SCHWAB CAPITAL TRUST, 485APOS, 1996-02-27

SCHWAB CAPITAL TRUST
485APOS, 1996-02-27

Previous: COUNTRYFUND OPPORTUNITY TRUST 1994 SERIES, 24F-2NT, 1996-02-27

Next: PROVIDENT MUTUAL VARIABLE ANNUITY SEPARATE ACCOUNT, 24F-2NT, 1996-02-27

<PAGE> 1

As filed with the Securities and Exchange Commission on February 27, 1996
File Nos. 33-62470 and 811-7704

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 7 /X/

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9 /X/

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

SCHWAB CAPITAL TRUST
--------------------
(Exact Name of Registrant as Specified in Charter)

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

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

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

Copies of communications to:

Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment Management, Inc.
1301 K Street, NW, Suite 800 East 101 Montgomery Street
Washington, D.C. 20005 San Francisco, CA 94104

It is proposed that this filing will become effective (check appropriate box)
/ / Immediately upon filing pursuant to paragraph (b)
/ X / On February 28, 1996 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check appropriate box:
/ / This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.

DECLARATION PURSUANT TO RULE 24f-2: Pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended, Registrant has registered an
indefinite number or amount of its shares of beneficial interest under the
Securities Act of 1933, as amended. The Rule 24f-2 Notice for Registrant's
fiscal year ending October 31, 1995 was filed on December 18, 1995.

<PAGE> 2
PART A

SCHWAB CAPITAL TRUST

The information required by Items 1 through 9 for the Schwab Asset
Director (R)--High Growth Fund, the Schwab Asset Director(R)--Balanced Growth
Fund and the Schwab Asset Director(R)--Conservative Growth Fund, three separate
portfolios of Registrant, is hereby incorporated by reference to the
Prospectuses for these portfolios filed with the Securities and Exchange
Commission under Rule 497(e) on December 11, 1995.

<PAGE> 3
CROSS REFERENCE SHEET

SCHWAB CAPITAL TRUST
SCHWAB INTERNATIONAL INDEX FUND(TM)

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

Synopsis Summary of Expenses; Key Features of the Fund

Condensed Financial Information Financial Highlights; How the Fund Shows
Performance

General Description of Registrant Matching the Fund to Your Investment Needs;
General Information; Investment Objective, Policies
and Risks; The Schwab International Index

Management of the Fund Management of the Fund

Management's Discussion of Fund Performance Discussion Included in Annual Report

Capital Stock and Other Securities General Information; Distributions and Taxes;
Shareholder Guide

Purchase of Securities Being Offered Share Price Calculation; Shareholder Guide

Redemption or Repurchase Shareholder Guide; Other Important Information

Pending Legal Proceedings Inapplicable
</TABLE>

<PAGE> 4

SCHWAB INTERNATIONAL INDEX FUND(TM)
- --------------------------------------------------------------------------------

PROSPECTUS February 28, 1996

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), 24 hours a
day.

THE SCHWAB INTERNATIONAL INDEX FUND (the "Fund") attempts to track the price and
dividend performance (total return) of the Schwab International Index(R) (the
"Index"), an index created by Schwab to represent the performance of common
stocks and other equity securities including preferred stocks, rights and
warrants ("Stocks") issued by large, publicly traded companies from countries
around the world with major developed securities markets, excluding the United
States. The Fund will attempt to achieve its objective by investing
substantially all of its assets in the Stocks that comprise the Index, in
approximately the same proportion as the constituent companies (or "issuers")
are represented in the Index. The 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 CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Fund in the Trust's Statement of Additional Information, dated February 28, 1996
(as amended from time to time). The Statement of Additional Information has been
filed with the Securities and Exchange Commission ("SEC") and is incorporated by
reference into this Prospectus. This Prospectus is also available electronically
by using our Internet address: http://www.schwab.com. To receive a free paper
copy of this Prospectus or the Statement of Additional Information, call Schwab
at 800-2 NO-LOAD, 24 hours a day, or write Schwab at 101 Montgomery Street, San
Francisco, CA 94104. TDD users may contact Schwab at 800-345-2550, 24 hours a
day.

TABLE OF CONTENTS

<TABLE>
<S> <C>
KEY FEATURES OF THE FUND...................................................... 2
SUMMARY OF EXPENSES........................................................... 3
FINANCIAL HIGHLIGHTS.......................................................... 5
MATCHING THE FUND TO YOUR INVESTMENT NEEDS.................................... 6
INVESTMENT OBJECTIVE, POLICIES AND RISKS...................................... 6
THE SCHWAB INTERNATIONAL INDEX................................................ 11
MANAGEMENT OF THE FUND........................................................ 12
DISTRIBUTIONS AND TAXES....................................................... 14
SHARE PRICE CALCULATION....................................................... 15
HOW THE FUND SHOWS PERFORMANCE................................................ 16
TAX-ADVANTAGED RETIREMENT PLANS............................................... 17
GENERAL INFORMATION........................................................... 17
SHAREHOLDER GUIDE............................................................. 18
HOW TO PURCHASE SHARES...................................................... 18
HOW TO SELL OR EXCHANGE SHARES.............................................. 22
SCHWAB AUTOMATIC INVESTMENT PLAN.............................................. 23
OTHER IMPORTANT INFORMATION................................................... 24
</TABLE>

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 5

KEY FEATURES OF THE FUND

PERFORMANCE. The investment objective of the Schwab International Index Fund(TM)
is to attempt to track the price and dividend performance (total return) of the
Schwab International Index(R) (the "Index"), an index created to represent the
performance of common stocks and other equity securities including preferred
stocks, rights and warrants ("Stocks") issued by large, publicly traded
companies from countries around the world with major developed securities
markets, excluding the United States. (See "The Schwab International Index.")
The Fund will attempt to achieve its objective by investing substantially all of
its assets in the Stocks that comprise the Index, in approximately the same
proportions as the constituent companies (or "issuers") are represented in the
Index. (See "Investment Objective, Policies and Risks.")

DIVERSIFICATION AND RISK. The Fund seeks to invest in substantially all of the
Stocks of the 350 companies that make up the Index. This level of
diversification reduces the risk (typically, a decline in the value of
individual securities) associated with investments in individual securities
because the Fund's investments will be spread over a range of industries and
issuers from various countries as opposed to being concentrated in a few
individual securities. Internationally diversified investors have historically
reduced their overall risk and at the same time earned significantly higher
returns. International Stocks may have greater price volatility and illiquidity
than U.S. Stocks. In addition, certain investment strategies such as foreign
currency exchange transactions and trading in options and futures may involve
increased risks to the Fund. (See "Investment Objective, Policies and Risks.")

LOW MINIMUM INVESTMENT. Investors can begin their investment program in the Fund
with as little as $1,000. Subsequent investments can be made with only $100.

LOW-COST INVESTING. The Fund brings a low-cost approach to investing with:

- no sales charges;

- an index fund management strategy designed to minimize overall
operating expenses; and

- the guarantee of Charles Schwab Investment Management, Inc. (the
"Investment Manager") and Schwab that the Fund's total fund operating
expenses will, through at least February 28, 1997, not exceed 0.69% of
the Fund's average daily net assets. (See "Management of the Fund.")

MINIMIZATION OF CURRENT CAPITAL GAINS TAX LIABILITY. The Fund's investment
policies are designed to minimize current capital gains tax liability. (See
"Distributions and Taxes.")

PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. currently
provides investment management services to the mutual funds in the SchwabFunds
Family(R), a family of 22 mutual funds. As of January 31, 1996, the SchwabFunds
had aggregate net assets of approximately $33 billion. (See "Management of the
Fund.")

2
<PAGE> 6

SHAREHOLDER SERVICE. Schwab serves as the Fund's principal
underwriter/distributor, transfer agent, and shareholder service provider.
Schwab's professional representatives are available 24 hours a day to receive
your purchase, redemption and exchange orders. Call your local Schwab office
during business hours or 800-2 NO-LOAD. TDD users may contact Schwab at
800-345-2550, 24 hours a day. As a discount broker, Schwab gives you investment
choices and lets you make your own decisions. Schwab has many services that help
you make the most informed investment decisions. Schwab also enables you to
execute your trading requests electronically by using StreetSmart(TM), The
Equalizer(R) and TeleBroker(R). (See "How to Purchase Shares" and "How to Sell
or Exchange Shares.")

FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in amounts and at intervals that you select. You
avoid the inconvenience, delay and expense associated with checks or bank wires.
(See "Automatic Investment Plan," visit or call your local Schwab office or call
800-2 NO-LOAD, 24 hours a day.)

CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their investment activity, including mutual funds, on one report. (See
"Other Important Information.")

NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders. (See "Management
of the Fund.")

SUMMARY OF EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases........................................................... None
Sales Load on Reinvested Dividends................................................ None
Deferred Sales Load............................................................... None
Early Withdrawal Fee 1............................................................ 0.75%
Exchange Fee...................................................................... None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fee (after fee reduction) 2............................................ 0.40%
12b-1 Fees........................................................................ None
Other Expenses (after fee reduction and expense reimbursement) 3.................. 0.29%
TOTAL FUND OPERATING EXPENSES (AFTER FEE REDUCTION AND EXPENSE REIMBURSEMENT) 3, 4.. 0.69%
</TABLE>

1 Applies only to the redemption (including by exchange) of shares purchased and
held less than six months. The fee is paid to the Fund and is designed to
protect long-term investors from the cost of frequent investments and
redemptions by short-term investors. (See "How to Sell or Exchange Shares.") The
Fund reserves the right to waive this fee for certain clients of Schwab
Institutional and The Charles Schwab Trust Company (the "Trust Company") and for
certain tax-advantaged retirement plans. Call your Schwab representative for
more information.

<PAGE> 7

2 This amount has been restated to reflect a reduction by the Investment Manager
which is guaranteed through at least February 28, 1997. If there were no such
reduction, the maximum management fee would be 0.70% of the Fund's average daily
net assets.

3 This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least February 28, 1997, the total fund
operating expenses for the Fund will not exceed 0.69% of the Fund's average
daily net assets. Without the guarantees on total fund operating expenses in
effect for the fiscal year ended October 31, 1995 (0.95% of the Fund's average
daily net assets through June 30, 1995, and 0.69% through October 31, 1995),
other expenses and total fund operating expenses would have been 0.52% and
1.22%, respectively, of the Fund's average daily net assets.

4 You may be charged a fee if applicable minimum balances are not maintained in
your Schwab brokerage account or Schwab One(R) account. (See "How to Purchase
Shares--Schwab Account Minimums and Associated Fees.") Schwab Individual
Retirement Accounts with balances of $10,000 or more by September 15, 1996 will
not be 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. (See "Tax-
Advantaged Retirement Plans.")

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$7 $22 $38 $86
</TABLE>

THE PURPOSE OF THE PRECEDING TABLE IS TO ASSIST INVESTORS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY. This example reflects the guarantee by the Investment Manager and
Schwab that the total fund operating expenses will not exceed the amount
specified for the time period referred to in note (3). ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of return
pursuant to requirements of the SEC. THIS HYPOTHETICAL RATE OF RETURN IS NOT
INTENDED TO BE REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE.

4
<PAGE> 8

FINANCIAL HIGHLIGHTS

Set forth below is the table containing information as to income and capital
changes for a share outstanding for the periods indicated below. This
information has been audited by Price Waterhouse LLP, the Trust's independent
accountants, whose unqualified report appears with the financial statements in
the Statement of Additional Information.

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED SEPTEMBER 9, 1993
OCTOBER 31, (COMMENCEMENT
-------------------- OF OPERATIONS)
1995 1994 TO OCTOBER 31, 1993
-------- -------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period............... $ 10.89 $ 10.15 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. 0.14 0.11 0.03
Net realized and unrealized gain on investments and
foreign currency transactions................... 0.22 0.69 0.12
-------- -------- ---------
Total from investment operations................... 0.36 0.80 0.15
LESS DISTRIBUTIONS
Dividends from net investment income............... (0.12) (0.04) --
Distributions from realized gain on investments.... -- (0.02) --
-------- -------- ---------
Total distributions................................ (0.12) (0.06) --
-------- -------- ---------
Net asset value at end of period..................... $ 11.13 $ 10.89 $ 10.15
========= ========= =========
Total return(%)...................................... 3.35 7.89 1.50
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)................... $179,612 $142,355 $ 106,085
Ratio of expenses to average net assets(%)......... 0.85 0.90 0.60*
Ratio of net investment income to average net
assets(%)....................................... 1.45 1.14 2.15*
Portfolio turnover rate(%)......................... 0 6 2
</TABLE>

Notes:

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, 1995, 1994 and 1993, would have been 1.22%, 1.30% and 2.10%*,
respectively, and the ratio of net investment income to average net assets would
have been 1.08%, 0.74% and 0.65%*, respectively.

On June 30, 1995, the sub-advisory agreement between Dimensional Fund Advisors
Inc. and the Investment Manager was terminated, and the Investment Manager
assumed sole responsibility for providing the Fund with investment advisory
services.

* Annualized

5
<PAGE> 9

MATCHING THE FUND TO YOUR INVESTMENT NEEDS

The Fund may be appropriate for a variety of investment programs. While the Fund
is not a substitute for an investment portfolio tailored to an individual's
investment needs and ability to tolerate risk, it can be used to supplement and
diversify a domestic equity portfolio.

As a complement to a domestic equity portfolio, the Fund offers a convenient way
to invest a portion of your assets internationally, while at the same time
achieving a level of diversification of countries and companies that would be
difficult and costly to achieve with individual securities. Internationally
diversified investors have historically reduced their risk and at the same time
earned significantly higher returns.

INVESTMENT OBJECTIVE, POLICIES AND RISKS
- -------------------------------------------------------------------------

THE FUND IS DESIGNED TO TRACK THE PERFORMANCE OF THE SCHWAB INTERNATIONAL
INDEX(R).

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

The Fund is a diversified investment portfolio of the Trust, an open-end
management investment company. The investment objective of the Fund is to
attempt to track the price and dividend performance (total return) of the Schwab
International Index, an index created to represent the performance of Stocks
issued by large, publicly traded companies from countries around the world with
major developed securities markets, excluding the United States. As a matter of
fundamental policy, the Fund will invest at least 65% of its total assets in
common stocks and other equity securities including preferred stocks, rights and
warrants of companies located in at least three countries other than the U.S.
The Fund's investment objective is fundamental and cannot be changed without
shareholder approval. The Fund's investment policies and restrictions, unless
otherwise noted, are non-fundamental and may be changed by the Board of
Trustees. (See "Investment Restrictions" in the Statement of Additional
Information.) While there is no assurance that the Fund will achieve its
investment objective, it will endeavor to do so by following the investment
policies set forth below.

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

THE FUND FOLLOWS AN "INDEXING" OR "PASSIVE" STRATEGY.

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

The Fund follows an "indexing" or "passive" strategy under which Stocks are
purchased or sold only in order to match the composition of the Index.
Accordingly, the Investment Manager generally does not select securities for the
Fund's investment portfolio based upon traditional economic, financial and
market analyses and/or forecasting.

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

THE FUND IS MANAGED TO MINIMIZE COSTS AND INCREASE SHAREHOLDERS' TOTAL RETURN.

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

The Fund is managed to offset capital gains with capital losses in order to
minimize your capital gains tax liability. This special feature of the Fund can
make a real difference in your after tax return, especially if you are in a high
tax bracket.

The Fund has adopted a number of policies that should cause its portfolio
turnover rate to be below that experienced in many other mutual fund portfolios.
The Fund's portfolio turnover rates for the fiscal years ended October 31, 1995
and 1994 were 0% and 6%, respectively. Lower portfolio turnover acts to minimize
associated transaction costs as well as the level of realized capital gains.
Shareholders' current tax liability for capital gains should be reduced and
their total return increased by these policies.

6
<PAGE> 10

To reduce transaction costs and minimize shareholders' current capital gains tax
liability, the Fund's investment portfolio will not be automatically traded
(i.e.,"rebalanced") to reflect changes in the Index. The Fund's trading strategy
is designed to further minimize transaction costs (e.g., the Fund will generally
only buy round-lots of stocks and may trade large blocks of securities). These
policies may cause a particular Stock or a group of Stocks from a particular
country to be over- or under-represented in the Fund relative to its Index
weighting or result in its continued ownership by the Fund after its deletion
from the Index, thereby reducing the correlation between Fund and Index
composition. However, given the diversified nature of the Fund, the Investment
Manager does not expect that these potential deviations will significantly
impact the correlation between Fund and Index performance. Moreover, the
Investment Manager will engage in these practices only to the extent that they
do not have a material effect on the Fund's ability to track the performance of
the Index.

- -------------------------------------------------------------------
THE FUND WILL ATTEMPT TO BE SUBSTANTIALLY INVESTED IN INDEX STOCKS.
- -------------------------------------------------------------------

Under normal market conditions, the Fund will invest at least 80% of its total
assets in Stocks that comprise the Index ("Index Stocks"). The Fund, however, is
not required to buy or sell securities solely because the percentage of its
assets invested in Index Stocks changes when the market value of its holdings
increases or decreases. In addition, the Fund may omit or remove an Index Stock
from its portfolio if the Investment Manager believes the Stock to be
insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions.
Moreover, to avoid any potential conflict of interest, the Fund will not
purchase securities of issuers with which it is affiliated. To compensate for
any Index Stocks omitted or removed from its investment portfolio, the Fund may
purchase Stocks not in the Index (which would then be considered Index Stocks
for purposes of the Fund's policy regarding the percentage of its assets to be
invested in Index Stocks) if the Investment Manager believes that their market
performance is likely to replicate that of the Index Stocks they replace.

