Note 5).

Sub-advisory agreement -- The Investment Manager has a sub-advisory agreement
with Dimensional Fund Advisors Inc. ("Dimensional") to perform day-to-day
portfolio management for the Fund. Dimensional does not receive compensation
directly from the Fund. However, the Investment Manager pays Dimensional an
annual fee, payable monthly, of .10% of the first $300 million of average daily
net assets and .05% of such assets over $300 million.

Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets for transfer
agency services and .20% of such assets for shareholder services. For the period
from December 3, 1993 (commencement of operations) to October 31, 1994, the Fund
incurred transfer agency and shareholder service fees of $129,197, before Schwab
reduced its fees (see Note 5).

Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers or directors of the Investment Manager, Schwab or
Dimensional. During the period ended October 31, 1994, the Trust made no direct
payments to its officers or trustees who were "interested persons" within the
meaning of the Investment Company Act of 1940, as amended. The Fund incurred
fees of $18,495 related to the Trust's unaffiliated trustees.

4. BORROWING AGREEMENT

The Trust has an arrangement with State Street Bank and Trust Company, the
Fund's custodian, whereby the Fund may borrow up to $10,000,000, on a temporary
basis, to fund redemptions. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the period December 3, 1993 (commencement of
operations) to October 31, 1994, no borrowings were made under this arrangement.

79
<PAGE> 104

SchwabFunds(R) 16
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the period December 3, 1993 (commencement of operations) to October 31, 1994
- --------------------------------------------------------------------------------

5. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB

The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit the Fund's ratio of operating expenses to
average net assets. For the period from December 3, 1993 (commencement of
operations) to October 31, 1994, the total of such fees and expenses reduced and
absorbed by the Investment Manager was $153,640 and the total of such fees
reduced by Schwab was $113,836.

6. INVESTMENT TRANSACTIONS

Purchases and sales of investment securities, other than short-term obligations,
aggregated $73,792,447 and $8,478,561, respectively, for the period from
December 3, 1993 (commencement of operations) to October 31, 1994.

7. EARLY WITHDRAWAL FEES PAID TO THE FUND

The Fund assesses a .50% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the period from December 3, 1993 (commencement of operations) to
October 31, 1994, total early withdrawal fees retained by the Fund amounted to
$27,385.

8. COMPOSITION OF NET ASSETS

At October 31, 1994, net assets consisted of:

<TABLE>
<S> <C>
Capital paid in $67,762,405
Accumulated undistributed net investment income 295,939
Accumulated net realized loss on investments sold (527,735)
Net unrealized appreciation on investments 597,392
-----------
Total $68,128,001
===========
</TABLE>

At October 31, 1994, the Fund's Statement of Net Assets included liabilities of
$106,248 for Fund shares redeemed and $24,610 for investment advisory and
administration fee payable.

80
<PAGE> 105

SchwabFunds(R) 17
- --------------------------------------------------------------------------------

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

9. FINANCIAL HIGHLIGHTS

Per share income and capital changes for a share outstanding throughout the
period, from December 3, 1993 (commencement of operations) to October 31, 1994:

<TABLE>
<S> <C>
Net asset value at beginning of period $ 10.00
Income from Investment Operations
Net investment income .06
Net realized and unrealized gain (loss) on investments --
-----------
Total from investment operations .06
Less Distributions
Dividends from net investment income (.01)
Distributions from realized gain on investments --
-----------
Total distributions (.01)
Net asset value at end of period $ 10.05
===========
Total return (%) .63
Ratios/Supplemental Data
Net assets, end of period $68,128,001
Ratio of expenses to average net assets (%)* .67
Ratio of net investment income to average net assets (%)* .68
Portfolio turnover rate (%) 16
</TABLE>

The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the period ended
October 31, 1994, would have been 1.19%*, and the ratio of net investment income
to average net assets would have been .16%*.

* Annualized

81
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SchwabFunds(R) 18
- --------------------------------------------------------------------------------

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

To the Board of Trustees
and Shareholders of the Schwab Small-Cap Index Fund(TM)

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

PRICE WATERHOUSE LLP
San Francisco, California
November 30, 1994

1994 SPECIAL TAX INFORMATION (UNAUDITED)

Notice to Corporate Shareholders
- -------------------------------------------------------------------------------
100% of the Fund's distributions for the fiscal year ended October 31, 1994
qualify for the corporate dividends received deduction.
- -------------------------------------------------------------------------------

82
<PAGE> 107

APPENDIX A

The following is a list of Companies whose securities were included in
the Schwab International Index(TM) calculation as of the date of this Statement
of Additional Information:

<TABLE>
<S> <C>
ABBEY NATIONAL United Kingdom
ABN-AMRO HOLDING Netherlands
AEGON Netherlands
AGF France
AIR LIQUIDE France
AJINOMOTO CO Japan
AKZO NOBEL Netherlands
ALCAN ALUMINIUM Canada
ALCATEL CABLE France
ALCATEL ALSTHOM France
ALL NIPPON AIRWAYS CO Japan
ALLEANZA ASSICUR. Italy
ALLIED DOMECQ(ALD-LYONS) United Kingdom
AMERICAN BARRICK RES. Canada
ARGENTARIA Spain
ARGYLL GROUP United Kingdom
ASAHI BREWERIES Japan
ASAHI BANK Japan
ASAHI GLASS CO Japan
ASAHI CHEMICAL IND CO Japan
ASEA Sweden
ASHIKAGA BANK Japan
ASSICURAZIONI GENERALI Italy
ASTRA Sweden
AXA France
BAA United Kingdom
BANCO SANTANDER Spain
BANCO BILBAO VIZCAYA Spain
BANCO ESPANOL DE CREDITO Spain
BANK TOKYO Japan
BANK YOKOHAMA Japan
BANK MONTREAL Canada
BANK FUKUOKA Japan
BANKGESELLSCHAFT BERLIN Germany
BARCLAYS United Kingdom
BASF Germany
BASS United Kingdom
</TABLE>