It is anticipated that the Fund will be able to invest in a majority of Index
Stocks. The Fund will generally select Index Stocks by reference to their
weighting in the Index. Thus, the Fund intends that the percentage of its assets
invested in each Index Stock will approximate the weighting of that Stock in the
Index.

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

FUND PERFORMANCE SHOULD TRACK THAT OF THE INDEX.

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

While Fund performance will not precisely match Index performance, the Fund will
attempt to maximize the correlation between its performance and that of the
Index. Factors such as the size of the Fund's portfolio, transaction costs,
management fees and expenses, brokerage commissions and fees, the extent and
timing of cash flows into and out of the Fund, the Fund's policy of minimizing
transaction costs and current capital gains tax liability, and changes in the
international securities markets and the Index itself are expected by the
Investment Manager to account for any differences between the Fund's performance
and that of the Index.

Over the long term, the Investment Manager seeks a correlation between the
performance of the Fund and that of the Schwab International Index(R) of 0.9 or
better. A figure of 1.0 would indicate

7
<PAGE> 11

perfect correlation. The Investment Manager monitors the correlation between
Fund and Index performance on a regular basis. In the unlikely event that a
correlation of 0.9 or better is not achieved, the Board of Trustees will
consider alternative arrangements.

- --------------------------------------------------------
INTERNATIONAL STOCKS MAY HAVE LESS LIQUIDITY AND GREATER
PRICE VOLATILITY THAN U.S. STOCKS.
- --------------------------------------------------------

Because the Fund will be invested primarily in international equity securities,
its price volatility may be even greater than if it were invested in U.S. equity
securities. When the Fund invests in such securities, they usually will be
denominated in a foreign currency, and the Fund may temporarily hold foreign
currencies. Thus, the value of the Fund's shares will be affected by changes in
currency exchange rates. The value of the Fund's investments denominated in
foreign currencies will depend on the relative strength of those currencies and
the U.S. dollar, and the Fund may be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rate between foreign
currencies and the U.S. dollar. 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 factors. Changes in the foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities, and net investment income and
gains, if any, to be distributed to shareholders by the Fund. Accordingly, the
Fund's ability to achieve its investment objective will depend, to some extent,
on favorable exchange rates.

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 Fund's 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.

As a fundamental policy, the Fund may 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 Fund has valued the instrument.

Because of the risks associated with international equity investments, the Fund
is intended to be a long-term investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock market movements.
Investors should not consider the Fund a complete investment program, but should
also hold securities with different risk characteristics including other mutual
funds or portfolios of individual securities, U.S. common stocks, bonds and
money market instruments.

- ---------------------------------------------------
THE FUND MAY PURCHASE SECURITIES ASIDE FROM STOCKS.
- ---------------------------------------------------

8
<PAGE> 12

the Fund may invest in securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, certificates of deposit, bankers'
acceptances, and commercial paper (which has been rated in one of the two
highest categories by a non-affiliated, nationally recognized statistical
ratings organization); enter into repurchase agreements collateralized by these
instruments; and purchase shares of other investment companies that invest
primarily in any of the securities described above. In the aggregate, no more
than 10% of the Fund's total assets may be invested in other investment
companies, and an investment in any one investment company will be limited to 5%
of total Fund assets. The Investment Manager will charge no management fees
attributable to any Fund assets invested in other investment companies. (See
"Investment Restrictions" in the Statement of Additional Information.)

- ----------------------------------------------------
THE FUND MAY UTILIZE FUTURES AND OPTIONS STRATEGIES.
- ----------------------------------------------------

The Fund may also purchase futures contracts on stocks and stock indices and
options contracts (including options on futures contracts) to accommodate cash
flows or in anticipation of taking a market position when, in the opinion of the
Investment Manager, available cash balances do not permit economically efficient
Stock purchases. Moreover, the Fund may sell futures and options to "close out"
futures and options it may have purchased or to protect against a decrease in
the price of securities it owns but intends to sell. Futures contracts and
options may be used 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. The 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. The value of all futures contracts on stocks and stock indices and
options contracts is not to exceed 10% of the Fund's total assets. In addition,
certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the Fund's use of futures contracts and options.

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 Fund 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 Fund's underlying securities. The risk that the Fund 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.

The risk of loss in trading futures contracts and options in some strategies can
be substantial, due both to the low margin deposits required and the extremely
high degree of leverage that can be involved in futures and options pricing. As
a result, a relatively small price movement in a futures contract or an option
may result in immediate and substantial loss (or gain) to the investor. While
futures contracts and options can be used as leveraged instruments, the Fund may
not use futures contracts or options to leverage its portfolio. When investing
in futures contracts and options, the Fund will segregate cash, cash-equivalents
or liquid, high-quality debt instruments in the amount of the underlying
obligation.

9
<PAGE> 13

CURRENCY HEDGING. The Fund may engage in foreign currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The Fund
expects 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 Fund enters into foreign currency
transactions with respect to specific receivables or payables of the Fund
arising in connection with the purchase or sale of its portfolio securities. By
transaction hedging, the Fund will attempt to protect itself 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 transaction's settlement date.
When it engages in position hedging, the Fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or against an
increase in the value of currency for securities which the Fund expects to
purchase).

When it engages in portfolio and/or transaction hedging, the Fund may purchase
or sell a foreign currency 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 Fund 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 Fund the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives the Fund 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 Fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
Fund 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 Fund's
ability to engage in hedging transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the prices of
the underlying securities that the Fund owns 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 a decline in the value of the hedged currency, they tend to limit
any potential gain that might result from an increase in the value of such
currency.

For further information on currency forward and futures contracts and foreign
currency options, see "Investment Securities" in the Statement of Additional
Information.
- --------------------------
THE FUND MAY BORROW MONEY.
- --------------------------

The Fund may borrow money for temporary purposes, but not for the purpose of
purchasing investments, in an amount up to one-third of the value of its total
assets. The Fund's borrowing policy is fundamental.

10
<PAGE> 14

- ----------------------------------------------------
THE FUND MAY LEND ITS SECURITIES TO GENERATE INCOME.
- ----------------------------------------------------

To increase its income, the Fund may lend securities from its portfolio
to brokers, dealers and other financial institutions that borrow securities. No
more than one-third of the Fund's total assets may be represented by loaned
securities. The Fund's loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. Government securities equal at all times to at
least 100% of the market value of the loaned securities plus accrued interest.
(For more information regarding securities lending, see "Other Investment
Policies--Loans of Portfolio Securities" in the Statement of Additional
Information.)

THE SCHWAB INTERNATIONAL INDEX(R)

- -------------------------------------
THE INDEX HAS SET INCLUSION CRITERIA.
- -------------------------------------

To be included in the Index, a company must satisfy all of the following
criteria:

1. it must be an "operating company" (i.e., not an investment company) whose
principal trading market is in a country with major developed securities
markets outside the United States;

2. a liquid market for its shares must exist;

3. its market value must place it among the top 350 such companies as measured
by market capitalization, provided that the total of all companies from any
country may not exceed 35% of the Index on a rebalancing date.

A particular Stock's weighting in the 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 value of the Index. As of January 31,
1996 the aggregate market capitalization of Index Stocks was approximately $3.8
trillion.

- -----------------------------------------
SCHWAB DEVELOPED AND MAINTAINS THE INDEX.
- -----------------------------------------

The Index, which as of January 31, 1996 represented approximately 37% of the
total market value of all publicly traded non-United States companies, was
developed in 1993 and is maintained by Schwab to represent the total return 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. Currently the countries included in the
Index are Australia, Belgium, Canada, Denmark, France, Germany, Hong Kong,
Italy, Japan, the Netherlands, Singapore, Spain, Sweden, Switzerland and the
United Kingdom. The Index serves as a standard of comparison for the Fund's
performance. Schwab receives no compensation from the Fund for maintaining the
Index.

- ------------------------------------------------------------
SCHWAB CALCULATES AND REPORTS THE INDEX'S PERFORMANCE DAILY.
- ------------------------------------------------------------

The Index's performance (i.e., the market value of all Index Stocks in U.S.
dollars) is calculated and made available each Business Day by Schwab. The total
return of the Index is computed monthly

11
<PAGE> 15

(using beginning of month capitalization weightings and assuming reinvestment of
dividends) and may be reported from time to time to Fund shareholders.

- ---------------------------------------------------------
SCHWAB PERIODICALLY UPDATES THE COMPOSITION OF THE INDEX.
- ---------------------------------------------------------

Schwab reviews and, as necessary, revises the list of companies whose securities
are included in the Index at least semi-annually. Companies known by Schwab to
meet or no longer meet the inclusion criteria will be added or deleted as
appropriate. Schwab will also modify the Index as necessary to account for
corporate actions (e.g., new issues, repurchases, stock dividends/splits,
tenders, mergers, swaps, spin-offs or bankruptcy filings made because of a
company's inability to continue operating as a going concern). Schwab may change
Index inclusion criteria if it determines that doing so would cause the Index to
be more representative of the large, publicly traded international company
equity market. In the future, the Trust's Board of Trustees, subject to
shareholder approval, may select another index should it decide that taking such
action would be in the best interests of Fund shareholders.

MANAGEMENT OF THE FUND

Responsibility for overall management of the Fund rests with the Trustees and
officers of the Trust. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. In addition to providing
day-to-day portfolio management of the Fund, the Investment Manager provides
general investment advice regarding the Fund's investment strategies and
performs expense management, accounting and recordkeeping, and other
administrative services necessary to the operation of the Fund. The Investment
Manager, formed in 1989, is the investment adviser and administrator of the
mutual funds in the SchwabFunds Family(R), a family of 22 mutual funds. As of
January 31, 1996, the SchwabFunds had aggregate net assets of approximately $33
billion.

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

Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 3.3 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 and the Investment Manager are wholly owned subsidiaries of The Charles
Schwab Corporation. Charles R. Schwab is the founder, Chairman, Chief Executive
Officer and a director of

12
<PAGE> 16

The Charles Schwab Corporation and, as of January 31, 1996, the beneficial owner
of approximately 20.1% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.

Geri Hom is the portfolio manager of the Fund. She joined Schwab in March 1995
as Portfolio Manager--Equities and currently manages the four Schwab index funds
and co-manages the three Schwab Asset Director(R) Funds with combined assets of
over $1.7 billion in assets. For four years before joining Schwab, she was a
Principal for Wells Fargo Nikko Investment Advisors. For the prior seven years,
she was Vice President and Manager of the Domestic Equity Portfolio Management
Group for Wells Fargo Nikko.

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

Please see the Fund's Annual Report to Shareholders for the fiscal year ended
October 31, 1995 for a discussion by the Investment Manager of the Fund's
performance.

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

THE INVESTMENT MANAGER AND SCHWAB GUARANTEE THAT TOTAL FUND OPERATING
EXPENSES WILL NOT EXCEED 0.69% OF THE FUND'S AVERAGE DAILY NET ASSETS
THROUGH AT LEAST FEBRUARY 28, 1997.

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

FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from the Fund a
graduated annual fee, payable monthly, of 0.70% of the Fund's average daily net
assets not in excess of $300 million and 0.60% of such assets over $300
million. The Investment Manager has agreed to waive the Fund's management fee
in excess of 0.40% of the Fund's average daily net assets through at least
February 28, 1997. In addition, the Investment Manager and Schwab guarantee
that total fund operating expenses will not exceed 0.69% of the Fund's average
daily net assets through at least February 28, 1997. This expense limit will
serve to maintain or lower the Fund's expenses and thus maintain or increase
the Fund's total return to shareholders. For the fiscal year ended October 31,
1995, the Fund paid investment management fees and total operating expenses of
0.43% and 0.85%, respectively, of the Fund's average daily net assets.

For the transfer agency and shareholder services provided under its Transfer
Agency and Shareholder Service Agreements with the Trust, Schwab receives an
annual fee, payable monthly, of 0.05% and 0.20%, respectively, of the Fund's
average daily net assets. State Street Bank and Trust Company is the Fund's
custodian.

The Trust pays the expenses of its operations, including the fees and expenses
of independent auditors, legal counsel and custodian; the costs of calculating
net asset values, brokerage commissions or transaction costs; taxes;
registration fees; and the fees and expenses of qualifying the Trust and its
shares for distribution. The expenses will generally be allocated among the
Trust's investment portfolios or classes on the basis of relative net assets at
the time the expense is incurred. However, expenses directly attributable to a
particular Fund or class will be charged to that Fund or class.

13
<PAGE> 17

PORTFOLIO BROKERAGE. When placing orders for the Fund's securities transactions,
the Investment Manager will use its judgment to obtain 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 or another qualified
affiliated broker or dealer to execute the Fund's transactions when it
reasonably believes that commissions (or prices) charged and transaction quality
will be at least comparable to those available from other qualified brokers or
dealers.

DISTRIBUTIONS AND TAXES
- -------------------------------------------------
THE FUND WILL DECLARE AND PAY DIVIDENDS ANNUALLY.
- -------------------------------------------------

DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund will distribute substantially all of
its net investment income and net capital gains, if any, on an annual basis, as
determined by the Trust's Board of Trustees. All distributions will be
automatically reinvested in additional shares of the Fund unless the shareholder
elects otherwise.

FEDERAL TAX INFORMATION. The Fund is treated as a separate entity for tax
purposes, has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such, and intends to continue to so
qualify. In order to so qualify, the Fund will distribute substantially all of
its net investment income and net capital gains to shareholders on an annual
basis and will meet certain other requirements. Such qualification will relieve
the Fund of liability for federal income tax to the extent its earnings are so
distributed.

Dividends paid by the Fund from net investment income and distributions from the
Fund's net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable as
ordinary income. Distributions received from the Fund 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 has owned shares in the Fund. However, any loss on the sale or
exchange of shares held for six months or less shall, to the extent of any
long-term capital gain distributions received with respect to such shares, 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
Fund, including any foreign taxes paid by the Fund and passed through, as
described below.

Dividends and distributions paid by the Fund are not eligible for the
dividends-received deduction for corporate shareholders if, as expected, none of
the Fund's income consists of dividends paid by United States corporations.

Income received by the Fund from sources within various foreign countries may be
subject to foreign income taxes withheld at the source. If more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
securities issued by foreign corporations, the Fund is permitted to elect to
"pass through" to the Fund's shareholders the amount of foreign income taxes
paid by the Fund. Pursuant to this election, U.S. shareholders must include in
gross income, even though not actually received, their respective pro rata share
of foreign taxes paid by the Fund, and may either

14
<PAGE> 18

deduct their pro rata share of foreign taxes (but not for alternative minimum
tax purposes) or credit the tax against U.S. income taxes (subject to certain
limitations described in Code section 904), but not both. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.

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 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 Fund generally
are not subject to U.S. taxation. Different tax consequences may result if the
foreign shareholder is engaged in a U.S. trade or business or is present in the
U.S. for more than 183 days during the year. 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 the Fund may also be
subject to state, local and foreign taxes, and their treatment under applicable
tax laws may differ from the federal income tax treatment.

The Fund may inadvertently invest in non-U.S. corporations which would be
treated as Passive Foreign Investment Companies ("PFICs") or become a PFIC under
the Code. 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 Fund does invest in PFICs, it may elect to treat
the PFIC as a "qualified electing fund" or mark-to-market its investments in
PFICs annually. In either case, the Fund may be required to distribute amounts
in excess of its realized income and gains. To the extent that the Fund itself
is required to pay a tax on income or gain from investment in PFICs, the payment
of this tax would reduce the Fund's economic return.

Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' Schwab account statements. The Fund will notify
shareholders at least annually as to the nature of all distributions made during
the taxable year, including amounts qualifying as ordinary dividends and capital
gain distributions.

The foregoing is only a brief summary of the federal income tax considerations
affecting the Fund and its shareholders. The discussion of taxes set forth above
is included for general information purposes only. Prospective investors should
consult their tax advisers with specific reference to their own tax situations.

SHARE PRICE CALCULATION
- ------------------------------------------------
THE FUND SELLS ITS SHARES FREE OF SALES CHARGES.
- ------------------------------------------------

15
<PAGE> 19

Exchange is open for trading (a "Business Day") at 4:00 p.m., Eastern time. The
Fund's NAV will fluctuate, and Fund shares are not insured against reduction in
net asset value. Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt and verification by Schwab's
Mutual Fund Transfer Agency Department or its authorized agent. (See "Share
Price Calculation" in the Statement of Additional Information.)

The Fund values its portfolio securities daily based on their market value. Each
security held by the Fund 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. 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. If extraordinary events that materially affect the value of
the investments of the Fund occur subsequent to the close of the securities
market on which such securities are primarily traded, the investments affected
thereby will be valued at "fair value" (as described above).