83
<PAGE> 108

<TABLE>
<S> <C>
BAT INDUSTRIES United Kingdom
BAYER Germany
BAYER VEREINSBANK STAMM Germany
BAYER HYPOTHEKEN BANK Germany
BBC BROWN BOVERI Switzerland
BCE INC Canada
BMW Germany
BNP France
BOC GROUP United Kingdom
BOOTS CO United Kingdom
BRIDGESTONE CORP Japan
BRITISH AIRWAYS United Kingdom
BRITISH GAS United Kingdom
BRITISH PETROLEUM United Kingdom
BRITISH TELECOM United Kingdom
BRITISH STEEL United Kingdom
BROKEN HILL PROP CO Australia
BTR United Kingdom
BTR NYLEX Australia
CABLE & WIRELESS United Kingdom
CADBURY SCHWEPPES United Kingdom
CANADIAN IMPERIAL BANK Canada
CANADIAN PACIFIC LTD Canada
CANON INC Japan
CARREFOUR France
CATHAY PACIFIC AIRWAYS Hong Kong
CHIBA BANK Japan
CHINA LIGHT & POWER Hong Kong
CHUBU ELECTRIC POWER CO Japan
CHUGOKU ELECTRIC POWER Japan
CIBA-GEIGY Switzerland
CITIC PACIFIC Hong Kong
COMMERCIAL UNION United Kingdom
COMMERZBANK AKTIE Germany
COMMONWEALTH BANK Australia
COSMO OIL CO Japan
CRA Australia
CS HOLDING Switzerland
DAI-ICHI KANGYO BANK Japan
DAI NIPPON PRINTING CO Japan
DAIEI Japan
DAIMLER-BENZ Germany
DAIWA HOUSE IND CO Japan
</TABLE>

84
<PAGE> 109

<TABLE>
<S> <C>
DAIWA BANK Japan
DAIWA SECURITIES CO Japan
DANONE (BSN) France
DEUTSCHE BANK Germany
DEVELOPMENT BK SINGAPORE Singapore
DRESDNER BANK Germany
EAST JAPAN RAILWAY CO Japan
EBARA CORP Japan
EISAI CO Japan
ELECTRABEL Belgium
ELF AQUITAINE France
ELSEVIER Netherlands
ENDESA Spain
ERICSSON (LM) Sweden
FANUC Japan
FIAT Italy
FUJI BANK Japan
FUJI PHOTO FILM CO Japan
FUJITSU LTD Japan
FURUKAWA ELECTRIC CO Japan
GENERAL ELECTRIC PLC United Kingdom
GENERALE BELGIQUE Belgium
GENERALE EAUX France
GLAXO HOLDINGS United Kingdom
GRAND METROPOLITAN United Kingdom
GREAT UNIVERSAL ST. ORD United Kingdom
GUINNESS United Kingdom
GUNMA BANK Japan
HACHIJUNI BANK Japan
HANG SENG BANK Hong Kong
HANKYU CORP Japan
HANSON United Kingdom
HEINEKEN NV Netherlands
HENDERSON LAND DEV. Hong Kong
HENKEL VORZUG Germany
HITACHI ZOSEN CORP Japan
HITACHI Japan
HOECHST Germany
HOKKAIDO ELECTRIC POWER Japan
HOKURIKU ELECTRIC POWER Japan
HOKURIKU BANK Japan
HONDA MOTOR CO Japan
HONGKONG LAND HOLDINGS Hong Kong
</TABLE>

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<PAGE> 110

<TABLE>
<S> <C>
HONGKONG ELECTRIC HLDGS Hong Kong
HONGKONG TELECOM Hong Kong
HSBC HOLDINGS United Kingdom
HUTCHISON WHAMPOA Hong Kong
IBERDROLA Spain
IMPERIAL OIL Canada
IMPERIAL CHEMICAL ICI United Kingdom
INA Italy
INDUSTRIAL BANK OF JAPAN Japan
INT'LE NEDERLANDEN GROEP Netherlands
ISHIKAWAJIMA-HARIMA Japan
ISUZU MOTORS Japan
ITO-YOKADO CO Japan
ITOCHU CORP Japan
JAPAN AIRLINES CO Japan
JAPAN ENERGY(NIKKO KYODO Japan
JARDINE MATHESON HLDGS Hong Kong
JOYO BANK Japan
JUSCO CO Japan
KAJIMA CORP Japan
KANSAI ELECTRIC POWER CO Japan
KAO CORP Japan
KAWASAKI STEEL CORP Japan
KAWASAKI HEAVY IND Japan
KDD Japan
KINGFISHER United Kingdom
KINKI NIPPON RAILWAY CO Japan
KIRIN BREWERY CO Japan
KOBE STEEL Japan
KOMATSU Japan
KON. PTT NEDERLAND Netherlands
KUBOTA CORP Japan
KYOCERA CORP Japan
KYUSHU ELECTRIC POWER CO Japan
KYUSHU MATSUSHITA ELECT Japan
LAFARGE COPPEE France
LLOYDS BANK United Kingdom
LONG-TERM CREDIT BANK Japan
LOREAL France
LVMH France
LYONNAISE DES EAUX France
MANNESMANN Germany
MARKS & SPENCER United Kingdom
</TABLE>

86
<PAGE> 111

<TABLE>
<S> <C>
MARUBENI CORP Japan
MARUI CO Japan
MATSUSHITA COMMUNICATION Japan
MATSUSHITA-KOTOBUKI ELEC Japan
MATSUSHITA ELECT WORKS Japan
MATSUSHITA ELECT IND'L Japan
MAZDA MOTOR CORP Japan
MICHELIN France
MITSUBISHI KASEI CORP Japan
MITSUBISHI MOTORS CORP Japan
MITSUBISHI OIL CO Japan
MITSUBISHI TRUST Japan
MITSUBISHI MATERIALS Japan
MITSUBISHI BANK Japan
MITSUBISHI CORP Japan
MITSUBISHI ESTATE CO Japan
MITSUBISHI HEAVY IND Japan
MITSUBISHI ELECTRIC Japan
MITSUI MARINE & FIRE Japan
MITSUI & CO Japan
MITSUI FUDOSAN CO Japan
MITSUI TRUST & BANK CO Japan
MITSUKOSHI Japan
MONTEDISON Italy
MUNCHENER RUCK Germany
MURATA MANUFACTURING CO Japan
NATIONAL WESTMINSTER BK United Kingdom
NATIONAL POWER United Kingdom
NATIONAL AUSTRALIA BANK Australia
NEC CORP Japan
NESTLE Switzerland
NEW WORLD DEVELOPMENT Hong Kong
NEW OJI PAPER CO Japan
NEWS CORP Australia
NIKKO SECURITIES CO Japan
NINTENDO CO Japan
NIPPON OIL CO Japan
NIPPON CREDIT BANK Japan
NIPPON EXPRESS CO Japan
NIPPON YUSEN K.K Japan
NIPPON STEEL CORP Japan
NIPPON PAPER IND CO Japan
NIPPONDENSO CO Japan
</TABLE>

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<PAGE> 112

<TABLE>
<S> <C>
NISSAN MOTOR CO Japan
NISSHIN STEEL CO Japan
NKK CORP Japan
NOMURA SECURITIES CO Japan
NORTHERN TELECOM Canada
NOVA CORP Canada
NTT CORP Japan
OBAYASHI CORP Japan
OCBC BANK Singapore
ODAKYU ELECTRIC RAILWAY Japan
OKI ELECTRIC INDUSTRY CO Japan
ONO PHARMACEUTICAL CO Japan
OSAKA GAS CO Japan
PARIBAS(CIE FINANCIERE)A France
PEARSON United Kingdom
PEN & ORIENTAL STEAM United Kingdom
PETROFINA Belgium
PEUGEOT SA France
PHILIPS ELECTRONICS Netherlands
PIONEER ELECTRONIC CORP Japan
PLACER DOME Canada
POLYGRAM Netherlands
POWERGEN United Kingdom
PREUSSAG Germany
PRUDENTIAL CORP United Kingdom
RANK ORGANISATION United Kingdom
REED INTERNATIONAL United Kingdom
REPSOL Spain
REUTERS HOLDINGS United Kingdom
RHONE-POULENC France
RICHEMONT (FIN) A UNIT Switzerland
RICOH CO Japan
ROCHE HOLDING Switzerland
ROYAL BANK OF SCOTLAND United Kingdom
ROYAL DUTCH PETROLEUM CO Netherlands
ROYAL BANK OF CANADA Canada
RTZ CORP United Kingdom
RWE Germany
SAINSBURY (J) United Kingdom
SAINT-GOBAIN France
SAKURA BANK Japan
SANDOZ Switzerland
SANKYO CO Japan
</TABLE>

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<PAGE> 113

<TABLE>
<S> <C>
SANWA BANK Japan
SANYO ELECTRIC CO Japan
SAP Germany
SCHNEIDER (EX-SPEP) France
SCHWEIZ BANKGESELL Switzerland
SCHWEIZ BANKVEREIN Switzerland
SCOTTISH POWER United Kingdom
SEAGRAM CO Canada
SECOM CO Japan
SEGA ENTREPRISES Japan
SEIBU RAILWAY CO Japan
SEKISUI CHEMICAL CO Japan
SEKISUI HOUSE Japan
SEVEN-ELEVEN JAPAN CO Japan
SHARP CORP Japan
SHELL T & T United Kingdom
SHIKOKU ELECTRIC POWER Japan
SHIMIZU CORP Japan
SHIN-ETSU CHEMICAL CO Japan
SHISEIDO CO Japan
SHIZUOKA BANK Japan
SHOWA SHELL SEKIYU K.K Japan
SIEMENS Germany
SINGAPORE AIRLINES Singapore
SINGAPORE TELECOM Singapore
SMITHKLINE BEECHAM PLC United Kingdom
SOCIETE GENERALE France
SONY CORP Japan
SONY MUSIC ENTERTAINMENT Japan
STET Italy
SUEZ (COMPAGNIE DE) France
SUMITOMO BANK Japan
SUMITOMO TRUST & BANK Japan
SUMITOMO METAL MINING CO Japan
SUMITOMO METAL IND Japan
SUMITOMO MARINE & FIRE Japan
SUMITOMO CHEMICAL CO Japan
SUMITOMO ELECTRIC IND Japan
SUMITOMO CORP Japan
SUN HUNG KAI PROPERTIES Hong Kong
SUZUKI MOTOR CORP Japan
SWIRE PACIFIC A Hong Kong
TAISEI CORP Japan
</TABLE>

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<PAGE> 114

<TABLE>
<S> <C>
TAISHO PHARMACEUTICAL CO Japan
TAKEDA CHEMICAL IND Japan
TDK CORP Japan
TEIJIN Japan
TELE DANMARK Denmark
TELECOM ITALIA (SIP) Italy
TELEFONICA DE ESPANA Spain
TESCO United Kingdom
THOMSON CORP Canada
THORN-EMI United Kingdom
THYSSEN Germany
TOBU RAILWAY CO Japan
TOHOKU ELECTRIC POWER CO Japan
TOKAI BANK Japan
TOKIO MARINE & FIRE Japan
TOKYO ELECTRIC POWER CO Japan
TOKYO GAS CO Japan
TOKYO ELECTRON Japan
TOKYU CORP Japan
TONEN CORP Japan
TOPPAN PRINTING CO Japan
TORAY INDUSTRIES Japan
TORONTO-DOMINION BANK Canada
TOSHIBA CORP Japan
TOSTEM CORP Japan
TOTAL SA France
TOTO Japan
TOYO SEIKAN KAISHA Japan
TOYO TRUST & BANKING CO Japan
TOYODA AUTOMATIC LOOM Japan
TOYOTA MOTOR CORP Japan
TSB GROUP United Kingdom
UAP (COMPAGNIE) France
UNILEVER PLC United Kingdom
UNILEVER NV Netherlands
UNITED OVERSEAS BANK Singapore
VEBA Germany
VENDOME LUXURY GRP UNITS United Kingdom
VEREIN EL WESTFALEN Germany
VIAG Germany
VODAFONE GROUP United Kingdom
VOLKSWAGEN Germany
VOLVO Sweden
</TABLE>

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<PAGE> 115

<TABLE>
<S> <C>
WELLCOME United Kingdom
WESTERN MINING CORP HLDG Australia
WESTPAC BANKING Australia
WHARF (HOLDINGS) Hong Kong
WOLTERS KLUWER Netherlands
YAMAICHI SECURITIES CO Japan
YAMANOUCHI PHARM. Japan
YAMAZAKI BAKING CO Japan
YASUDA FIRE & MARINE Japan
YASUDA TRUST & BANK CO Japan
ZENECA GROUP United Kingdom
ZURICH VERS. Switzerland
</TABLE>