HOW THE FUND SHOWS PERFORMANCE
- ------------------------------------------------------------------
THE FUND'S PERFORMANCE MAY BE ADVERTISED IN TERMS OF TOTAL RETURN.
- ------------------------------------------------------------------

From time to time the Fund may advertise its total return. Performance figures
are based upon historical results and are not intended to indicate future
performance.

The 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 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.

The Fund's performance may be compared to that of other mutual funds tracked by
mutual fund rating services, various indices of investment performance
(including the Schwab 1000 Index(R), the Schwab International Index(R), the
Schwab Small-Cap Index(TM) and the Standard & Poor's 500 Index), United States
Treasury obligations, bank certificates of deposit, the Consumer Price Index and
other investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings or other
information prepared by Lipper Analytical Services, Inc. and Morningstar, Inc.

Additional performance information is included in the Fund's Annual Report to
Shareholders, which is available free of charge by calling 800-2 NO-LOAD or from
your local Schwab office.

16
<PAGE> 20

TAX-ADVANTAGED RETIREMENT PLANS
- -------------------------------------------------------------

RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES, AND THE FUND
MAY BE AN ESPECIALLY SUITABLE INVESTMENT FOR THEM.

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

Schwab offers tax-advantaged retirement plans for which the Fund may be a
particularly appropriate investment. Schwab's retirement plans allow
participants to defer taxes while helping them build their retirement savings.

SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab IRAs with balances of $10,000 or more by September 15, 1996 will not be
charged Schwab's $29 annual IRA account fee for the life of the account.

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

SCHWAB CORPORATE RETIREMENT PLANS. A well-designed retirement program can help a
company attract and retain valuable employees. Call your local Schwab office or
800-2 NO-LOAD, 24 hours a day, for more information.

GENERAL INFORMATION

ABOUT THE TRUST. 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 or classes of shares in one or more investment portfolios or
series ("Series"). Currently, shares of six 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 or class have equal,
noncumulative voting rights and equal rights as to distributions, assets and
liquidation of such Series, except to the extent such voting rights or rights as
to distributions, assets and liquidation vary among classes of a Series.

The Trust is not required to hold annual shareholders' 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 such purposes as electing or removing
Trustees, changing fundamental policies, or approving or amending an investment
advisory agreement. In addition, a Trustee may be removed by shareholders at a
special meeting called upon written request by shareholders owning at least 10%
of the outstanding shares of the Trust. Shareholders will vote by Series and not
in the aggregate (for example, when voting to approve the investment advisory
agreement), except when voting in the aggregate is permitted under the
Investment Company Act of 1940, as amended, such as for the election of
Trustees.

17
<PAGE> 21

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

SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
exchange requests at any one of over 200 Schwab offices nationwide or by calling
800-2 NO-LOAD, 24 hours a day, where trained representatives are available to
answer questions about the Fund and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmation of such instructions and tape
recording telephone transactions.

Investors should be aware that telephone transactions may be difficult during
periods of drastic economic or market changes. Shareholders who experience
difficulties in purchasing, redeeming or exchanging shares by telephone can
utilize the alternative methods discussed below to place their orders.

To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.

You may purchase shares through an account maintained with Schwab or through any
other entity which has been designated by Schwab. The following information
regarding the purchase, exchange and redemption of Fund shares through a Schwab
account relates solely to transactions through Schwab accounts and should not be
read to apply to transactions through other designated entities. For more
information, see "Purchase and Redemption of Shares" in the Statement of
Additional information or contact such designated entity.

HOW TO PURCHASE SHARES
- ---------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND THROUGH A SCHWAB BROKERAGE,
SCHWAB ONE(R), IRA, TRUST OR KEOGH ACCOUNT.
- ---------------------------------------------------------------

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

You may purchase Fund shares through your Schwab account as described below. If
you already have a Schwab account, you need not open a new account.

18
<PAGE> 22

at 101 Montgomery Street, San Francisco, CA 94104. Corporations and other
organizations should call their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.

You may deposit funds into your Schwab account by check, wire or many other
forms of electronic funds transfer (securities may also be deposited). You may
also buy Fund shares using electronic products such as StreetSmart(TM), The
Equalizer(R) and TeleBroker(R). All deposit checks should be made payable to
Charles Schwab & Co., Inc. If you would like to wire funds into your existing
Schwab account, please contact your local Schwab office for instructions.

PURCHASING SHARES THROUGH THE CHARLES SCHWAB TRUST COMPANY. You may also
purchase shares of the Fund through an account maintained with the Trust
Company. Payment for shares must be made directly to the Trust Company, and you
must have funds available in your account to purchase shares of the Fund.
Contact a Trust Company representative for more information.

SCHWAB ACCOUNT MINIMUMS AND ASSOCIATED FEES. Schwab requires a $1,000 deposit
and account balance minimum to maintain a Schwab brokerage account ($500 for
custodial accounts). A quarterly fee of $7.50 will be charged on Schwab
brokerage 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 at least
one commissionable trade within the last six months, or if the shareholder's
combined account balances at Schwab total $10,000 or more.

Schwab currently imposes no fee for opening a Schwab One(R) account with a
minimum of $5,000 account equity. Schwab One accounts containing less than
$5,000 account equity are subject to a fee of $5 per month imposed by Schwab if
there have been fewer than two commissionable trades within the last twelve
months.

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

YOUR INITIAL FUND INVESTMENT MAY BE AS LOW AS $1,000.

ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.
- -------------------------------------------------------------

MINIMUM FUND INVESTMENT REQUIREMENTS. Your initial Fund investment may be as low
as $1,000 ($500 for IRAs, certain other retirement plans and custodial
accounts). The minimum subsequent investment is $100. These requirements may be
reduced or waived on certain occasions. (See "Purchase and Redemption of Shares"
in the Statement of Additional Information.)

Schwab reserves the right to waive these minimums for clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

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

SHARES WILL BE PURCHASED AFTER YOU HAVE FUNDS
AVAILABLE IN YOUR SCHWAB ACCOUNT.

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

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

19
<PAGE> 23

METHODS OF PURCHASING SHARES. Schwab offers you several convenient ways to
purchase Fund shares. You may choose the one that works best for you, and Schwab
will confirm execution of your purchase order.

BY PHONE:

You may use existing funds in your Schwab account to make initial and
subsequent share purchases. To place your order, call your local Schwab office
during regular business hours or 800-2 NO-LOAD, 24 hours a day. TDD users may
contact Schwab at 800-345-2550, 24 hours a day.

BY MAIL:

You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases. Alternatively, your purchase
instructions may be accompanied by a check made out to Charles Schwab & Co.,
Inc., which will be deposited into your Schwab account and used, as necessary,
to cover all or part of your purchase order.

Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, CA 94104 or to your local Schwab office
and should:

- reference your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);

- specify the name of the Fund and the dollar amount of shares you would
like purchased; and

- (initial share purchases only) select one of the distribution options
listed below and on the following page.

ELECTRONICALLY:

For more information regarding how to purchase Fund shares electronically
using StreetSmart(TM), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.

IN PERSON AT A SCHWAB OFFICE:

Visit your local Schwab office where a representative will be happy to assist
you.

AUTOMATIC INVESTMENT:

Once you have satisfied the initial investment requirements, you may authorize
Schwab to automatically purchase Fund shares at intervals and in amounts
pre-selected by you on your behalf. (See "Schwab Automatic Investment Plan.")

- -----------------------------------------------
YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS.
- -----------------------------------------------

SELECTING A DISTRIBUTION OPTION. You may select from the three distribution
options listed below when you first become a shareholder in the Fund. If you
already are a Fund shareholder and wish to change your distribution option,
please call your local Schwab office for assistance.

1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gain
distributions will be reinvested in additional Fund shares. This option
will be selected automatically unless you

20
<PAGE> 24

specify another option. If you are purchasing Fund shares through Schwab's
Automatic Investment Plan, you must choose this distribution option for
this Fund.

2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in
cash, and capital gain distributions will be reinvested in additional
shares.

3. ALL CASH: Dividends and any capital gain distributions will both be paid in
cash.

Dividends and distributions subject to reinvestment will be invested at the NAV
next determined after their record date. Cash distributions will be credited to
your Schwab account and will be held there or mailed to you depending on the
account standing instructions applicable to your account. For information on how
to wire funds from your Schwab account to your bank, see "Other Important
Information--Wire Transfers To Your Bank."

OTHER PURCHASE INFORMATION. The Fund reserves the right in its sole discretion
and without prior notice to shareholders to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to purchase shares of the Fund
are subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing. Any purchase which would result in a single shareholder
owning shares with a value of more than 10% of a Fund's assets or $3 million,
whichever is greater, are subject to prior approval by the Fund. Schwab will
charge a $15 service fee against an investor's Schwab account if his or her
investment check is returned because of insufficient or uncollected funds or a
stop payment order.

21
<PAGE> 25

HOW TO SELL OR EXCHANGE SHARES

- ------------------------------------------------
FUND SHARES MAY BE EXCHANGED FOR SHARES OF OTHER
FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- ------------------------------------------------

SALE OF SHARES. Shares will be redeemed at the NAV next determined after receipt
and verification by Schwab's Mutual Fund Transfer Agency Department or its
authorized agent of proper redemption instructions, as set forth on the
following pages. 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 or its authorized agent receives your redemption instructions in
proper form. Redemption proceeds will then be held there or mailed to you
depending on the account standing instructions you selected. For information on
how to wire funds from your Schwab account to your bank, see "Other Important
Information--Wire Transfers to Your Bank." If you purchased shares by check,
your redemption 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 Fund may suspend redemption rights or postpone payments when: trading on the
New York Stock Exchange (the "Exchange") is restricted; the Exchange is closed
for any reason other than its customary weekend or holiday closings; emergency
circumstances as determined by the SEC exist; or for such other circumstances as
the SEC may permit. The Fund may also elect to invoke a 7-day period for cash
settlement of individual redemption requests in excess of $250,000 of 1% of the
Fund's net assets, whichever is less. (See "Purchase and Redemption of Shares"
in the Statement of Additional Information.)

EXCHANGE OF SHARES. The exchange privilege allows you to exchange your
SchwabFunds(R) shares for shares of any other SchwabFunds class or Series
available to investors in your state. Thus, you can conveniently modify your
investments if your goals or market conditions change. An exchange involves the
redemption of Fund shares and the purchase of shares of any SchwabFunds class or
Series of your choice. An exchange of shares will be treated as a sale and
purchase of shares for federal income tax purposes. Note that you must meet the
initial or subsequent minimum investment requirements applicable to the shares
you wish to receive in exchange. The Fund reserves the right on 60 days' written
notice to modify, limit or terminate the exchange privilege.

EARLY WITHDRAWAL FEE PAID TO THE FUND. The Fund is meant to be a long-term
investment. Frequent trading in Fund shares by short-term investors increases
the Fund's costs. To offset the costs of short-term trading and to ensure that
long-term investors do not bear these costs, the Fund assesses a 0.75%
(three-fourths of one percent) early withdrawal fee upon redemption or exchange
proceeds attributable to shares purchased and held less than six months. To
benefit Fund shareholders directly, the early withdrawal fee is paid directly to
the Fund and does not apply to the redemption or exchange of shares acquired
through reinvestment of dividends or capital gains. Solely for purposes of
calculating the amount (if any) of the early withdrawal fee, shares will be
treated as redeemed on a "first-in first-out basis," except that shares acquired
through dividend reinvestment will be treated as redeemed first. This method of
calculating the fee should result in the lowest total early withdrawal fee. The
Fund reserves the right to waive this fee for certain clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

22
<PAGE> 26

METHODS OF SELLING OR EXCHANGING SHARES.

BY PHONE:

To sell shares or to exchange shares between any of the SchwabFunds(R) by
telephone, please call your local Schwab office during its regular business
hours or 800-2 NO-LOAD, 24 hours a day. TDD users may contact Schwab at
800-345-2550, 24 hours a day. To properly process your telephone redemption or
exchange request, we will need the following information:

- your Schwab account number and your name for verification;

- the number of shares to be sold or exchanged;

- the name of the Fund from which you wish to sell or exchange shares;

- the name of the Fund and class into which shares are to be exchanged,
if applicable; and

- the distribution option you select (if exchanging shares).

BY MAIL:

You may also request a redemption or an exchange by writing Schwab at 101
Montgomery Street, San Francisco, CA 94104 or your local Schwab office. To
properly process your mailed redemption or exchange request, we will need the
above information and a letter signed by at least one of the registered Schwab
account holders in the exact form specified in the account. Once mailed, a
redemption request is irrevocable and may not be modified or canceled.

ELECTRONICALLY:

For more information regarding how to sell or exchange Fund shares
electronically using StreetSmart(TM), The Equalizer(R) and TeleBroker(R),
please call 800-2 NO-LOAD.

IN PERSON AT A SCHWAB OFFICE:

You can also request a redemption or exchange in person at your local Schwab
office.

SCHWAB AUTOMATIC INVESTMENT PLAN
- ---------------------------------------------------------------------------
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST, CONVENIENT WAY TO MAKE
REGULAR INVESTMENTS IN THE FUND.
- ---------------------------------------------------------------------------

Schwab's Automatic Investment Plan ("AIP") allows you to make periodic
investments in non-money market SchwabFunds (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. As long as you are purchasing the Fund's
shares through AIP, all dividends and distributions paid to you by the Fund must
be reinvested in additional shares of that Fund. For more detailed information
about this service, or to establish your AIP, call your local Schwab office or
800-2 NO-LOAD, 24 hours a day.

23
<PAGE> 27

OTHER IMPORTANT INFORMATION

MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, the Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of the shareholder's account drops below the Fund's $500 minimum balance
requirement ($250 in the case of IRAs, other retirement plans and custodial
accounts). Shareholders will be notified in writing 30 days before the Fund
takes such action to allow them to increase their holdings to at least the
minimum level. Fund shares will be automatically redeemed should the Schwab
account in which they are carried be closed.

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

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

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

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

24
<PAGE> 28

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 29

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 30

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 31

<TABLE>
<S> <C>
----------------
SCHWAB INTERNATIONAL INDEX BULK RATE
FUND(TM) U.S. POSTAGE
PAID
PROSPECTUS February 28, 1996 CHARLES SCHWAB

SchwabFunds(R) ----------------
101 Montgomery Street
San Francisco, California 94104

981-5 (2/96) CRS 10167 Printed on recycled paper.

SchwabFunds(R)
</TABLE>

<PAGE> 32

CROSS REFERENCE SHEET

SCHWAB CAPITAL TRUST
SCHWAB SMALL-CAP INDEX FUND(R)

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

Synopsis Summary of Expenses; Key Features of the Fund

Condensed Financial Information Financial Highlights; How the Fund Shows
Performance

General Description of Registrant Matching the Fund to Your Investment Needs;
General Information; Investment Objective, Policies
and Risks; The Schwab Small-Cap Index

Management of the Fund Management of the Fund

Management's Discussion of Fund Performance Discussion Included in Annual Report

Capital Stock and Other Securities General Information; Distributions and Taxes;
Shareholder Guide

Purchase of Securities Being Offered Share Price Calculation; Shareholder Guide

Redemption or Repurchase Shareholder Guide; Other Important Information

Pending Legal Proceedings Inapplicable
</TABLE>

<PAGE> 33

SCHWAB SMALL-CAP INDEX FUND(R)

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

PROSPECTUS February 28, 1996

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), 24 hours a
day.

THE SCHWAB SMALL-CAP INDEX FUND (the "Fund") attempts to track the price and
dividend performance (total return) of the Schwab Small-Cap Index(TM) (the
"Index"), an index created by Schwab to represent the performance of common
stocks of the second 1,000 largest United States corporations (excluding
investment companies), ranked by market capitalization (share price times the
number of shares outstanding). The issuers of these common stocks are referred
to in this prospectus as "Small-Cap Issuers." The Fund will attempt to achieve
its objective by investing substantially all of its assets in stocks that
comprise the Index, in approximately the same proportion as the Small-Cap
Issuers are represented in the Index. The Fund is a diversified investment
portfolio of Schwab Capital Trust (the "Trust"), a no-load, open-end management
investment company.

TABLE OF CONTENTS

<TABLE>
<S> <C>
KEY FEATURES OF THE FUND...................................................... 2
SUMMARY OF EXPENSES........................................................... 3
FINANCIAL HIGHLIGHTS.......................................................... 5
MATCHING THE FUND TO YOUR INVESTMENT NEEDS.................................... 6
INVESTMENT OBJECTIVE, POLICIES AND RISKS...................................... 6
THE SCHWAB SMALL-CAP INDEX.................................................... 10
MANAGEMENT OF THE FUND........................................................ 11
DISTRIBUTIONS AND TAXES....................................................... 13
SHARE PRICE CALCULATION....................................................... 14
HOW THE FUND SHOWS PERFORMANCE................................................ 14
TAX-ADVANTAGED RETIREMENT PLANS............................................... 15
GENERAL INFORMATION........................................................... 15
SHAREHOLDER GUIDE............................................................. 16
HOW TO PURCHASE SHARES...................................................... 16
HOW TO SELL OR EXCHANGE SHARES.............................................. 19
SCHWAB AUTOMATIC INVESTMENT PLAN.............................................. 21
OTHER IMPORTANT INFORMATION................................................... 21
</TABLE>

- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 34

KEY FEATURES OF THE FUND

PERFORMANCE. The investment objective of the Schwab Small-Cap Index Fund(R) is
to attempt to track the price and dividend performance (total return) of the
Index, an index composed of the common stocks of the second 1,000 largest United
States corporations (excluding investment companies), ranked by market
capitalization (share price times the number of shares outstanding). The Fund
will attempt to achieve its objective by investing substantially all of its
assets in stocks that comprise the Index, in approximately the same proportions
as the Small-Cap Issuers are represented in the Index. (See "Investment
Objective, Policies and Risks.")