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APPENDIX B

The following is a list of Companies whose securities were included in
the Schwab Small-Cap Index(TM) calculation as of the date of this Statement of
Additional Information:

<TABLE>
<S> <C>
A L PHARMA INC AMERICAN ANNUITY GROUP
AAR CORP AMERICAN BANKERS INSURANCE
ABBEY HEALTHCARE GROUP AMERICAN BUSINESS INFORMATION
ABM INDS INC AMERICAN BUSINESS PRODUCTS
ACCLAIM ENTMT INC AMERICAN CLASSC VOYAGES
ACME METALS INC AMERICAN COLLOID CO
ACORDIA INC AMERICAN FREIGHTWAYS
ACUSON CORP AMERICAN HERITAGE LIFE
ACX TECHNOLOGIES INC INVESTMENT
ACXIOM CORP AMERICAN MAIZE PRODUCTS
ADELPHIA COMMUNICATIONS AMERICAN MEDIA INC
ADIA SVCS INC AMERICAN MEDICAL RESPONSE
ADVANCED TECH LABS AMERICAN MGMT SYSTEMS
ADVANCED TISSUE SCIENCES AMERICAN MOBILE SATELLITE
ADVANTAGE HEALTH CORP AMERICAN SAVINGS BK OF FLORIDA
ADVO INC AMERICAN SUPERCONDUCTOR
AGCO CORP AMETEK
AIR & WTR TECHNOLOGIES AMSCO INTL
AIR EXPRESS INTL ANALOGIC CORP
AIRBORNE FREIGHT ANCHOR BANCORP
ALANTEC CORP ANGELICA
ALASKA AIR GROUP INC ANTEC
ALBANK FINL CORP ANTHONY INDUSTRIES
ALBANY INTL CORP APOGEE ENTERPRISES
ALDILA INC APPLE SOUTH
ALEX BROWN INC APPLEBEE'S INTERNATIONAL
ALEXANDERS INC APPLIED POWER
ALFA CORP APS HLDG CORP
ALLEN GROUP INC APTARGROUP
ALLIANCE SEMICONDUCT AQUILA GAS PIPELINE
ALLIANT TECHSYSTEMS ARBOR DRUGS
ALLIED GROUP INC ARCTCO
ALLWASTE INC ARGOSY GAMING CORP
AMAX GOLD INC ARKANSAS BEST
AMC ENTMT INC ARMOR ALL PRODUCTS
AMCAST INDUSTRIAL CORP ARNOLD INDUSTRIES
AMCORE FINANCIAL INC ARVIN INDUSTRIES
AMERICA WEST AIRLINES ASHLAND COAL
</TABLE>

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<PAGE> 117

<TABLE>
<S> <C>
ASPECT TELECOMMUNICATIONS BLACK HILLS CORP
ASSOCIATED BANC-CORP BLAIR CORP
AST RESEARCH BLANCH E W HOLDINGS
ATARI CORP BLOCK DRUG CO
ATLANTIC SOUTHEAST AIRLINES BLOUNT INC
ATMOS ENERGY CORP BMC INDS INC
AU BON PAIN BOLT BERANEK & NEWMAN
AUGAT BOMBAY CO
AUTHENTIC FITNESS CORP BOOKS-A-MILLION
AUTOMOTIVE INDUSTRIES HOLDING BOOLE & BABBAGE
AUTOTOTE CORP BORG WARNER SECURITY
AVATAR HOLDINGS BORLAND INTL
AVID TECHNOLOGY BOSTON TECHNOLOGY
AZTAR CORP BOWNE & CO
BAKER J INC BOX ENERGY CORP
BALDOR ELEC CO BOYD GAMING CORP
BALDWIN & LYONS BRADY WH CO
BALLARD MEDICAL PRODUCTS BROADBAND TECHNOLOGIES
BALLY ENTMT CORP BROADWAY & SEYMOUR
BANCORPSOUTH INC BROADWAY STORES
BANCTEC INC BROWN GROUP INC
BANTA CORP BROWN TOM INC
BANYAN SYSTEMS BRUNOS INC
BAREFOOT BRUSH WELLMAN INC
BARNES GROUP BUFFETS INC
BARR LABS BURLINGTON COAT FACTORY
BARRETT RESOURCES BUSINESS RECORDS CP HLDGS
BASSETT FURNITURE BW/IP INC
BAY ST GAS CO C COR ELECTRONICS
BEARINGS C D I CORP
BELDEN INC C TEC CORP
BELL BANCORP CABOT OIL & GAS CORP
BENTON OIL & GAS CO CAERE CORP
BERKLEY W R CORP CALDOR CORP
BERRY PETE CALGENE INC
BET HLDGS CALGON CARBON CORP
BIG B CALIFORNIA ENERGY
BIO RAD LABS CALIFORNIA FED BK
BIOCRAFT LABS CALIFORNIA MICROWAVE
BIRMINGHAM STEEL ALIFORNIA WTR SVC CO
BISYS GROUP CALMAT
BJ SERVICES CAMCO INTERNATIONAL
BLACK BOX CORP CANANDAIGUA WINE
</TABLE>