DIVERSIFICATION AND RISK. The Fund seeks to invest in substantially all of the
common stocks of the 1,000 companies that make up the Index. This level of
diversification reduces the risk (typically, a decline in the value of
individual securities) associated with investments in individual securities
because the Fund's investments will be spread over a range of industries and
issuers as opposed to being concentrated in a few individual securities. Stocks
of Small-Cap Issuers generally have greater illiquidity and price volatility
than stocks of larger capitalization issuers. (See "Investment Objective,
Policies and Risks.")

LOW MINIMUM INVESTMENT. Investors can begin their investment program in the Fund
with as little as $1,000. Subsequent investments can be made with only $100.

LOW-COST INVESTING. The Fund brings a low-cost approach to investing with:

- no sales charges;

- an index fund management strategy designed to minimize overall
operating expenses; and

- the guarantee of Charles Schwab Investment Management, Inc. (the
"Investment Manager") and Schwab that the Fund's total fund operating
expenses will, through at least February 28, 1997, not exceed 0.59% of
the Fund's average daily net assets. (See "Management of the Fund.")

MINIMIZATION OF CURRENT CAPITAL GAINS TAX LIABILITY. The Fund's investment
policies are designed to minimize current capital gains tax liability. (See
"Distributions and Taxes.")

2
<PAGE> 35

FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in amounts and at intervals that you select. You
avoid the inconvenience, delay and expense associated with checks or bank wires.
(See "Schwab Automatic Investment Plan," visit or call your local Schwab office
or call 800-2 NO-LOAD, 24 hours a day.)

CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their investment activity, including mutual funds, on one report. (See
"Other Important Information.")

NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders. (See "Management
of the Fund.")

SUMMARY OF EXPENSES

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases........................................................... None
Sales Load on Reinvested Dividends................................................ None
Deferred Sales Load............................................................... None
Early Withdrawal Fee 1............................................................ 0.50%
Exchange Fee...................................................................... None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fee (after fee reduction) 2............................................ 0.30%
12b-1 Fees........................................................................ None
Other Expenses (after fee reduction and expense reimbursement) 3.................. 0.29%
TOTAL FUND OPERATING EXPENSES (AFTER FEE REDUCTION AND EXPENSE REIMBURSEMENT) 3, 4.. 0.59%
</TABLE>

3 This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least February 28, 1997, the total fund
operating expenses for the Fund will not exceed 0.59% of the Fund's average
daily net assets. Without the guarantees on total fund operating expenses in
effect for the fiscal year ended October 31, 1995 (0.75% of the Fund's average
daily net assets through June 30, 1995, and 0.59% through October 31, 1995),
other expenses and total fund operating expenses would have been 0.52% and
1.02%, respectively, of the Fund's average daily net assets.

3
<PAGE> 36

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$6 $19 $33 $ 74
</TABLE>

4
<PAGE> 37

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 3, 1993
FOR THE (COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
OCTOBER 31, 1995 OCTOBER 31, 1994
---------------- ----------------
<S> <C> <C>
Net asset value at beginning of period...................... $ 10.05 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... 0.10 0.06
Net realized and unrealized gain on investments........... 1.61 --
------------ ------------
Total from investment operations.......................... 1.71 0.06
LESS DISTRIBUTIONS
Dividends from net investment income...................... (0.06) (0.01)
Distributions from realized gain on investments........... -- --
Total distributions....................................... (0.06) (0.01)
------------ ------------
Net asset value at end of period............................ $ 11.70 $ 10.05
============= ============
Total return (%)............................................ 17.11 0.63
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s).......................... $122,074 $ 68,128
Ratio of expenses to average net assets (%)............... 0.68 0.67*
Ratio of net investment income to average
net assets (%)......................................... 0.68 0.68*
Portfolio turnover rate (%)............................... 24 16
</TABLE>

Notes:

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, 1995 and 1994, would have been 1.02% and 1.19%*, respectively, and
the ratio of net investment income to average net assets would have been 0.34%
and 0.16%*, respectively.

On May 1, 1995, the sub-advisory agreement between Dimensional Fund Advisors
Inc. and the Investment Manager was terminated, and the Investment Manager
assumed sole responsibility for providing the Fund with investment advisory
services.

* Annualized

5
<PAGE> 38

MATCHING THE FUND TO YOUR INVESTMENT NEEDS

- --------------------------------------------------------------------------------
THE FUND MAY BE ESPECIALLY SUITABLE FOR LONG-TERM INVESTORS.
- --------------------------------------------------------------------------------

Because the Fund will ordinarily invest in a large number of common stocks, it
may be especially appropriate for investors with long-term investment
objectives, including those saving for retirement or college. While common stock
prices tend to rise and decline for short or extended periods, historically they
have generally risen over the long-term. As a result, stocks have over time
historically provided many investors with higher returns than most alternative
securities investments.

INVESTMENT OBJECTIVE, POLICIES AND RISKS
- --------------------------------------------------------------------------------

THE FUND IS DESIGNED TO TRACK THE PERFORMANCE OF THE INDEX.

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

The Fund is a diversified investment portfolio of the Trust, a no-load, open-end
management investment company. The investment objective of the Fund is to
attempt to track the price and dividend performance (total return) of the Index,
an index created by Schwab to represent the performance of common stocks of
Small-Cap Issuers. As of December 31, 1995, the market capitalization of stocks
in the Index ranged in size from approximately $240 million to $849 million. As
a matter of fundamental policy, the Fund will invest at least 65% of its total
assets in common stocks or other equity securities including preferred stocks,
rights and warrants. The Fund's investment objective is fundamental and cannot
be changed without shareholder approval. The Fund's investment policies and
restrictions, unless otherwise noted, are non-fundamental and may be changed by
the Board of Trustees. (See "Investment Restrictions" in the Statement of
Additional Information.) While there is no assurance that the Fund will achieve
its investment objective, it will endeavor to do so by following the investment
policies set forth below.

- ---------------------------------------------------------------------------
THE FUND FOLLOWS AN "INDEXING" OR "PASSIVE" STRATEGY.
- ---------------------------------------------------------------------------

The Fund follows an "indexing" or "passive" strategy under which stocks are
purchased or sold only in order to match the composition of the Index.
Accordingly, the Investment Manager generally does not select securities for the
Fund's investment portfolio based upon traditional economic, financial and
market analyses and/or forecasting.

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

THE FUND IS MANAGED TO MINIMIZE COSTS TO INCREASE SHAREHOLDERS' TOTAL RETURN.

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

The Fund is managed to offset capital gains with capital losses in order to
minimize your capital gains tax liability. This special feature of the Fund can
make a real difference in your after-tax return, especially if you are in a high
tax bracket.

6
<PAGE> 39

operations) through October 31, 1994 were 24% and 16%, respectively. Lower
portfolio turnover acts to minimize associated transaction costs as well as the
level of realized capital gains. Shareholders' current tax liability for capital
gains should be reduced and their total return increased by these policies.

To reduce transaction costs and minimize shareholders' current capital gains tax
liability, the Fund's investment portfolio will not be automatically traded
(i.e.,"rebalanced") to reflect changes in the Index. The Fund's trading strategy
is designed to further minimize transaction costs (e.g., the Fund will generally
only buy round-lots of stocks and may trade large blocks of securities). These
policies may cause a particular stock to be over- or under-represented in the
Fund relative to its Index weighting or result in its continued ownership by the
Fund after its deletion from the Index, thereby reducing the correlation between
Fund and Index composition. However, given the diversified nature of the Fund,
the Investment Manager does not expect that these potential deviations will
significantly impact the correlation between Fund and Index performance.
Moreover, the Investment Manager will engage in these practices only to the
extent that they do not have a material effect on the Fund's ability to track
the performance of the Index.

- --------------------------------------------------------------------------------
THE FUND WILL ATTEMPT TO BE SUBSTANTIALLY INVESTED IN INDEX STOCKS.
- --------------------------------------------------------------------------------

Under normal market conditions, the Fund will invest at least 80% of its total
assets in stocks of Small-Cap Issuers that comprise the Index ("Index Stocks").
The Fund, however, is not required to buy or sell securities solely because the
percentage of its assets invested in Index Stocks changes when the market value
of its holdings increases or decreases. In addition, the Fund may omit or remove
an Index Stock from its portfolio if the Investment Manager believes the stock
to be insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions.
Moreover, to avoid any potential conflict of interest, the Fund will not
purchase securities of issuers with which it is affiliated. To compensate for
any Index Stocks omitted or removed from its investment portfolio, the Fund may
purchase stocks not in the Index (which would then be considered Index Stocks
for purposes of the Fund's policy regarding the percentage of its assets to be
invested in Index Stocks) if the Investment Manager believes that their market
performance is likely to replicate that of the Index Stocks they replace.

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

FUND PERFORMANCE SHOULD TRACK THAT OF THE INDEX.

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

7
<PAGE> 40

Index itself are expected by the Investment Manager to account for any
differences between the Fund's performance and that of the Index.

Over the long term, the Investment Manager seeks a correlation between the
performance of the Fund and that of the Schwab Small-Cap Index(TM) of 0.9 or
better. A figure of 1.0 would indicate perfect correlation. The Investment
Manager monitors the correlation between Fund and Index performance on a regular
basis. In the unlikely event that a correlation of 0.9 or better is not
achieved, the Board of Trustees will consider alternative arrangements.

- --------------------------------------------------------------------------------
STOCKS OF SMALL-CAP ISSUERS GENERALLY HAVE GREATER PRICE VOLATILITY
AND LESS LIQUIDITY THAN LARGER CAPITALIZATION STOCKS.
- --------------------------------------------------------------------------------

Because the Fund will be invested primarily in common stocks and other equity
securities, its portfolio will be subject to price volatility over both short-
and long-term periods. Moreover, because the Fund invests in equity securities
of Small-Cap Issuers, its price volatility may be greater than if the Fund
invested in equity securities of issuers with larger market capitalizations than
those of Small-Cap Issuers.

Generally, equity securities of Small-Cap Issuers have historically been
characterized by greater volatility of returns, greater total returns, and lower
dividend yields than equity securities of large capitalization issuers. For any
particular period of time, these characteristics may not be consistent.
Historically, equity securities of Small-Cap Issuers have shown a pattern of
over-performing or under-performing equity securities of larger capitalization
issuers for extended periods of time (cycles) ranging in duration from four to
fourteen years. The greater price volatility of equity securities of Small-Cap
Issuers may result from the fact that there may be less market liquidity, less
publicly available information or fewer investors who monitor the activities of
these companies. In addition, the market prices of these securities may exhibit
more sensitivity to changes in industry or general economic conditions.

Because of the risks associated with investments in equity securities of
Small-Cap Issuers, the Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of speculating on short-term
stock market movements. Investors should not consider the Fund a complete
investment program, but should also hold securities with different risk
characteristics including other mutual funds or portfolios of individual
securities, equity securities of larger capitalization issuers, bonds and money
market instruments.
- ------------------------------------------------------------------------

THE FUND MAY PURCHASE SECURITIES ASIDE FROM STOCKS.

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

The value of all non-Index Stock investments may normally represent no more than
20% of the Fund's total assets. In order to accommodate cash flows resulting
from the purchase and sale of Fund shares, the Fund may invest in securities
issued or guaranteed by the U.S. Government, its agencies or

8
<PAGE> 41

instrumentalities, certificates of deposit, bankers' acceptances and commercial
paper (which has been rated in one of the two highest categories by a
non-affiliated, nationally recognized statistical rating organization); enter
into repurchase agreements collateralized by these instruments; and purchase
shares of other investment companies that invest primarily in any of the
securities described above. In the aggregate, no more than 10% of the Fund's
total assets may be invested in other investment companies, and an investment in
any one investment company will be limited to 5% of total Fund assets. The
Investment Manager will charge no management fees attributable to any Fund
assets invested in other investment companies. (See "Investment Restrictions" in
the Statement of Additional Information.)

- -----------------------------------------------------------------------
THE FUND MAY UTILIZE FUTURES AND OPTIONS STRATEGIES.
- -----------------------------------------------------------------------

The Fund may also purchase futures contracts on stocks and stock indices and
options contracts (including options on futures contracts) to accommodate cash
flows or in anticipation of taking a market position when, in the opinion of the
Investment Manager, available cash balances do not permit economically efficient
stock purchases. Moreover, the Fund may sell futures and options to "close out"
futures and options it may have purchased or to protect against a decrease in
the price of securities it owns but intends to sell. Futures contracts and
options may be used 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. The 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. The value of all futures contracts on stocks and stock indices and
options contracts is not to exceed 10% of the Fund's total assets. In addition,
certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the Fund's use of futures contracts and options.

9
<PAGE> 42

- -----------------------------------------
THE FUND MAY BORROW MONEY.
- -----------------------------------------

- -------------------------------------------------------------------------
THE FUND MAY LEND ITS SECURITIES TO GENERATE INCOME.
- -------------------------------------------------------------------------

To increase its income, the Fund may lend securities from its portfolio to
brokers, dealers and other financial institutions that borrow securities. No
more than one-third of the Fund's total assets may be represented by loaned
securities. The Fund's loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. Government securities equal at all times to at
least 100% of the market value of the loaned securities plus accrued interest.
(For more information regarding securities lending, see "Other Investment
Policies--Loans of Portfolio Securities" in the Statement of Additional
Information.)

THE SCHWAB SMALL-CAP INDEX(TM)
- ------------------------------------------------
THE INDEX HAS SET INCLUSION CRITERIA.
- ------------------------------------------------

To be included in the 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 (the "Exchange"), the American Stock Exchange or the NASDAQ/NMS; and

3. its market value must place it among the second 1,000 such companies as
measured by market capitalization (i.e., from the company with a rank of
1,001 through the company with a rank of 2,000).

A particular stock's weighting in the Index is based on its relative total
market value (i.e., its market price per share times the number of shares
outstanding, for all classes of shares), divided by the total market value of
the Index. As of January 31, 1996, the aggregate market capitalization of Index
Stocks was approximately $463 billion.

- ------------------------------------------------------------
SCHWAB DEVELOPED AND MAINTAINS THE INDEX.
- ------------------------------------------------------------

The Index was developed in 1993 and is maintained by Schwab to represent the
total return of common stocks of Small-Cap Issuers. The Index serves as a
standard of comparison for the Fund's performance. Schwab receives no
compensation from the Fund for maintaining the Index.

10
<PAGE> 43

- --------------------------------------------------------------------------------
SCHWAB CALCULATES AND REPORTS THE INDEX'S PERFORMANCE DAILY.
- --------------------------------------------------------------------------------

The Index's performance (i.e., the market value of all Index Stocks) is
calculated and made available each Business Day by Schwab. The total return of
the Index is computed monthly (using beginning of month capitalization
weightings and assuming reinvestment of dividends) and may be reported from time
to time to Fund shareholders.

- --------------------------------------------------------------------------------
SCHWAB PERIODICALLY UPDATES THE COMPOSITION OF THE INDEX.
- --------------------------------------------------------------------------------

Schwab reviews and, as necessary, revises the list of Small-Cap Issuers whose
securities are included in the Index at least semi-annually. Companies known by
Schwab to meet or no longer meet the inclusion criteria will be added or deleted
as appropriate. Schwab will also modify the Index as necessary to account for
corporate actions (e.g., new issues, repurchases, stock dividends/splits, tender
offers, mergers, swaps, spin-offs or Chapter 11 bankruptcy filings made because
of a company's inability to continue operating as a going concern). Schwab may
change Index inclusion criteria if it determines that doing so would cause the
Index to be more representative of the domestic equity market. In the future,
the Trust's Board of Trustees, subject to shareholder approval, may select
another index should it decide that taking such action would be in the best
interests of Fund shareholders.

MANAGEMENT OF THE FUND

Responsibility for overall management of the Fund rests with the Trustees and
officers of the Trust. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. In addition to providing
day-to-day management of the Fund, the Investment Manager provides general
investment advice regarding the Fund's investment strategies and performs
expense management, accounting and recordkeeping, and other administrative
services necessary to the operation of the Fund. The Investment Manager, formed
in 1989, is the investment adviser and administrator of the mutual funds in the
SchwabFunds Family(R), a family of 22 mutual funds. As of January 31, 1996,
SchwabFunds had aggregate net assets of approximately $33 billion.

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

11
<PAGE> 44

information services and provides products and services that help investors make
investment decisions. Schwab and the Investment Manager are wholly owned
subsidiaries of The Charles Schwab Corporation. Charles R. Schwab is the
founder, Chairman, Chief Executive Officer and a director of The Charles Schwab
Corporation and, as of January 31, 1996, the beneficial owner of approximately
20.1% of the outstanding shares of that corporation. Mr. Schwab may be deemed to
be a controlling person of Schwab and the Investment Manager.