93
<PAGE> 118

<TABLE>
<S> <C>
CAPITAL RE CORP CITY NATIONAL CORP
CAPITOL AMERN FINL CORP CLAIRE'S STORES
CAPSURE HLDGS CORP CLARCOR
CARAUSTAR INDS INC CLEVELAND CLIFFS
CARLISLE COS INC CMAC INVT CORP
CARMIKE CINEMAS INC CML GROUP
CARPENTER TECHNOLOGY CNB BANCSHARES
CARTER WALLACE COAST SAVINGS FINANCIAL
CASEYS GEN STORES COASTAL HEALTHCARE
CASH AMER INTL INC COBRA GOLF INC
CATALINA MARKETING COCA-COLA BOTTLING
CATELLUS DEV CORP COEUR D'ALENE MINES
CATO CORP COGNEX
CCB FINL CORP COHERENT
CCP INS INC COLLAGEN
CELLULAR COMMUNICATIONS COLLECTIVE BANCORP
CENTENNIAL CELLULAR COLONIAL BANCGROUP
CENTEX CORP COLONIAL DATA TECH
CENTRAL HUDSON GAS&ELEC COLONIAL GROUP
CENTRAL JERSEY BANCORP COMAIR HOLDINGS
CENTRAL LA ELEC INC COMMERCE CLEARING HOUSE
CENTRAL MAINE PWR CO COMMERCIAL FEDERAL
CENTURA BKS COMMERCIAL INTERTECH
CENTURY COMMUNICATIONS COMMERCIAL METALS CO
CERNER COMMNET CELLULAR
CHAMBERS DEV INC COMMONWEALTH ENERGY
CHAMPION ENTERPRISES COMMUNITY HEALTH SYSTEMS
CHAPARRAL STEEL COMMUNITY PSYCHIATRIC CENTERS
CHARTER MEDICAL COMPUSA
CHARTER ONE FINANCIAL COMPUTERVISION
CHECKPOINT SYSTEMS COMVERSE TECHNOLOGY
CHEMED CONCORD COMPUTING
CHEMICAL FINANCIAL CONE MILLS
CHERRY CORP CONNECTICUT NATURAL GAS
CHEYENNE SOFTWARE CONNER PERIPHERALS
CHRONIMED CONTINENTAL AIRLINES
CHURCH & DWIGHT CONTINENTAL MED SYS
CIDCO CONTINUUM INC
CILCORP CONVERSE INC
CIRCA PHARMACEUTICALS CONVEX COMPUTER CORP
CITIZENS BANCORP COPLEY PHARMACEUTICAL
CITIZENS BANKING CORP COR THERAPEUTICS
CITIZENS CORP CORRECTIONS CORP OF AMERICA
</TABLE>

94
<PAGE> 119

<TABLE>
<S> <C>
CPI DRESS BARN
CRAIG JENNY DREYERS GRAND ICE CREAM
CRAWFORD & CO DSP GROUP
CRAY RESEARCH DURACRAFT
CREDENCE SYSTEMS DURIRON
CROSS A T CO DUTY FREE INTERNATIONAL
CROSS TIMBERS OIL CO DYNATECH CORP
CSF HOLDINGS EAGLE HARDWARE&GARDEN
CSS INDUSTRIES EASTERN ENTERPRISES
CULLEN FROST BANKERS EASTERN UTILS ASSOCIATES
CURTISS WRIGHT CORP EATON VANCE
CYRIX CORP EDISON BROS STORES
CYRK INC EGGHEAD
CYTEC INDUSTRIES ELECTROGLAS
DALLAS SEMICONDUCTOR ELECTRONICS FOR IMAGING
DAMES & MOORE INC EMPIRE DIST ELEC
DATA GENERAL CORP ENERGEN CORP
DATASCOPE ENHANCE FINANCIAL SERVICES GRP
DAVIDSON & ASSOC INC ENNIS BUSINESS FORMS
DELPHI FINL GROUP ENTERRA CORP
DELTA WOODSIDE INDUSTRIES ENVOY CORP
DEPOSIT GUARANTY CORP ENZO BIOCHEM
DESTEC ENERGY EPITOPE
DETROIT DIESEL EQUICREDIT
DEVON ENERGY CORP ETHAN ALLEN INTERIORS
DEVON GROUP INC EXABYTE CORP
DEVRY INC EXAR CORP
DEXTER CORP EXPEDITORS INTL OF WASHINGTON
DIAGNOSTEK INC
DIAGNOSTIC PRODS EXPRESS SCRIPTS
DIAL PAGE F & M NATL CORP
DIBRELL BROS INC FAB INDS INC
DIGI INTERNATIONAL FAIR ISAAC & CO
DIGIDESIGN INC FARMER BROS CO
DIGITAL LINK FEDDERS CORP
DIGITAL MICROWAVE FIELDCREST CANNON
DIME BANCORP FILENET CORP
DIONEX CORP FINANCIAL TRUST CORP
DISCOUNT AUTO PARTS FIRST ALERT
DISCOVERY ZONE FIRST AMERICAN FINANCIAL CP
DONALDSON FIRST CITIZENS BANCSHARES
DOWNEY SVGS & LN ASSN FIRST COLONIAL BANCSHARES
DRAVO CORP FIRST COMMERCE CORP
</TABLE>

95
<PAGE> 120

<TABLE>
<S> <C>
FIRST COMMERCIAL CORP GENERAL BINDING CORP
FIRST COMWLTH FINL GENERAL DATACOMM INDUSTRIES
FIRST FINANCIAL BANCORP GENESIS HEALTH VENTURES
FIRST FINANCIALL CORP GENEVA STEEL
FIRST MICHIGAN BANK CORP GENTEX CORP
FIRST MIDWEST BANCORP GEOTEK COMMUNICATIONS
FIRST MISSISSIPPI CORP GERBER SCIENTIFIC
FIRST NATIONAL BANCORP GIBSON GREETINGS
1ST SOURCE CORP GIDDINGS&LEWIS
FIRSTBANK OF ILLINOIS GILEAD SCIENCES
FIRSTFED MICHIGAN CORP GLENDALE FED BK
FIRSTIER FINANCIAL GLOBAL MARINE
FISHER SCIENTIFIC GLOBAL NAT RES
FLAGSTAR COS INC GOULDS PUMPS
FLORIDA EAST COAST GRACO
FLORIDA ROCK INDUSTRIES GRANCARE
FLUKE CORP GRAND CASINOS
FMC GOLD GRANITE CONSTRUCTION
FOAMEX INTL GREENFIELD INDUSTRIES
FOOTHILL GROUP INC GRENADA SUNBURST SYSTEM
FOREMOST CORP GROW GROUP
FOREST CITY ENTERPRI GUARANTY NATIONAL
FOXMEYER HEALTH CORP GUILFORD MILLS
FRAME TECHNOLOGY HAEMONETICS
FRANKLIN ELECTRIC HAGGAR
FRANKLIN QUEST HANCOCK FABRICS
FREMONT GENERAL HANCOCK HOLDING
FRESENIUS USA HANDLEMAN CO
FRITZ COS INC HANDY & HARMAN
FRONTIER INS GROUP HANOVER DIRECT
FROZEN FOOD EXPRESS HARLAND JOHN H
FT WAYNE NATIONAL CORP HARLEYSVILLE GROUP
FULLER H B CO HARMAN INTL INDS
FULTON FINL CORP HARPER GROUP
FUND AMERN ENTRPR HLDG HARTMARX CORP
FURON HAWKEYE BANCORPORATION
FUTURE HEALTHCARE HAYES WHEELS INTL
G & K SVCS INC HCC INS HLDGS INC
GALLAGHER (ARTHUR J &) CO HEALTH MGMT SYS INC
GAYLORD CONTAINER HEART TECHNOLOGY INC
GC COMPANIES HEARTLAND EXPRESS
GENCARE HEALTH SYSTEM HECHINGER CO
GENCORP HECLA MINING
</TABLE>

96
<PAGE> 121

<TABLE>
<S> <C>
HELENE CURTIS INDUSTRIES INTER REGL FINL GROUP
HELMERICH & PAYNE INTERCO
HERBALIFE INTERNATIONAL INTERDIGITAL COMMUNICATIONS
HERITAGE MEDIA INTERGRAPH
HILB ROGAL & HAMILTON INTERIM SVCS
HILLHAVEN CORP INTERNATIONAL DAIRY QUEEN
HILLS STORES INTERNATIONAL MULTIFOODS
HOLLY CORP INTERNATIONAL RECTIFIER
HOLLYWOOD ENTERTAINMENT INTERPOOL
HOME BENEFICIAL CORP INTERSOLV INC
HOME HOLDINGS INTERSTATE BAKERIES
HOMEDCO GROUP INC INTERSTATE PWR CO
HORACE MANN EDUCATORS INTERVOICE INC
HORSEHEAD RESOURCE INTL CABLETEL INC
DEVELOPMENT INTL FAMILY ENTMT
HOUGHTON MIFFLIN CO INTL IMAGING MATERIALS
HS RESOURCES INC INVACARE CORP
HUDSON FOODS IONICS INC
HUFFY IOWA ILL GAS & ELEC
HUNT JB TRANS SVC JACOBS ENGR GROUP
HUNT MFG JACOR COMMUNICATIONS
HUNTCO INC JASON
I-STAT CORP JEFFERIES GROUP
ICN PHARMACEUTICAL JEFFERSON BANKSHARES
IDEX CORP JONES INTERCABLE INC
IDEXX LABS CORP JOSLYN CORP
IHOP CORP JSB FINANCIAL INC
IMMUNEX CORP JUNO LTG INC
IMO INDS INC JUSTIN INDUSTRIES
IMRS INC KAISER ALUMINUM CORP
IN FOCUS SYSTEMS KAMAN CORP
INDIANA ENERGY KAUFMAN&BROAD HOME
INDRESCO KAYDON CORP
INFORMATION RESOURCES KCS ENERGY INC
INFOSOFT INTERNATIONAL KEANE INC
INGLES MARKETS KELLWOOD CO
INPUT/OUTPUT INC KEMET CORP
INSIGNIA FINANCIAL KENNAMETAL INC
INSILCO KENT ELECTRS CORP
INSTRUMENT SYSTEMS KEYSTONE INTL INC
INSURANCE AUTO AUCTIONS KIMBALL INTL INC
INTEGON KINDER-CARE LR
INTELLIGENT ELECTRONICS KINETIC CONCEPTS INC
</TABLE>

97
<PAGE> 122

<TABLE>
<S> <C>
KIRBY CORP MACFRUGALS BARGAINS
KN ENERGY INC MACROMEDIA INC
KOMAG INC MADISON GAS & ELECTRIC
LA Z BOY CHAIR CO MAGNA GROUP
LABONE INC MAGNETEK INC
LACLEDE GAS CO MARCUS CORP
LANCE INC MARINER HEALTH GROUP
LANDMARK GRAPHICS CO MARK TWAIN BANCSHARE
LANDS END INC MARKEL CORP
LANDSTAR SYS INC MARSHALL INDUSTRIES
LATTICE SEMICONDUCTOR MASLAND CORP
LAWSON PRODS INC MATERIAL SCIENCES
LAWTER INTL INC MAXUS ENERGY CORP
LCI INTL INC MAXXAM INC
LEADER FINL CORP MAYBELLINE INC
LEARNING CO MCAFEE ASSOCS INC
LECHTERS CORP MCCLATCHY NEWSPAPERS
LEGG MASON INC MDU RES GROUP INC
LENNAR CORP MEASUREX CORP
LEVEL ONE COMMUNICATIONS MEDIC COMPUTER SYSTEMS
LEVITZ FURNITURE MEDICINE SHOPPE INTL
LIBBEY INC MEDUSA CORP
LIBERTY BANCORP MENS WEARHOUSE
LIBERTY CORP MENTOR CORP
LIFE PARTNERS GRP MEREDITH CORP
LIFE RE CORP MERISEL INC
LIFE TECHNOLOGIES MESA AIRLINES
LILLY INDS INC MESA INC
LIN TELEVISION CORP METHODE ELECTRONICS
LINCOLN TELECOMMICATIONS METRICOM INC
LIPOSOME CO MICHAEL FOODS INC
LIQUI-BOX CORP MICROS SYSTEMS
LITTELFUSE INC MICROTEST
LIVING CTRS AMER INC MICROTOUCH SYSTEMS
LOGICON INC MID AM INC
LONE STAR INDS MIDWEST GRAIN PRODUCTS
LONGS DRUG STORES MILLER HERMAN INC
LOUIS DREYFUS NATURAL GAS MINE SAFETY APPLIANCES
LUBYS CAFETERIAS MINERALS TECHNOLOGIES
LUKENS INC MK RAIL CORP
LYDALL INC MOHAWK INDUSTRIES
M A COM INC MOLTEN METAL TECHNOLOGY
M S CARRIERS INC MONEY STORE
</TABLE>