Geri Hom is the portfolio manager of the Fund. She joined Schwab in March 1995
as Portfolio Manager -- Equities and currently manages the four Schwab index
funds and co-manages the three Schwab Asset Director(R) Funds with combined
assets of over $1.7 billion. For four years before joining Schwab, she was a
Principal for Wells Fargo Nikko Investment Advisors. For the prior seven years,
she was Vice President and Manager of the Domestic Equity Portfolio Management
Group for Wells Fargo Nikko.

Please see the Fund's Annual Report to Shareholders for the fiscal year ended
October 31, 1995 for a discussion by the Investment Manager of the Fund's
performance.

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

THE INVESTMENT MANAGER AND SCHWAB GUARANTEE THAT TOTAL FUND OPERATING EXPENSES
WILL NOT EXCEED 0.59% OF THE FUND'S AVERAGE DAILY NET ASSETS
THROUGH AT LEAST FEBRUARY 28, 1997.

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

FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from the Fund 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 has agreed to waive the Fund's management fee in excess
of 0.30% of the Fund's average daily net assets through at least February 28,
1997. In addition, the Investment Manager and Schwab guarantee that total fund
operating expenses will not exceed 0.59% of the Fund's average daily net assets
through at least February 28, 1997. This expense limit will serve to maintain or
lower the Fund's expenses and thus maintain or increase the Fund's total return
to shareholders. For the fiscal year ended October 31, 1995, the Fund paid
investment management fees and total fund operating expenses of 0.37% and 0.68%,
respectively, of the Fund's average daily net assets.

12
<PAGE> 45

portfolios or classes on the basis of relative net assets at the time the
expense is incurred. However, expenses directly attributable to a particular
Fund or class will be charged to that Fund or class.

DISTRIBUTIONS AND TAXES
- ---------------------------------------------------------------------
THE FUND WILL DECLARE AND PAY DIVIDENDS ANNUALLY.
- ---------------------------------------------------------------------

Dividends paid by the Fund from net investment income and distributions from the
Fund's net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable as
ordinary income. For corporate investors in the Fund, dividend distributions
designated by the Fund 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 Fund were a regular corporation.
Distributions received from the Fund 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 has
owned shares in the Fund. However, any loss on the sale or exchange of shares
held for six months or less shall, to the extent of any long-term capital gain
distributions received with respect to such shares, 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 Fund.

13
<PAGE> 46

SHARE PRICE CALCULATION
- ---------------------------------------------------------------
THE FUND SELLS ITS SHARES FREE OF SALES CHARGES.
- ---------------------------------------------------------------

The price of a single Fund share on any given day is the Fund's net asset value
per share or "NAV." This amount is computed by dividing the total market value
of the Fund's investments and other assets on that day, less any liabilities, by
the number of shares outstanding. The Fund's NAV is determined on each day the
Exchange is open for trading (a "Business Day") at 4:00 p.m., Eastern time. The
Fund's NAV will fluctuate, and Fund shares are not insured against reduction in
net asset value. Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt and verification by Schwab's
Mutual Fund Transfer Agency Department or its authorized agent. (See "Share
Price Calculations" in the Statement of Additional Information.)

The Fund values its portfolio securities daily based on their market value. Each
security held by the Fund 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 recently 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. 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 FUND SHOWS PERFORMANCE
- --------------------------------------------------------------------------------
THE FUND'S PERFORMANCE MAY BE ADVERTISED IN TERMS OF TOTAL RETURN.
- --------------------------------------------------------------------------------

From time to time the Fund may advertise its total return. Performance figures
are based upon historical results and are not intended to indicate future
performance.

14
<PAGE> 47

deposit, the Consumer Price Index and other investments for which reliable
performance data is available. The Fund's performance may also be compared to
averages, performance rankings or other information prepared by Lipper
Analytical Services, Inc. and Morningstar, Inc.

Additional performance information is included in the Fund's Annual Report to
Shareholders, which is available free of charge by calling 800-2 NO-LOAD or from
your local Schwab office.

TAX-ADVANTAGED RETIREMENT PLANS
- --------------------------------------------------------------------------------

RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES, AND THE FUND MAY
BE AN ESPECIALLY SUITABLE INVESTMENT FOR THEM.

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

GENERAL INFORMATION

ABOUT THE TRUST. 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 or classes of shares in one or more investment portfolios or
series ("Series"). Currently, shares of six 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 or class have equal,
noncumulative voting rights and equal rights as to distributions, assets and
liquidation of such Series, except to the extent such voting rights or rights to
distributions, assets and liquidation vary among classes of a Series.

15
<PAGE> 48

approve the investment advisory agreement), except when voting in the aggregate
is permitted under the Investment Company Act of 1940, as amended, such as for
the election of Trustees.

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

SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
exchange requests at any one of over 200 Schwab offices nationwide or by calling
800-2 NO-LOAD, 24 hours a day, where trained representatives are available to
answer questions about the Fund and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmations of such instructions and tape
recording telephone transactions.

To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.

HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND THROUGH A SCHWAB BROKERAGE,
SCHWAB ONE(R), IRA, TRUST OR KEOGH ACCOUNT.
- --------------------------------------------------------------------------------

You may purchase Fund shares through your Schwab account as described below. If
you already have a Schwab account, you need not open a new account.

16
<PAGE> 49

If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab account application (available by calling 800-2 NO-LOAD
or contacting your local Schwab office) and mail or deliver it to your local
Schwab office. You may also mail the application to Schwab at 101 Montgomery
Street, San Francisco, CA 94104. Corporations and other organizations should
call their local Schwab office to determine which additional forms may be
necessary to open a Schwab account.

PURCHASING SHARES THROUGH THE CHARLES SCHWAB TRUST COMPANY. You may also
purchase shares of the Fund though an account maintained with the Trust Company.
Payment for any such shares must be made directly to the Trust Company, and you
must have funds available in your account to purchase shares of the Fund.
Contact a Trust Company representative for more information.

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

YOUR INITIAL FUND INVESTMENT MAY BE AS LOW AS $1,000.

ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.

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

MINIMUM FUND INVESTMENT REQUIREMENTS. Your initial Fund investment may be as low
as $1,000 ($500 for IRAs, certain other retirement plans, and custodial
accounts). The minimum subsequent investment is $100. These requirements may be
reduced or waived on certain occasions. (See "Purchase and Redemption of Shares"
in the Statement of Additional Information.)

Schwab reserves the right to waive these minimums for clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

17
<PAGE> 50

time), they will be available for investment on the day of receipt. If funds
arrive after that time, they will be available for investment the next Business
Day.

BY PHONE:

BY MAIL:

Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, CA 94104 or to your local Schwab office
and should:

- reference your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);

- specify the name of the Fund and the dollar amount of shares you would
like purchased; and

- (initial share purchases only) select one of the distribution options
listed on the following page.

ELECTRONICALLY:

For information regarding how to purchase Fund shares electronically using
StreetSmart(TM), The Equalizer(R) and TeleBroker(R), call 800-2 NO LOAD.

IN PERSON AT A SCHWAB OFFICE:

Visit your local Schwab office where a representative will be happy to assist
you.

AUTOMATIC INVESTMENT:

YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS. You may select from the three
distribution options listed on the following page when you first become a Fund
shareholder. If you already are a shareholder and wish to change your
distribution option, please call your local Schwab office for assistance.

18
<PAGE> 51

1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gain
distributions will be reinvested in additional Fund shares. This option will
be selected automatically unless you specify another option. If you are
purchasing Fund shares through Schwab's Automatic Investment Plan, you must
choose this distribution option for this Fund.

2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in
cash, and any capital gain distributions will be reinvested in additional
shares.

3. ALL CASH: Dividends and any capital gain distributions will both be paid in
cash.

Dividends and distributions subject to reinvestment will be invested at the NAV
next determined after their record date. Cash distributions will be credited to
your Schwab account and will be held there or mailed to you depending on the
account standing instructions applicable to your account. For information on how
to wire funds from a Schwab account to a bank, see "Other Important
Information--Wire Transfers to Your Bank."

HOW TO SELL OR EXCHANGE SHARES

- ---------------------------------------------------------------------
FUND SHARES MAY BE EXCHANGED FOR SHARES OF OTHER
FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- ---------------------------------------------------------------------

SALE OF SHARES. Shares will be redeemed at the NAV next determined after receipt
and verification by Schwab's Mutual Fund Transfer Agency Department or its
authorized agent of proper redemption instructions, as set forth on the
following pages. 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 or its authorized agent receives your redemption instructions in
proper form. Redemption proceeds will then be held there or mailed to you
depending on the account standing instructions you selected. For information on
how to wire funds from your Schwab account to your bank, see "Other Important
Information -- Wire Transfers to Your Bank." If you purchased shares by check,
your redemption 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 Fund may suspend redemption rights or postpone payments when: trading on the
Exchange is restricted; the Exchange is closed for any reason other than its
customary weekend or holiday closings; emergency circumstances as determined by
the SEC exist; or for such other circumstances as the SEC may permit. The Fund
may also elect to invoke a 7-day period for cash settlement of individual

19
<PAGE> 52

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

EARLY WITHDRAWAL FEE PAID TO THE FUND. The Fund is meant to be a long-term
investment. Frequent trading in Fund shares by short-term investors increases
the Fund's costs. To offset the costs of short-term trading and to ensure that
long-term investors do not bear these costs, the Fund assesses a 0.50% (one-half
of one percent) early withdrawal fee upon redemption or exchange proceeds
attributable to shares purchased and held less than six months. To benefit Fund
shareholders directly, the early withdrawal fee is paid directly to the Fund and
does not apply to the redemption or exchange of shares acquired through
reinvestment of dividends or capital gains. Solely for purposes of calculating
the amount (if any) of the early withdrawal fee, shares will be treated as
redeemed on a "first-in first-out basis," except that shares acquired through
dividend reinvestment will be treated as redeemed first. This method of
calculating the fee should result in the lowest total early withdrawal fee. The
Fund reserves the right to waive this fee for certain clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

METHODS OF SELLING OR EXCHANGING SHARES.

BY PHONE:

To sell shares or to exchange shares between any of the SchwabFunds by
telephone, please call your local Schwab office during its regular business
hours or 800-2 NO LOAD, 24 hours a day. TDD users may contact Schwab at
800-345-2550, 24 hours a day. To properly process your telephone redemption or
exchange request, we will need the following information:

- your Schwab account number and your name for verification;

- the number of shares to be sold or exchanged;

- the name of the Fund from which you wish to sell or exchange shares;

- the name of the Fund and class into which shares are to be exchanged, if
applicable; and

- the distribution option you select (if exchanging shares).

20
<PAGE> 53

BY MAIL:

ELECTRONICALLY:

For more information regarding how to sell or exchange Fund shares
electronically using Street Smart(TM), The Equalizer(R) and TeleBroker(R),
please call 800-2 NO-LOAD.

IN PERSON AT A SCHWAB OFFICE:

You can also request a redemption or exchange in person at your local Schwab
office.

SCHWAB AUTOMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST, CONVENIENT WAY
TO MAKE REGULAR INVESTMENTS IN THE FUND.
- --------------------------------------------------------------------------------

Schwab's Automatic Investment Plan ("AIP") allows you to make periodic
investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. You can make automatic
investments in any amount, from $100 to $50,000, once you meet 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. As long as you are purchasing the Fund's
shares through AIP, all dividends and distributions paid to you by the Fund must
be reinvested in additional shares of that Fund. For more detailed information
about this service, or to establish your AIP, call your local Schwab office or
800-2 NO LOAD, 24 hours a day.

OTHER IMPORTANT INFORMATION

MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, the Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of the shareholder's account drops below the Fund's $500 minimum balance
requirement ($250 in the case of IRAs, other retirement plans and custodial
accounts.) Shareholders will be notified in writing 30 days before the Fund
takes such action to allow them to increase their holdings to at least the
minimum level. Fund shares will be automatically redeemed if the Schwab account
in which the shares are carried is closed.

21
<PAGE> 54

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

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

22
<PAGE> 55

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 56

SCHWAB SMALL-CAP
INDEX FUND(R)

Prospectus February 28, 1996

SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104

2015-5 (2/96) CRS 10169 Printed on recycled paper.

SchwabFunds(R)

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

BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB

--------------
<PAGE> 57

CROSS REFERENCE SHEET

SCHWAB CAPITAL TRUST:
SCHWAB S&P 500 FUND--INVESTOR SHARES AND E.SHARES(TM)

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

Synopsis Expenses; Key Features of Our Fund; Matching
the Fund to Your Investment Needs

Condensed Financial Information Not Applicable

General Description of Registrant Matching the Fund to Your Investment Needs;
Investment Objective and Policies; Investments
and Techniques Used by Our Fund and Related
Risks; Organization and Management of Our
Fund

Management of the Fund Organization and Management of Our Fund

Management's Discussion of Fund Performance [Discussion to be included in the Fund's
Shareholder Reports]

Capital Stock and Other Securities Investing in Our Fund; Important Information
About Your Investment; Organization and
Management of Our Fund

Purchase of Securities Being Offered Investing in Our Fund; Important Information
About Your Investment

Redemption or Repurchase Investing in Our Fund

Pending Legal Proceedings Not Applicable
</TABLE>

<PAGE> 58

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses................................... 2
Key Features of Our Fund................... 3
Matching the Fund to Your Investment
Needs.................................... 4
Investing in Our Fund...................... 6
How to Buy Investor Shares............... 7
How to Buy e.Shares...................... 8
How to Sell or Exchange Investor
Shares................................. 8
How to Sell or Exchange e.Shares......... 9
Investment Objective and Policies.......... 10
Investments and Techniques Used by
Our Fund and Related Risks............... 11
Important Information About
Your Investment.......................... 13
Dividends and Other Distributions........ 13
Federal Income Tax Information........... 14
How We Determine the Price of
Your Shares............................ 14
How Our Fund Reports Performance......... 15
Annual and Semi-Annual Report Mailings... 15
Organization and Management of Our Fund.... 15
Management Functions and
Responsibilities....................... 15
Operating Fees and Expenses.............. 16
Other Information on the Operation
of Our Fund............................ 17
Glossary of Important Terms................ 19
</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
shareholders, while references to "we," "us," "our" and "our Fund" refer to the
Fund or in some cases, the Trust.

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 S&P 500 FUND

SCHWAB S&P 500 FUND - INVESTOR SHARES
SCHWAB S&P 500 FUND - E.SHARES(TM)

THE SCHWAB S&P 500 FUND (THE "FUND") seeks to track the price and dividend
performance (total return) of common stocks of United States companies, as
represented by the Standard & Poor's Composite Index of 500 Stocks (the "S&P
500(R)" or "Index"). The Fund invests primarily in common stocks of companies
composing the S&P 500. The Fund is a diversified investment portfolio of Schwab
Capital Trust (the "Trust"), a no-load, open-end management investment company
managed by Charles Schwab Investment Management, Inc. (the "Investment Manager"
or "CSIM"). This Prospectus describes both of the Fund's classes of shares - the
Investor Shares and the e.Shares.

ABOUT THIS PROSPECTUS: THIS PROSPECTUS PROVIDES YOU WITH CONCISE INFORMATION
THAT YOU SHOULD KNOW BEFORE YOU DECIDE IF THE FUND PROVIDES THE INVESTMENT
OPPORTUNITIES YOU SEEK. READ IT CAREFULLY, AND RETAIN IT FOR FUTURE REFERENCE.
You can find more detailed information in the Statement of Additional
Information ("SAI"), dated February 28, 1996 (as amended from time to time). The
SAI 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). This
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
SAI 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:

INVESTOR SHARES: Contact your local Schwab office, or call 800-2 NO-LOAD
(800-266-5623). TDD users may contact Schwab at 800-345-2550, 24 hours a day.

E.SHARES: Use SchwabLink(TM) to contact Schwab Institutional or The Charles
Schwab Trust Company (the "Trust Company").

PROSPECTUS FEBRUARY 28, 1996

<PAGE> 59

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 Fund.

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

<TABLE>
<CAPTION>
INVESTOR
SHARES E.SHARES(TM)
-------- ---------
<S> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Sales Charge on Purchases
and Reinvested
Dividends................. None None
Deferred Sales Charge or
Redemption Fees........... None None
Exchange Fees............... None None
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENTAGE
OF AVERAGE DAILY NET
ASSETS)
Management Fee
(after fee
reduction)1............. 0.13% 0.13%
12b-1 Fees................ None None
Other Expenses (after fee
reduction and expense
reimbursement)2,3....... 0.36% 0.15%
-------- ---------
TOTAL FUND OPERATING
EXPENSES (AFTER FEE
REDUCTION AND EXPENSE
REIMBURSEMENT)3,4......... 0.49% 0.28%
</TABLE>

1 This amount reflects a reduction guaranteed by the Investment Manager through
at least February 28, 1997. If there were no such reduction, the maximum
management fee would be 0.36% of the Fund's average daily net assets.

2 "Other Expenses" are based on estimated amounts for the current fiscal year
for the Fund after fee reductions and expense reimbursements. If there were no
such reduction, the estimated other expenses of the Investor Shares and the
e.Shares would be 0.40% and 0.19%, respectively, of the average daily net
assets of that class of shares. See "Organization and Management of Our Fund -
Operating Fees and Expenses" for information regarding the differing expenses
for the Fund's multiple classes of shares.