98
<PAGE> 123

<TABLE>
<S> <C>
MONK AUSTIN INC NORTHWEST NAT GAS CO
MOORCO INTL INC NORTHWESTERN PUB SVC
MORRISON KNUDSEN NOVACARE CORP
MOSINEE PAPER CORP NOVEN PHARMACEUTICAL
MUELLER INDS INC NU-KOTE HLDG INC
MULTICARE COS INC NUEVO ENERGY CO
MUSICLAND STORES NYMAGIC INC
MUTUAL ASSURN INC O REILLY AUTOMOTIVE
MYERS INDS INC OAK INDS INC
N S BANCORP INC OAKWOOD HOMES CORP
NABORS INDS INC OCEANEERING INTL INC
NAC RE CORP OCTEL COMMUNICATIONS
NACCO INDS INC OEA INC
NASH FINCH CO OFFSHORE LOGISTICS
NATIONAL AUTO CREDIT OFFSHORE PIPELINES
NATIONAL BANCORP OM GROUP INC
NATIONAL COMMERCE BANCORP OMI CORP
NATIONAL COMPUTER SYSTEMS OMNICARE INC
NATIONAL DATA CORP ONBANCORP INC
NATIONAL PRESTO INDS ONE VALLEY BANCORP OF WV
NATIONAL STL CORP ONECOMM CORP
NATL PENN BANCSHARES ONEOK INC
NATL RE CORP OPTICAL DATA SYS
NAUTICA ENTERPRISES ORANGE & ROCKLAND
NBB BANCORP ORBITAL SCIENCES
NCH CORP OREGON STEEL MILLS
NEIMAN MARCUS ORGANOGENESIS
NELLCOR INC ORION CAP CORP
NELSON THOMAS INC ORNDA HEALTHCORP
NETWORK EQUIPMENT OSHKOSH B GOSH
TECHNOLOGIES OSMONICS
NETWORK GENERAL CORP OTTER TAIL POWER
NETWORK SYSTEMS CORP OUTBOARD MARINE CORP
NEW ENG BUSINESS SERVICE OWENS & MINOR INC
NEW JERSEY RESOURCES OXFORD INDS INC
NEWFIELD EXPLORATION PACIFIC PHYSICIAN SERVICES
NEWPARK RESOURCES PACIFIC SCIENTIFIC
NL INDUSTRIES PAIRGAIN TECHNOLOGIES
NOBLE DRILLING CORP PAPA JOHNS INTL INC
NORAM ENERGY CORP PARK COMMUNICATIONS
NORAND CORP PARK NATL CORP
NORTH AMERICAN MORTGAGE PARKER DRILLING
NORTH FORK BANCORP PATTERSON DENTAL
</TABLE>

99
<PAGE> 124

<TABLE>
<S> <C>
PAXAR CORP PROGRESS SOFTWARE
PENN TRAFFIC PROTEIN DESIGN LABS
PENNCORP FINL GROUP PROVIDENT BANCORP
PEOPLES BK OF BRIDGEPORT PROXIMA CORP
PEOPLES HERITAGE FINL GRP PUBLIC SVC CO OF N C
PETROLEUM HEAT&PWR PUBLIC SVC CO OF N MEX
PETROLITE CORP PULITZER PUBG CO
PHH CORP PULTE CORP
PHILADELPHIA SUBURBAN PURITAN BENNETT CORP
PHILLIPS VAN HEUSEN PXRE CORP
PHOENIX RESOURCE PYRAMID TECHNOLOGY
PHOTRONICS QUAKER STATE
PHYCOR QUALITY FOOD CTRS
PHYSICIANS HEALTH SERVICES QUANEX CORP
PICTURETEL QUANTUM HEALTH RES
PIEDMONT NAT GAS QUEENS CNTY BANCORP
PIER 1 IMPORTS QUICK&REILLY GROUP
PIKEVILLE NATL CORP RAYMOND JAMES FINL
PILGRIMS PRIDE CORP READING & BATES CORP
PIONEER GROUP INC RECOTON CORP
PIONEER STANDARD ELECTRONICS REGAL BELOIT CORP
REGAL CINEMAS INC
PIPER JAFFRAY REGENCY HEALTH SVCS
PITTSTON MINERALS GROUP REINSURANCE GROUP OF AMERICA
PITTWAY CORP RELIANCE GROUP HLDGS
PLAINS PETE CO REN CORP-USA
PLANAR SYS INC RESPIRONICS
PLATINUM TECHNOLOGY REXALL SUNDOWN
PLAYERS INTL INC REXENE CORP
PLY GEM INDS INC RICHFOOD HLDGS INC
POE & BROWN INC RIGGS NATL
POGO PRODUCING CO RIO HOTEL & CASINO
POPE & TALBOT INC RIVER FOREST BANCORP
PRATT & LAMBERT UNIT ROBERT HALF INTL
PRECISION CASTPARTS ROBERTS PHARMACEUTIC
PREMIER BANCORP INC ROCHESTER CMNTY SVGS BK
PRESIDENT RIVERBOAT CASINOS ROGERS CORP
PRESIDENTIAL LIFE ROHR INC
PRESSTEK INC ROLLINS ENVIRMTL SVC
PRIMARK CORP ROLLINS TRUCK LEASIN
PRIME HOSPITALITY CO ROOSEVELT FINL GROUP
PRODUCTION OPERATORS ROPER INDS
PROFFITTS INC ROSS STORES INC
</TABLE>