3 This amount reflects the guarantee by Schwab and the Investment Manager that,
through at least February 28, 1997, the total operating expenses of each class
will not exceed 0.49% and 0.28% of the average daily net assets of the
Investor Shares and the e.Shares, respectively. After that, the guarantee may
be terminated, modified or continued. If there were no such guarantee, the
estimated total operating expenses of the Investor Shares and the e.Shares
would be 0.76% and 0.55%, respectively, of the average daily net assets of
that class of shares.

4 You may be charged a fee if applicable minimum balances are not maintained in
your Schwab brokerage or Schwab One(R) account. Schwab Individual Retirement
Accounts with balances of $10,000 or more by September 15, 1996 will not be
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. See "Investing
in Our Fund" for information regarding minimum balance and investment
requirements.

2
<PAGE> 60

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Investor Shares.............. $5 $16
e.Shares(TM)................. $3 $ 9
</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 February 28, 1997, total operating expenses of each class will
not exceed 0.49% and 0.28% of the average daily net assets of the Investor
Shares and the e.Shares, respectively. Please remember that, while this example
assumes a 5% annual return on investment, the actual returns of each class 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 Fund. (See
"Organization and Management of Our Fund - Operating Fees and Expenses.")

KEY FEATURES OF OUR FUND

INVESTMENT OBJECTIVE: seeks to track the price and dividend performance (total
return) of common stocks of United States companies as represented by the S&P
500. The S&P 500 is a widely recognized, unmanaged index of the prices of 500
large company common stocks selected by Standard & Poor's ("Index Stocks").
These stocks represent approximately 70% of the market value of all common
stocks publicly traded in the United States.*

The Index Stocks of the 50 largest companies of the S&P 500 account for
approximately 46% of the Index. Total returns for the S&P 500 assume
reinvestment of dividends and do not include fees such as those charged by the
Investment Manager. Total returns for the S&P 500 also do not reflect taxes,
brokerage commissions or other fees that you would pay if you invested directly
in all the Index Stocks.

The Fund seeks investment results that track, rather than beat, the total return
of the S&P 500. Thus, it does not "actively" choose investments in the same way
as actively managed stock funds do. Those funds choose investments based on
economic, financial and market factors and investment judgment. In contrast, the
Fund uses a "passive" or "indexing" strategy. It buys and sells stocks primarily
to match the Index, to invest cash from Fund share purchases or to obtain cash
for redemptions of Fund shares. Thus, the Fund and the Investment Manager
normally do not judge the merits of any particular stock. Under normal market
conditions, the Fund invests at least 80% of its total assets in Index Stocks.
For more detailed information, see "Investment Objective and Policies."

*Source: Standard & Poor's, December 1995.

STRATEGY: to invest in common stocks of companies composing the S&P 500 and to
minimize trading and other costs.

Common stock prices can be volatile in the short term. Market conditions or
other company, political and economic news often can cause large changes in a
stock's price. You should be comfortable with the volatility of an all-stock
investment and the risks of the stock market. When you sell your shares, they
may be worth more or less than what you paid for them. For more details on the
Fund's invest-

3
<PAGE> 61

ments and the risks associated with them, see "Matching the Fund to Your
Investment Needs - Risk Considerations," "Investment Objective and Policies" and
"Investments and Techniques Used by Our Fund and Related Risks."

MANAGEMENT. The Investment Manager, Charles Schwab Investment Management, Inc.,
currently manages the mutual funds in the SchwabFunds Family(R), a family of 22
mutual funds. The SchwabFunds had aggregate net assets of approximately $33
billion as of January 31, 1996. For more details, see "Organization and
Management of Our Fund."

MARKET PERFORMANCE. For the twenty years ended 1995, the S&P 500 provided an
average annual total return of 14.61%.* Total return figures for the S&P 500
assume reinvestment of all dividends paid by stocks included in the Index. These
figures do not include fees such as those charged by the Fund. They also do not
include taxes, brokerage or other fees that you would pay if you directly
invested in all the stocks of the Index.

*Source: Standard & Poor's, December 1995. Past performance of the S&P 500 does
not necessarily reflect future performance results of the S&P 500 or the Fund.

LOW-COST INVESTING. You pay no sales fees or charges when you buy or sell shares
of the Fund. The Investment Manager and Schwab guarantee that through at least
February 28, 1997, total operating expenses for the Investor Shares and the
e.Shares(TM) will not exceed 0.49% and 0.28%, respectively, of the average daily
net assets of that class of shares. After that, the guarantee may be terminated,
modified or continued. For more details, see
"Investing in Our Fund" and "Operating Fees and Expenses."

REDUCED TAXES. The Fund has adopted trading strategies that will attempt to
minimize capital gains and keep portfolio turnover low. This can help reduce
your current capital gains taxes. See "Investment Objective and Policies."

SHAREHOLDER SERVICES - INVESTOR SHARES. Schwab's professional representatives
are available toll-free 24 hours a day at 800-2 NO-LOAD to serve your account,
or you can visit or call your local Schwab office during regular business hours.

SHAREHOLDER SERVICES - E.SHARES(TM). The e.Shares are available only to clients
of Schwab Institutional and the Trust Company and to certain tax-advantaged
retirement plans who can execute their trading and information requests through
SchwabLink(TM). Transactions in the e.Shares are not available by telephone,
mail or in person. See "Investing in Our Fund."

CONVENIENT REPORTING. You receive regular Schwab statements that combine all
your investment activity, including mutual funds, on one report.

FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in the Investor Shares in amounts and at
intervals that you select. For more details, see "Schwab's Automatic Investment
Plan."

MATCHING THE FUND TO YOUR INVESTMENT NEEDS

We designed the Fund to provide you exposure to the growth potential of the
stock market. In the past, common stocks have outperformed most other securities
over time. The Fund may be appropriate for you if you have a long-term
investment horizon and want

4
<PAGE> 62

the growth potential of stock investments. Typical uses for the Fund may include
saving for retirement or college funding. The Fund is also appropriate for use
in IRAs and other retirement plans. A broadly-based stock index fund, like the
Fund, is also often used as a component of an asset allocation plan. While the
Fund is not a complete investment plan, you may use it as a "core" equity
investment around which you tailor your overall plan.

The Fund offers two different classes of shares - one of which may be
appropriate for you. Although both classes invest in the same portfolio of
stocks, the classes' operating expense ratios, and therefore their return and
per share net asset value, are different. The lower operating expense ratio of
the e.Shares(TM) reflects the substantially lower costs of entering transactions
and communicating with the Fund electronically through SchwabLink(TM).

The e.Shares are available only to clients of Schwab Institutional and the Trust
Company and to certain tax-advantaged retirement plans who can execute their
trading and information requests through SchwabLink. Transactions in e.Shares
are not available by telephone, mail or in person.

The Investor Shares are appropriate for investors who desire to transact or
communicate with the Fund in person, by telephone or by mail or who do not want
to be limited to using a computer for these purposes.

We seek investment results that track, rather than beat, the total return of the
S&P 500. Thus, we do not "actively" choose investments in the same way as
actively managed stock funds do. Those funds choose investments based on
economic, financial and market factors and investment judgment. In contrast, we
use a "passive" or "indexing" strategy. This means that we buy and sell stocks
primarily to match the Index, to invest cash from purchases or to obtain cash
for redemptions of Fund shares. The Fund and the Investment Manager normally do
not judge the merits of any particular stock. Thus, you should not expect our
Fund to match the potential returns of funds that aggressively seek growth.

We designed the Fund for long-term investors. You should not use the Fund to
speculate on short-term market movements. Doing so can disrupt our investment
strategy and operations. It also raises costs for other Fund investors. As a
result, we may refuse any purchase or exchange order that we deem to be
disruptive to the Fund or its investments.

RISK CONSIDERATIONS. Because we invest in substantially all of the 500 common
stocks composing the Index, investing in our Fund will expose you to stock risk.
Prices of many stocks or of a single stock may decline over short or even long
periods. However, diversity of stock holdings tends to reduce stock risk.
Because we own so many different stocks, our Fund is less sensitive to the
decline of any one of them than if it invested in fewer stocks. Their wide range
of industries also tends to lessen the impact of one industry's decline. Even
so, these factors cannot protect you from all possible losses.

Also, to better track the investment results of the S&P 500, we may engage in
certain stock futures contracts and options, which are types of derivative
transactions. Their potential return and risk can vary widely from type to type.
See "Investments and Techniques Used By Our Fund and Related Risks" in this
Prospectus and "Investment Securities" in the SAI for details about the
derivatives that we use and the limits on them. You should pay

5
<PAGE> 63

special attention to these descriptions of derivatives, for these investments
carry more risk potential than the Fund's other investments.

INVESTING IN OUR FUND

You may purchase shares through an account maintained with Schwab or through any
other entity that has been designated by Schwab. The following information
regarding the purchase, exchange and redemption of Investor Shares and
e.Shares(TM) through a Schwab account relates solely to transactions through
Schwab accounts and should not be read to apply to transactions through other
designated entities. For more information, see "Purchase and Redemption of
Shares" in the SAI.

NEW INVESTORS TO SCHWAB need to open a Schwab account by completing and signing
an 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 pages 7 and 8.

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

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 your securities, including Fund shares, that you hold
in a Schwab account. Of course, SIPC account protection does not protect you
from share price fluctuations.

SCHWAB ACCOUNT AND FUND MINIMUMS AND FEES

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

<TABLE>
<S> <C>
SCHWAB ACCOUNT MINIMUM BALANCE
Brokerage account................. $1,000
Custodial account................. $500
FUND INITIAL PURCHASE
Brokerage account................. $1,000
IRA, other retirement plan and
custodial account.............. $500
FUND ADDITIONAL PURCHASE
Any type of account............... $100
</TABLE>

Schwab reserves the right to waive these minimums for clients of Schwab
Institutional and the Trust Company and for certain tax-advantaged retirement
plans.

A quarterly fee of $7.50 will be charged on Schwab brokerage 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 at least one commissionable trade
within the last six months or if the shareholder's combined account balances at
Schwab total $10,000 or more. Schwab currently imposes no fee for opening a
Schwab One(R) account with a minimum balance of $5,000. Schwab One accounts with
balances below $5,000 are subject to a fee of $5 per month imposed by Schwab if
there have been fewer than two commissionable trades within the last twelve
months.

SPECIAL SUBSCRIPTION OFFERING

The distributor, Charles Schwab & Co., Inc., is soliciting subscriptions for
both Investor Shares and e.Shares of the Fund during an initial offering period,
which is currently scheduled

6
<PAGE> 64

to end April 30, 1996, subject to extension by the Fund and the distributor.
Shares of each class are being offered at the initial net asset value of $10 per
share. The Fund and its distributor reserve the right to withdraw, cancel or
modify the offering without notice and to refuse any order in whole or in part.
The Fund expects to commence continuous offerings of its Investor Shares and
e.Shares(TM) immediately following the settlement of the subscription offerings.

The 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. Orders to buy shares must be accepted by the Fund to be effective
and are not binding until the Fund confirms or accepts them in writing.

HOW TO BUY INVESTOR SHARES

You may place Investor Shares 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 Investor Shares 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. If we do not follow reasonable procedures to confirm that your
telephone order is genuine, we may be liable for any losses you may suffer from
unauthorized or fraudulent orders. These procedures may include requiring a form
of personal identification, 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 below.
- ------------------------------------------------------

Whether by phone, mail or in person, you must always provide the following
information:
- - your Schwab account number.
- - the name of the Fund and class of shares you wish to buy.
- - the amount you wish to invest.

BY PHONE

- - Call 800-2 NO-LOAD.

- - Place a buy order for your account.

- - TDD users may contact Schwab at 800-345-2550, 24 hours a day.

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.

- - After you mail your letter, it is irrevocable and may not be modified or
canceled.

ELECTRONICALLY
- - For more information regarding how to purchase Investor Shares electronically
using StreetSmart(TM), The Equalizer(R), TeleBroker(R) and SchwabLink(TM),
call 800-2 NO-LOAD.

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

7
<PAGE> 65

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

AUTOMATICALLY (INVESTOR SHARES ONLY)
- - Use Schwab Automatic Investment Plan.
- - Sign up for this service when opening your account.
- ------------------------------------------------------

SCHWAB'S AUTOMATIC INVESTMENT PLAN ("AIP") allows you to make periodic
investments in the Investor Shares and other 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. You may make investments
automatically from your Schwab account. You may use the uninvested cash in your
Schwab account or the proceeds of the redemption of shares of the Schwab Money
Fund linked to your Schwab account. In addition, you may use the Schwab
MoneyLink(R) Transfer Service. For more detailed information about this service
or to establish your AIP, call your local Schwab office or 800-2 NO-LOAD, 24
hours a day.

As long as you are purchasing Investor Shares through AIP, all distributions
paid by the Investor Shares must be reinvested in additional Investor Shares and
may not be received in cash.

HOW TO BUY E.SHARES(TM)

The e.Shares are available to clients of Schwab Institutional and the Trust
Company and to certain tax-advantaged retirement plans who can communicate with
Schwab through SchwabLink(TM). Transactions in e.Shares are not available by
telephone, mail or in person.

To enter your transactions, follow the specific transaction instructions in the
SchwabLink user manual.

In the event you experience electronic or mechanical difficulties with
SchwabLink, you should contact the Schwab Institutional trading desk at
800-367-5198 for assistance.

HOW TO SELL OR EXCHANGE YOUR SHARES

You can sell your Investor Shares and your e.Shares at any time as described
below. 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 shares for shares
of any other SchwabFunds class or series available to investors in your state if
your purchase meets the Fund's eligibility requirements. Thus, you can
conveniently modify your investments if your goals or market conditions change.
An exchange of shares between Funds will be treated as a sale of the shares for
federal income tax purposes, while an exchange of shares between classes of
shares of the same Fund should not be treated as a sale of the shares. Note that
you must meet the minimum investment requirements applicable to the shares you
wish to receive in an exchange. The Fund reserves the right on 60 days' written
notice to modify, limit or terminate the exchange privilege.

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

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

When Selling Shares:
- - your Schwab account number.

8
<PAGE> 66

- - the name of the Fund and class 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 wish to exchange.

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

- - the name of the Fund and class (if any) 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.

- - TDD users may contact Schwab at 800-345-2550, 24 hours a day.

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
- - For more information regarding how to sell or exchange Investor Shares
electronically using StreetSmart(TM), The Equalizer(R), TeleBroker(R) and
SchwabLink(TM), call 800-2 NO-LOAD.

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

HOW TO SELL OR EXCHANGE E.SHARES(TM)
------------------------------------------------------

To sell or exchange your e.Shares through SchwabLink the following information
is always needed:

When Selling Shares:

- - Your SchwabLink master account number and subaccount number.

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

- - the number of shares you wish to sell.

When Exchanging Shares:

- - Your SchwabLink master account number and subaccount number.

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

- - the number of shares you wish to exchange.
- - the name of the Fund and class (if any) into which shares are to be exchanged.
- - the distribution option you select.
- ------------------------------------------------------

To enter your transaction, follow the specific transaction instructions in the
SchwabLink user manual. Transactions in e.Shares are not available by telephone,
mail or in person. In the event you experience electronic or mechanical
difficulties with SchwabLink, you should contact the Schwab Institutional
trading desk at 800-367-5198 for assistance.

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 or its
authorized agent receives your sell instructions in proper form. Proceeds will
then be held there 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 for additional
information.

9
<PAGE> 67

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

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to seek to track the price and dividend
performance (total return) of common stocks of United States companies, as
represented by the S&P 500.

Under normal market conditions, the Fund invests at least 80% of its total
assets in Index Stocks. The Fund generally tries to match its Index Stock
holdings to those Stocks' weightings in the Index. In extraordinary
circumstances, the Fund may exclude an Index Stock from its holdings or include
a similar stock in its place if it believes that doing so will help achieve its
investment objective. The Fund may purchase securities of companies with which
it may be affiliated to the extent that these companies are represented in the
Index.

TAX EFFICIENCY. The Fund is managed to minimize the Fund's current capital gains
tax liability. This feature can make a real difference in your after-tax return,
especially if you are in a high tax bracket. The Fund has adopted a number of
policies that help reduce its portfolio turnover ratio and minimize the level of
current realized capital gains. These policies include selling the highest tax
cost securities first, not automatically rebalancing the portfolio to reflect
changes in the Index and trading only round-lots or large blocks of securities.
These policies will be utilized only to the extent they do not have a material
effect on the Fund's ability to track the performance of the Index.

Although the Fund focuses on Index Stocks, it may buy and sell other equity
securities and other types of instruments. It also buys and sells short-term
debt securities for cash management purposes. In addition, the Fund may use
options and futures contracts to adjust its correlation to the S&P 500.

The Fund typically will not track the performance of the S&P 500 perfectly. Fund
costs, fees and expenses impair the Fund's correlation, as

10
<PAGE> 68

do the amounts and timing of Fund cash inflows and outflows. Changes in the
securities markets can also inhibit the match. The Fund's strategy of minimizing
capital gains taxes and portfolio turnover also may cause differences. Over the
long term, the Fund will attempt to achieve a correlation between its
performance and that of the S&P 500 of 0.9 or better. A figure of 1.0 would
indicate perfect correlation. The Investment Manager monitors performance of the
Fund and the S&P 500 on a regular basis. In the unlikely event that the Fund
cannot achieve a long-term correlation of 0.9 or better, the Board of Trustees
will consider alternative arrangements.

INVESTMENTS AND TECHNIQUES
USED BY OUR FUND AND

RELATED RISKS

In seeking its objective, the Fund may buy and sell the investments and employ
the techniques described below. Please see the SAI for more details. The Fund's
investment policies and restrictions apply at the time the Fund makes an
investment. Except with respect to futures and options, later changes, such as
changed market values, do not require the Fund to sell the investment even if
the Fund could not then make the same investment.

The Fund's investment objective is fundamental and cannot be changed without
shareholder approval. The Fund's investment policies and techniques discussed
below are non-fundamental, unless otherwise noted. See "Investment Restrictions"
in the SAI for details. Because any investment involves risk, we cannot
guarantee achieving the Fund's objective.

EQUITY SECURITIES. Equity securities are ownership interests in the net worth of
a corporation. They include common stocks, preferred stocks, convertible
securities and warrants. In the past, they have outperformed most other
securities over time, though their prices can be volatile in the short term.
Market conditions or other company, political and economic news often can cause
large changes in a stock's price for the short term or long term. Smaller
company securities are especially sensitive to these factors.

SHORT-TERM DEBT SECURITIES. While the Fund tries to remain invested in Index
Stocks as fully as possible, it must manage cash flows resulting from the
purchase and sale of Fund shares. Thus, the Fund also may invest in U.S. Dollar
denominated short-term bonds and money market instruments. The Fund may buy debt
securities of or guaranteed by the U.S. government, its agencies or related
bodies. It also may use certificates of deposit, time deposits and bankers'
acceptances. The Fund may also buy commercial paper if the commercial paper has
one of an NRSRO's top two ratings or has comparable quality if it is unrated.
The Fund may enter into repurchase agreements using any of these debt
securities. It also may buy and sell shares of other mutual funds to manage its
cash flows.

THE FUND MAY USE FUTURES CONTRACTS AND OPTIONS. To track the Index in an
efficient and cost-effective manner, the Fund may use stock futures contracts
and options, which are types of derivative transactions. Specifically, the Fund
may enter into futures contracts and options on futures contracts provided that
the aggregate deposits required on these contracts do not exceed 5% of the
Fund's total assets. In addition, certain provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), may limit the Fund's use of futures
contracts and options.

11
<PAGE> 69

The Fund may use futures contracts and options for several reasons: to more
closely track the performance of the S&P 500(R); to reallocate the Fund's assets
among Index Stocks 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.

Trading costs for futures contracts and options often are less than the costs of
direct investments. Thus, the Fund may use these instruments to reduce the
Fund's total trading costs. Also, futures contracts only require a small initial
margin deposit. That way, the Fund often is able to keep a cash reserve for
future redemptions but in effect remain fully invested. The Fund sells futures
contracts upon net redemptions to avoid leverage.

Futures contracts and options pose certain risks. The values of futures
contracts and options may not perfectly track changes in the Index Stocks'
holdings. The secondary market for a futures contract also may not be liquid,
resulting in the Fund's inability to close a futures position before it settles.
The Fund seeks to avoid the risk of tracking error by careful selection of the
futures and options to match the Fund's holdings. It also buys and sells on a
national exchange that has an active and liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial. Low required margin deposits and the extremely high degree of
leverage of some contracts contribute to this risk. Thus, a relatively small
price change in a security or index linked to a futures contract may result in
immediate and substantial loss (or gain). When investing in futures contracts,
the Fund will segregate cash, cash-equivalents or liquid, high-quality debt
instruments in the amount of the underlying obligation.

Since the Fund will not use futures and options contracts for the purposes of
leveraging its portfolio, the Investment Manager does not believe that the Fund
is subject to the degree of risk frequently associated with futures and options
transactions.

ILLIQUID SECURITIES. As a fundamental policy, the Fund may 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 Fund has valued the
instrument.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities on
a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, the Fund will not pay for 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 the Fund.

REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreements. In a
repurchase agreement, the Fund buys a security at one price and agrees to sell
it back at a higher

12
<PAGE> 70

price. In the event of a bankruptcy or other default of a repurchase agreement
counterparty, the Fund may incur 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 Fund may borrow money only for temporary purposes to meet
redemption requests that it cannot otherwise meet without immediately selling
portfolio securities. The Fund may borrow up to one-third of its total assets
and pledge up to one-third of its total assets to secure such borrowings. The
Fund may not borrow to leverage. The Fund's borrowing and pledging policies are
fundamental.

SECURITIES LENDING: As a means of increasing income, the Fund may lend
securities it owns worth up to one-third of its total assets. Any loan must be
fully collateralized by the borrower at all times. If the borrower defaults or
becomes insolvent, the Fund may incur expenses or losses. The Fund may not
recover the loaned securities immediately and may even lose them entirely.

INVESTMENT COMPANIES. The Fund may buy shares of other investment companies,
including those managed by CSIM, the Investment Manager. These purchases will be
subject to the limitations imposed by the 1940 Act, and the Fund will make these
purchases only after obtaining any required regulatory approvals. Investment by
the Fund in other investment companies may cause you to bear duplicative fees
for certain services.

PORTFOLIO TURNOVER. The Fund anticipates that its annual portfolio turnover rate
will not exceed 100%.

IMPORTANT INFORMATION ABOUT
YOUR INVESTMENT

DIVIDENDS AND OTHER DISTRIBUTIONS

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

1. AUTOMATIC REINVESTMENT: We will reinvest all distributions in additional
shares of the Fund. The Fund chooses this option automatically unless you
specify otherwise. If you are purchasing Investor Shares through Schwab's AIP,
you must choose this distribution option for this Fund.

2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: We will pay you income dividends in
cash and invest capital gains for you in additional Fund shares.

3. ALL CASH: We will pay you both income dividends and any capital gain
distributions in cash.

The Fund reinvests distributions at the NAV determined on the declaration date.
We credit your cash distributions to your Schwab account on the date
distributions are payable. We leave them there or mail them to you, depending on
your standing account instructions.

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

The Fund will distribute substantially all of its net investment income each
year, as determined by the Board of Trustees. The Fund will distribute net
investment income and capital gains, if any, annually in December. You should be
aware that your per share equity in undistributed net investment income and
capital gains may be diluted by the continuing purchases and redemptions of the
Fund's

13
<PAGE> 71

shares. We will automatically reinvest all your distributions in additional
class shares unless you elect otherwise.

FEDERAL INCOME TAX INFORMATION

The following is only a very brief summary of how some of the federal income tax
laws affect you and the Fund. Thus, you must consult with your own tax adviser
about your particular tax situation.

The Fund intends to qualify as a regulated investment company under the Code. To
qualify, we will distribute substantially all of our investment company taxable
income and our capital gain net income (if any) each year. In addition, we will
meet certain other Code requirements. As a regulated investment company, we will
pay no federal income taxes insofar as we distribute our earnings to our
shareholders. Income we receive from certain foreign sources, however, may be
subject to foreign income taxes and withholding.

Dividends that the Fund pays to you from net investment income generally are
taxable to you as ordinary income. So are payments of the Fund's net short-term
capital gains in excess of any net long-term capital losses. Distributions that
the Fund designates as long-term capital gains (net of capital losses) are
generally taxable to you as long-term capital gains no matter how long you own
your Fund shares. These tax rules apply whether the Fund pays distributions in
cash or in reinvested shares.

If you are not subject to tax on your income, you may have different tax
treatment. In general, you will not pay tax on the Fund's distributions to you.

You should be aware that an exchange of Fund shares for shares of other
SchwabFunds(R) will be treated as a taxable event for federal income tax
purposes. However, an exchange between the Investor Shares and the e.Shares(TM)
should not be treated as a taxable event.

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

HOW WE DETERMINE THE PRICE OF YOUR SHARES

The price of a single Investor Share or e.Share of the Fund on any given day is
the net asset value per share of that class of shares. We determine NAVs each
Business Day at the close of trading on the Exchange, generally at 4:00 p.m.
Eastern time. We determine the price of each class of shares by first valuing
the total assets of the Fund attributable to that class, then subtracting that
class's share of any liabilities and dividing the balance by the number of
shares outstanding of that class.

The Fund values its portfolio securities based on market quotes if they are
readily available. If they are not readily available, the Investment Manager
assigns fair values to its assets in good faith under Board of Trustees
guidelines. The Fund values illiquid and restricted securities in this way. The
Board of Trustees regularly reviews these values. The Fund uses prices furnished
by pricing services if it believes that they reflect market values.

Purchase or redemption orders and exchange requests will be executed at the NAV
next determined after receipt by Schwab's Mutual Fund Transfer Agency Department
or its authorized agent.

14
<PAGE> 72

HOW OUR FUND REPORTS PERFORMANCE

From time to time the Fund may advertise the total return and yield of each
class of shares. These figures reflect past results and are not intended to
predict future performance. We will often compare our performance to the S&P
500(R) and other indices.

Total return measures the percentage change in the value of an investment in a
class of shares over time. It reflects all share price movements, distributions
and expenses. It assumes the reinvestment of all distributions. Average annual
total return is a measure of the yearly changes in the value of the investment.
It is the constant compound rate of return, which, if applied to the investment
each year, would result in the actual total return over that time. Other total
return figures we show may differ. We may base them on non-standard periods. We
may also show aggregate or cumulative returns.

Yield refers to the income generated by an investment in a class of shares over
a given period. It is expressed as an annualized percentage rate. Each class of
shares calculates yields according to an SEC standard for all stock and bond
funds. Because this differs from other accounting methods, each class of shares
may quote a yield not equal to the income that class actually pays to you.

The Investor Shares and the e.Shares(TM) are subject to different expenses. As a
result, their performances will differ.

ANNUAL AND SEMI-ANNUAL REPORT MAILINGS

Twice a year, the Fund provides you a report showing the performance of the Fund
and each class of its shares and outlining its investments. To reduce mailing
costs, we combine these mailings by household. If a household has multiple
accounts and the same record address for all the accounts, we send mailings for
all accounts at that address in a single package. If you do not want to combine
mailings for your account, please write to Schwab at the address on the front of
this Prospectus. To request a free copy of the Fund's Annual or Semi-Annual
Reports, call your local Schwab office or call 800-2 NO-LOAD.

ORGANIZATION AND
MANAGEMENT OF OUR FUND

MANAGEMENT FUNCTIONS AND RESPONSIBILITIES

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

THE INVESTMENT MANAGER. The Investment Manager, Charles Schwab Investment
Management, Inc. or CSIM, manages the Fund's business affairs. Its actions are
subject to the authority of the Board of Trustees and officers of the Trust. The
Investment Manager also manages the Fund's investments. It places all orders for
the Fund's securities transactions. The Investment Manager, founded in 1989, is
a wholly owned subsidiary of The Charles Schwab Corporation. It also acts as
investment manager and administrator to the mutual funds in the SchwabFunds
Family(R), a family of 22 mutual funds. As of January 31, 1996, the
SchwabFunds(R) had aggregate net assets of approximately $33 billion.

Geri Hom is the Fund's portfolio manager. She joined Schwab in March 1995 as
Portfolio Manager -- Equities and currently manages the four Schwab index funds
and the equity

15
<PAGE> 73

portions of the three Schwab Asset Director(R) Funds with combined assets of
over $1.7 billion. For four years before joining Schwab, she was a Principal for
Wells Fargo Nikko Investment Advisors. For the prior seven years, she was Vice
President and Manager of the Domestic Equity Portfolio Management Group for
Wells Fargo Nikko.

Stephen B. Ward, Senior Vice President and Chief Investment Officer, also
participates in the management of the Fund. Before April 1991, Mr. Ward was Vice
President and Portfolio Manager for Federated Investors.

TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as the Shareholder
Services Agent and Transfer Agent for the Fund. Schwab was established in 1971
and is America's largest discount broker. Schwab provides low-cost securities
brokerage and related financial services to approximately 3.3 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 January 31, 1996, the beneficial owner of approximately 20.1% 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

The Investment Manager provides investment management services under the terms
of its Investment Advisory and Administration Agreement with the Trust. For
these services, it is entitled to a graduated annual fee payable monthly from
the Fund. The rate is 0.36% of the first $1 billion of the Fund's average daily
net assets; 0.33% of the next $1 billion; and 0.31% of net assets over $2
billion.

The Investment Manager guarantees that, through at least February 28, 1997, the
management fees for each class of the Fund's shares will not exceed 0.13% of the
Fund's average daily net assets.

For its services as Transfer Agent, Schwab is entitled to receive an annual fee
from each class of shares of 0.05% of its average daily net assets. In addition,
for shareholder services provided, Schwab is entitled to receive from the
Investor Shares and the e.Shares(TM) an annual fee of 0.20% and 0.05%,
respectively, of the average daily net assets of that class of shares. Schwab
may absorb certain expenses incurred by each class of shares for these services
in order to limit its ratio of operating expenses.

The Investment Manager and Schwab also guarantee that, through at least February
28, 1997, total operating expenses of the Fund allocable to the Investor Shares
and the e.Shares will not exceed 0.49% and 0.28%, respectively, of the average
daily net assets of that class of shares. For purposes of this guarantee,
"operating expenses" do not include 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 each class's total
return to shareholders.

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

16
<PAGE> 74

OTHER EXPENSES. The Trust pays the expenses of the Fund's operations. These
expenses include the fees and expenses for independent auditors, legal counsel
and custodians; the cost of maintaining books and records of account;
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 Fund seeks to keep transaction costs and other
expenses low.

These expenses will generally be allocated among the Trust's investment
portfolios or classes on the basis of relative net assets at the time the
expense is incurred. However, such expenses directly attributable to a
particular Fund or class will be charged to that Fund or class. The differing
expenses applicable to the Investor Shares and the e.Shares(TM) of the Fund will
cause the performance of the classes to differ.

PORTFOLIO BROKERAGE. When placing orders for the Fund's securities transactions,
the Investment Manager uses its judgment to obtain the best price and execution.
It considers the full range and quality of brokerage services available in
making these determinations. For securities transactions in which Schwab is not
a principal, the Investment Manager may use Schwab or other qualified affiliated
brokers or dealers to execute the Fund's transactions. To do so, it must
reasonably believe that commissions or prices paid to and transaction quality
received from Schwab or other qualified affiliated brokers or dealers will be at
least comparable to those available from qualified non-affiliated brokers or
dealers.

OTHER INFORMATION ON THE OPERATION OF OUR FUND

The Trust is a business trust formed under the laws of Massachusetts on May 7,
1993. It may issue an unlimited number of shares of beneficial interest in one
or more Series or classes. Currently it offers shares of six Series. 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 distributions, assets and liquidation
of such Series except to the extent that such voting rights or rights as to
distributions, assets and liquidation vary among classes of a Series.

The Fund's two classes of shares represent ownership of the same investment
portfolio. The differing expenses applicable to the two classes cause their
distributions and share prices to differ.

Due to the relatively high cost of maintaining accounts with smaller holdings,
the Fund reserves the right to redeem your shares if, as a result of
redemptions, the aggregate value of your account drops below the Fund's $500
minimum balance requirement ($250 in the case of IRAs, other retirement plans
and custodial accounts). You will be given 30 days' advance written notice and a
chance to increase your Fund balance to the minimum requirement before the Fund
redeems your shares. Fund shares will be automatically redeemed should the
Schwab account in which they are carried be closed.

17
<PAGE> 75

SHAREHOLDER MEETINGS. The Trust is not required to hold annual shareholders'
meetings and does not intend to do so. It may, however, hold special meetings in
connection with certain matters. These include a change in a Fund's fundamental
policies, election or removal of Trustees or approval of or amendment to any
investment advisory agreement. In addition, shareholders may remove a Trustee 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 the Fund's management or
fundamental policies, we would ask you to vote as a shareholder. If we hold a
meeting 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 return. Shareholders have 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.
In addition, holders of each class of shares will vote exclusively as a class on
any matter relating solely to their arrangement as a class and on any matter in
which the interest of that class differs from the interest of any other class in
that Fund.

SHARE CERTIFICATES. To assist in minimizing administrative costs, share
certificates will not be issued. Records regarding share ownership are
maintained by the Transfer Agent.

S&P 500 LICENSE. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's ("S&P"). S&P makes no representation or warranty, express or
implied, to the shareholders of the Fund or any member of the public regarding
the advisability of investing in securities generally or in the Fund
particularly or the ability of the S&P 500 Index to track general stock market
performance. S&P's only relationship to the Fund is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index, which is determined,
composed and calculated by S&P without regard to the Fund. S&P has no obligation
to take the needs of the Fund or its shareholders into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
Fund shares, the timing of the issuance or sale of Fund shares or in the
determination or calculation of the equation by which the Fund's shares are to
be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Fund's shares.

S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein, and S&P shall have no liability for any errors,
omissions or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the Fund, its shareholders or any other person
or entity from the use of the S&P 500 Index or any data included therein. S&P
makes no express or implied warranties and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect or consequential damages (including lost profits), even if notified of
the possibility of such damages.

18
<PAGE> 76

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 would happen if the
results were 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. Upon maturity, 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 the New York Stock Exchange is 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
relative to 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.