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<TABLE>
<S> <C>
ROTECH MED CORP SMITH A O
ROWAN COS INC SMITH INTL INC
RUDDICK CORP SMITHFIELD FOODS
RUSS BERRIE & CO SNYDER OIL CORP
RYANS FAMILY STEAK HOUSE SODAK GAMING INC
RYKOFF-SEXTON INC SOFAMOR/DANEK GROUP
RYLAND GROUP INC SONAT OFFSHORE DRILL
S & T BANCORP INC SOTHEBYS HLDGS
S3 INC SOUTH JERSEY INDUSTRIES
SAFECARD SVCS INC SOUTHDOWN INC
SAFESKIN CORP SOUTHERN IND GAS & ELECTRIC
SAFETY 1ST INC SOUTHERN UNION CO
SALICK HEALTH CARE SOUTHESTN MICH GAS
SANDERSON FARMS INC ENTERPRISES SOUTHWEST GAS
SANIFILL INC CORP
SANTA CRUZ OPERATION SOUTHWESTERN ENERGY
SAVANNAH FOODS & IND SOVEREIGN BANCORP
SBARRO INC SPACELABS MEDICAL
SCHULER HOMES SPECTRUM HOLOBYTE
SCI SYS INC SPORTS & RECREATION
SCIOS NOVA INC SPRINGS INDUSTRIES
SCOTTS CO SPX CORP
SEABOARD CORP ST JOHN KNITS
SEAFIELD CAP CORP ST PAUL BANCORP INC
SEALRIGHT CO STANDARD MICROSYSTEMS
SECURITY CAP BANCORP STANDARD MOTOR PRODUCTS
SECURITY-CONN CORP STANDARD PACIFIC
SEI CORP STANDARD PRODS CO
SELECTIVE INS GROUP STANDARD REGISTER CO
SEQUA CORPORATION STANDEX INTL CORP
SEQUENT COMPUTER SYSTEMS STANHOME INC
SERVICE MERCHANDISE STANT CORP
SHONEYS INC STARTER CORP
SHOPKO STORES INC STATION CASINOS
SHOREWOOD PACKAGING STEIN MART INC
SHOWBOAT INC STERIS CORP
SIERRA HEALTH SERVICES STEWART ENTERPRISES
SIERRA ON-LINE INC STONE & WEBSTER INC
SIERRA PACIFIC RESOURCES STRAWBRIDGE & CLOTHIER
SILICON VALLEY GROUP STRIDE RITE CORP
SITHE ENERGIES INC STUDENT LOAN
SKYLINE CORP STURM RUGER & CO
SMART & FINAL SUMMIT BANCORP
</TABLE>

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<PAGE> 126

<TABLE>
<S> <C>
SUMMIT TECHNOLOGY TORO CO
SUNGLASS HUT INTL TRACTOR SUPPLY CO
SUNRISE MED INC TRENWICK GROUP INC
SUNSHINE MINING TRIARC COS INC
SUSQUEHANNA BKSHS TRIDENT NGL HOLDING
SWIFT TRANSN CO TRIMBLE NAVIGATION LTD
SYMANTEC CORP TRUE NORTH COMMUNICATIONS
SYMMETRICOM INC TRUST CO OF NJ
SYNETIC INC TRUSTCO BANK CORP
SYQUEST TECHNOLOGY TRUSTMARK CORP
SYRATECH CORP TUCSON ELEC PWR CO
SYSTEM SOFTWARE ASSOCIATES 20TH CENTURY INDUSTRIES
SYSTEMS & COMPUTER TYCO TOYS
TECHNOLOGY TARGET U S CAN CORP
THERAPEUTICS U S ROBOTICS
TBC CORP U S TRUST CORP
TCA CABLE TV UGI CORP
TCF FINL CORP ULTRATECH STEPPER INC
TECH DATA CORP UMB FINL CORP
TECNOL MED PRODS UNIFIRST CORP
TEJAS GAS CORP UNION PLANTERS CORP
TELEFLEX INC UNITED BANKSHARES
TELXON CORP UNITED CAROLINA BANCSHARES
TENCOR INSTRS UNITED COS FINL CORP
TENNANT CO UNITED FIRE & CASUALTY CO
TESORO PETE CORP UNITED ILLUMINATING
TEXAS INDS UNITED INS COS INC
THERMEDICS UNITED INTL HLDGS IN
THERMO CARDIOSYSTEMS UNITED MERIDIAN CORP
THERMO FIBERTEK UNITED STATES FILTER
THERMOTREX CORP UNITED STATIONERS
THIOKOL CORP UNITED TELEVISION
3DO CO UNITED WASTE SYSTEMS
THREE FIVE SYSTEMS UNITED WISCONSIN SERVICES
TIFFANY & CO UNITED WTR RES INC
TIMBERLAND CO UNITRODE CORP
TITAN WHEEL INTL INC UNIVAR CORP
TJ INTL INC UNIVERSAL HLTH SVCS
TNT FREIGHTWAYS CORP UNR INDS INC
TOLL BROTHERS INC USA WASTE SVCS INC
TOOTSIE ROLL INDS USAIR GROUP INC
TOP SOURCE TECH INC USLICO CORP
TOPPS INC UST CORP
</TABLE>

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<TABLE>
<S> <C>
VALASSIS COMMUNICATIONS WHITE RIVER CORP
VALMONT INDUSTRIES WHITNEY HLDG CORP
VALUE CITY DEPT STORES WHX CORP
VALUE LINE INC WICOR INC
VARCO INTERNATIONAL WILEY JOHN & SONS
VENTRITEX WINNEBAGO INDUSTRIES
VENTURE STORES WLR FOODS INC
VERIFONE WMS INDS INC
VERTEX PHARMACEUTICALS WOLVERINE TUBE INC
VESTA INS GROUP WOLVERINE WORLD WIDE
VICOR CORP WONDERWARE CORP
VICTORIA BANKSHARES WORTHEN BKG CORP
VIEWLOGIC SYSTEMS WPS RESOURCES CORP
VIGORO CORP WYLE LABS
VINTAGE PETE
VITALINK PHARMACY SERVICES
VIVRA INC
VLSI TECHNOLOGY
WABAN INC
WALL DATA INC
WALLACE COMPUTER SERVICES
WASHINGTON ENERGY
WASHINGTON NATL CORP
WATKINS JOHNSON
WATSON PHARMACEUTICALS
WATTS INDUSTRIES
WD-40
WEATHERFORD INTL INC
WEBB (DEL) CORP
WEIRTON STEEL
WELBILT CORP
WERNER ENTERPRISES
WESBANCO INC
WEST
WESTAMERICA BANCORP
WESTCORP
WESTCOTT COMMUNICATIONS
WESTERN CO OF NORTH AMERICA
WESTERN GAS RESOURCES
WESTERN PUBLISHING
WESTERN WASTE INDS
WESTPOINT STEVENS
WESTWOOD ONE
</TABLE>

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WYMAN GORDON CO
X-RITE INC
XCL LTD
XIRCOM INC
YANKEE ENERGY SYSTEM
ZALE CORP
ZEBRA TECHNOLOGIES
ZENITH ELECTRS CORP
ZENITH LABS
ZENITH NATL INS CORP
ZERO CORP
ZILOG INC
ZIONS BANCORPORATION
ZURN INDUSTRIES

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

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