CSIM: The Fund's Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104.

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 gain 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 SAI.

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

INVESTMENT MANAGER: Charles Schwab Investment Management, Inc. (or CSIM), 101
Montgomery Street, San Francisco, CA 94104.

LARGE COMPANY STOCKS: The stocks of companies with the largest market
capitalizations, i.e., market capitalizations above approximately $1.5 billion.

MARKET VALUE: The total value of a company as represented by the share price
times the number of shares outstanding.

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

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

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

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

NRSRO: nationally recognized statistical rating organization.

19
<PAGE> 77

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(R): an index of 500 stocks selected, calculated and published by
Standard & Poor's ("S&P"). S&P is neither an affiliate nor sponsor of the Fund,
and inclusion of a stock in the Index does not necessarily imply that it is a
good investment. "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard &
Poor's 500" and "500" are trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by Schwab Capital Trust.

SAI: the Trust's Statement of Additional Information, as amended from time to
time.

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 the Fund's portfolio investments, maturing in 397
days or less.

STOCK RISK: the possibility that stock prices in general or particular will
decline over short or even extended periods.

TOTAL RETURN: the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gains. Cumulative
total return reflects actual performance over a stated period of time. Average
annual total return is a hypothetical rate of return that would have produced
the same cumulative total return if performance had been constant over the
entire period. Average annual total returns smooth out variations in
performance; they are not the same as actual year-by-year results.

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

20
<PAGE> 78

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 79

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 80

THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 81

[OBC TO COME]
<PAGE> 82
CROSS REFERENCE SHEET

SCHWAB CAPITAL TRUST

<TABLE>
<CAPTION>
Statement of Additional
Part B Item Information Caption
- ----------- -----------------------
<S> <C>
Cover Page Cover Page

Table of Contents Table of Contents

General Information and History General Information

Investment Objectives and Policies Investment Objectives; Investment Securities;
Investment Restrictions

Management of the Fund Management of the Trust

Control Persons and Principal Holders of Management of the Trust; General Information
Securities

Investment Advisory and Other Services Management of the Trust

Brokerage Allocation and Other Practices Portfolio Transactions and Turnover

Capital Stock and Other Securities General Information

Purchase, Redemption and Pricing of Securities Share Price Calculation; Purchase and
Being Offered Redemption of Shares

Tax Status Taxes

Underwriters Management of the Trust

Calculation of Performance Data How the Funds Reflect Performance

Financial Statements Financial Statements
</TABLE>
<PAGE> 83
STATEMENT OF ADDITIONAL INFORMATION

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

FEBRUARY 28, 1996

This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectuses, dated February 28, 1996 (as
amended from time to time) for Schwab International Index Fund(TM) (the
"International Index Fund") and Schwab Small-Cap Index Fund(R) (the "Small-Cap
Index Fund"), the joint Prospectus dated September 25, 1995, as amended December
8, 1995 (and as further amended from time to time), 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")
and the joint prospectus dated February 28, 1996 (as amended from time to time)
for the Investor Shares and the e.Shares(TM) of the Schwab S & P 500 Fund (the
"S & P 500 Fund"), six 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. TDD users may contact Schwab at 800-345-2550, 24 hours a day. These
Prospectuses are also available electronically by using our Internet address:
http://www.schwab.com.

SCHWABFunds(R)
800-2 NO-LOAD

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES.......................................................................................... 2
INVESTMENT SECURITIES.......................................................................................... 3
INVESTMENT RESTRICTIONS........................................................................................ 24
MANAGEMENT OF THE TRUST........................................................................................ 26
PORTFOLIO TRANSACTIONS AND TURNOVER............................................................................ 34
TAXES.......................................................................................................... 36
SHARE PRICE CALCULATION........................................................................................ 39
HOW THE FUNDS REFLECT PERFORMANCE.............................................................................. 40
THE BENEFITS OF INTERNATIONAL INVESTING........................................................................ 41
INDEXING AND THE SCHWAB INDEX FUNDS............................................................................ 41
GENERAL INFORMATION............................................................................................ 46
PURCHASE AND REDEMPTION OF SHARES.............................................................................. 48
OTHER INFORMATION.............................................................................................. 48
COMPANIES IN THE SCHWAB INTERNATIONAL INDEX.................................................................... 50
COMPANIES IN THE SCHWAB SMALL-CAP INDEX........................................................................ 60
FINANCIAL STATEMENTS........................................................................................... F-1
</TABLE>

<PAGE> 84

INVESTMENT OBJECTIVES

SCHWAB INTERNATIONAL INDEX FUND(TM)

The investment objective of the International Index Fund is to attempt
to track the price and dividend performance (total return) of the Schwab
International Index(R) (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(R)

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
IndexTM (the "Small-Cap Index"), an index created to represent the performance
of common stocks of the second 1,000 largest 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 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 income and more growth potential than an all-bond
portfolio. This Fund's stock component is designed to help offset inflation.

SCHWAB S&P 500 FUND-INVESTOR SHARES

SCHWAB S&P 500 FUND - e.SHARES(TM)

The Fund's investment objective is to track the price and dividend
performance (total return) of common stocks of United States companies, as
represented by the S&P 500.

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").

2
<PAGE> 85

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. Securities of
foreign companies have less volume, are less liquid and are more volatile than
securities of U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
International Index Fund and the Asset Director Funds endeavor 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 is 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 the 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

3
<PAGE> 86
companies in which the International Index Fund and the Asset Director Funds 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 that trade a small number of securities. Prices on these exchanges tend
to be volatile, and securities in these countries have historically 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.

DEPOSITARY RECEIPTS

Each of the Asset Director Funds may invest up to 5% of its total
assets in American Depositary Receipts and European Depositary Receipts (ADRs
and EDRs) which are receipts representing ownership of shares 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, which means that the Funds will own the
securities subject to the option so long as the option is outstanding. The
purpose of

4
<PAGE> 87
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 may also 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.

Risks Associated With Options Transactions. There is no assurance that

5
<PAGE> 88
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 transactions
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 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 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 circumstances. The International Index Fund and
the Asset Director Funds may

6
<PAGE> 89
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
transaction's settlement date. 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 position and/or transaction hedging, the International
Index Fund and the Asset Director Funds may purchase or sell foreign currencies
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
ability of the International Index Fund and the Asset Director Funds to engage
in hedging transactions may be limited by tax considerations. Transaction and
position hedging do not eliminate fluctuations in the underlying prices of the
securities which the Funds own or expect to purchase or sell. They simply
establish a rate of exchange that one can achieve at some future point in time.

7
<PAGE> 90

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 that 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 ability of the
International Index Fund and the Asset Director Funds 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 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

8
<PAGE> 91
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 that
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 their options in order to realize any 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 covered call option writers, are unable to effect a

9
<PAGE> 92

closing purchase transaction in a secondary market, they will not be able to
sell the underlying currency (or security denominated in that currency) until
the option expires or they deliver 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. This could result in an exchange instituting special
procedures that 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 their
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

The Funds may purchase and sell various kinds of futures contracts and
options on futures contracts. 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. 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. The Funds are
not permitted to engage in speculative futures trading.

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 their 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 effect anticipated purchases. Similarly, the International
Index Fund and the Asset Director Funds can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and their portfolio securities that are denominated in such currency. The
International Index Fund and the Asset Director Funds can purchase futures
contracts on a 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

10
<PAGE> 93
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 currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.

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
that 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 that 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.

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

11
<PAGE> 94

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 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 Investment 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 be substantially 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 will 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 expect the prices or currency exchange rates then available
in the applicable market to be less favorable than prices that are currently
available.

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

Regulations of the Commodities Futures Trading Commission ("CFTC")
applicable to the Funds generally require that all of their futures transactions
constitute "bona fide" hedging transactions. As a result, a Fund will normally
sell futures contracts to protect against a decrease in the price of securities
it owns but intends to sell or purchase futures contracts to protect against an
increase in the price of securities it intends to purchase. In

12
<PAGE> 95

addition, the Funds may purchase and sell futures contracts and options as a
substitute for a comparable market position in the underlying securities.
Futures transactions need not constitute "bona fide" hedging under CFTC
regulations if the aggregate initial margin and premiums required to establish
such positions do not exceed 5% of each Fund's net assets.

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

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

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

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

13
<PAGE> 96

Fund has an open position in a futures contract or option.

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

SWAPS

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

14
<PAGE> 97

bonds that are investment grade, convertible preferred stocks and warrants. The
S&P 500 Fund will not purchase convertible securities directly. It may, however,
hold convertible securities to the extent that such holdings are incident to the
Fund's ownership of common stocks.

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.

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
price 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 and the
S&P 500 Fund may invest in common stocks of domestic companies principally
engaged in precious metal-related activities which include companies principally
engaged in the extraction, processing, distribution or marketing of precious
metals 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

15
<PAGE> 98

also invest in securities of foreign companies principally engaged in the
precious metals industry. For further disclosure on foreign securities, see
"Foreign Investments" in this Statement of Additional Information.

The Asset Director Funds and the S&P 500 Fund 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 and the S&P 500 Fund 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 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 U.S. government are supported by the full faith and credit of the U.S.
Treasury. While obligations of certain U.S. government agencies and
instrumentalities are similarly backed, those of others, such as the Federal
National Mortgage Association and the Student Loan Marketing Association, are
only supported by the right of the issuer to borrow from the U.S. Treasury, the
discretionary authority of the U.S. Government to purchase the agency's
obligations or the credit of the issuing agency or instrumentality. There can be
no assurance that the U.S. government would provide financial support to U.S.
government sponsored agencies or instrumentalities if it 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 U.S. Treasury only when 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 interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of

16
<PAGE> 99

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 indicates. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the realized yield or average life of a particular issue of
pass-through certificates. Prepayment rates are important because of their
effect on the yield and price of the securities. Accelerated prepayments
adversely impact yields for pass-throughs purchased at a premium (i.e., a price
in excess of principal amount) and may involve additional risk of loss of
principal because the premium may not 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 mortgage securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.

The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. government. 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

17
<PAGE> 100

mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. The FHLMC guarantees timely monthly payment of interest
on PCs and the ultimate payment of principal.

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

FNMA Securities. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages 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 U.S. Government.

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

18
<PAGE> 101
any defaults by the obligors on the underlying assets not covered by any credit
support.

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

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 that 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

19
<PAGE> 102
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 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 of additional credit card charges made on an
account to the pool of assets supporting the related Credit Card Receivable
Securities. The initial fixed period 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.

20
<PAGE> 103

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

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 that are acquired by the International Index Fund and the
Asset Director Funds outside the U.S. and that are publicly traded in the U.S.,
on a foreign securities exchange or in a foreign securities market are not
considered by the Funds to be illiquid assets provided that: (i) the Funds
acquire and hold the securities with the intention of reselling the securities
in the foreign trading market, (ii) the Funds reasonably believe they can
readily dispose of the securities in the foreign trading market or for cash in
the U.S., or (iii) 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 regarding convertibility or exchange rates could result in
investment losses for the Funds. Investments in foreign securities may also
subject the Funds to losses due

21
<PAGE> 104

to nationalization, expropriation or differing accounting practices and
treatments. Moreover, investors should recognize that foreign 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,
securities subject to repurchase agreements may have maturity dates in excess of
one year from the effective date of the repurchase agreements. The transaction
requires the initial collateralization of the seller's

22
<PAGE> 105

obligation with securities having a market value, including accrued interest,
equal to at 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
net 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' portfolios 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.

23
<PAGE> 106

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 U.S. government, its agencies
or instrumentalities) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer.

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, the
Small-Cap Index Fund and the S&P 500 Fund may purchase securities under such
circumstances only to the extent that the Schwab International Index(R), the
Schwab Small-Cap IndexTM or the S&P 500(R), respectively, is also so
concentrated).

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

4) Purchase or retain securities of an issuer if any of the
officers, trustees or directors of the Trust or the Investment 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 and the S&P 500 Fund, 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 SEC.

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

24
<PAGE> 107
agreements) that are publicly distributed or customarily purchased by
institutional investors, and (ii) lend its portfolio securities.

9) Borrow money or issue senior securities except that each Fund
may borrow 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.

25
<PAGE> 108
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.

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 the Investment Manager, are as
follows:

<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
------------- --------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Founder, Chairman, Chief Executive Officer and
July 29, 1937 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; Chairman and Director, and Chairman
(officer position) until December 1995,
Mayer & Schweitzer, Inc. (a securities brokerage
subsidiary of The Charles Schwab Corporation);
Director, The Gap, Inc. (a clothing retailer),
Transamerica Corporation (a financial services
organization), AirTouch Communications (a
telecommunications company) and Siebel Systems
(a software company).
</TABLE>

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

26
<PAGE> 109

<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
------------- --------- --------------------
<S> <C> <C>
TIMOTHY F. McCARTHY** President and Trustee Executive Vice President - Mutual Funds, Charles
September 19, 1951 Schwab & Co., Inc. and The Charles Schwab
Corporation; Chief Executive Officer, Charles
Schwab Investment Management, Inc. From 1994 to
1995, Mr. McCarthy was Chief Executive Officer,
Jardine Fleming Unit Trusts Ltd.; Executive
Director, Jardine Fleming Holdings Ltd.;
Chairman, Jardine Fleming Taiwan Securities Ltd.;
and Director of JF India and Fleming Flagship,
Europe. Prior to 1994, he was President of
Fidelity Investments Advisor Group, a division of
Fidelity Investments in Boston.

DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
September 23, 1931 Associates (advertising and marketing/consulting).

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

DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (real estate
June 28, 1938 investment). Prior to 1993, Mr. Stephens was

Chairman and Chief Executive Officer of the Bank of
San Francisco.

MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 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
November 16, 1945 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.

</TABLE>

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

27
<PAGE> 110

<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
------------- --------- --------------------
<S> <C> <C>

WILLIAM J. KLIPP* Senior Vice President, Senior Vice President, Charles Schwab & Co., Inc.;
December 9, 1955 Chief Operating Officer President and Chief Operating Officer, Charles
and Trustee Schwab Investment Management, Inc. Prior to 1993,
Mr. Klipp was Treasurer of Charles Schwab & Co.,
Inc. and Mayer & Schweitzer, Inc.

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

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

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

CHRISTINA M. PERRINO Assistant Secretary Vice President and Senior Counsel - Charles Schwab
June 16, 1961 Investment 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 and Schwab Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.

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

28
<PAGE> 111

<TABLE>
<CAPTION>
COMPENSATION TABLE(1)

Pension or
Retirement
Benefits Estimated
Accrued as Part Annual Benefits
of Fund Upon Total
Aggregate Expenses from Retirement from Compensation
Name of Person, Compensation the Fund the Fund from the Fund
Position from 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(3), 0 N/A N/A 0
President and Trustee

Timothy F. McCarthy(4), 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 60,500
Trustee

Robert G. Holmes, 16,000 N/A N/A 60,500
Trustee

Donald R. Stephens, 16,000 N/A N/A 60,500
Trustee

Michael W. Wilsey, 16,000 N/A N/A 60,500
Trustee
</TABLE>

1 Figures are for the Trust's fiscal year ended October 31,
1995.

2 "Fund Complex" comprises all 23 funds of the Trust, The
Charles Schwab Family of Funds, Schwab Investments and Schwab
Annuity Portfolios.

3 Ms. Sawi served as President and Trustee until October 1995.

4 Mr. McCarthy became President and Trustee in October 1995.

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

29
<PAGE> 112

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

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

Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account"), as of the
date such fees would have been paid to such Trustee. The value of the Deferred
Fee Account as of any date will be equal to the value the Account would have had
as of that date if the amounts credited to the Account had been invested 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 mutual funds in the
SchwabFunds Family(R), a family of 22 mutual funds with approximately $33
billion in assets as of January 31, 1996. 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 May 30, 1997 with respect
to each of the Funds and thereafter will continue for one year terms subject to
annual approval by: (1) the Trust's Board of Trustees or (2) a vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of a
Fund. In either event, the continuance must also be approved by a majority of
the Trust's Board of Trustees who are not parties to the Agreement or interested
persons (as defined in the 1940 Act) of any such party by vote cast in person at
a meeting called for the purpose of voting

30
<PAGE> 113

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
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 February 28, 1997, 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 years ended October 31, 1995 and 1994 and for the fiscal
period from September 9, 1993 (commencement of operations) to October 31, 1993,
the International Index Fund paid investment advisory fees of $665,000,
$474,000, and $0, respectively (fees were reduced by $415,000, $388,000, and
$98,000, respectively).

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
February 28, 1997, 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 year ended October 31, 1995 and 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 $332,000 and $152,000,
respectively (fees were reduced by $115,000 and $107,000, respectively).

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 each Asset
Director Fund will not exceed 0.89% of the Fund's average daily net assets.

S&P 500 Fund. For its advisory and administrative services to the S&P
500 Fund, the Investment Manager is entitled to receive a graduated annual fee,
payable monthly, of 0.36% of the Fund's average daily net assets not in excess
of $1 billion, and 0.33% of the next $1 billion; and 0.31% of such net assets
over $2 billion.

31
<PAGE> 114

The Investment Manager and Schwab have guaranteed that, through at
least February 28, 1997, the total operating expenses allocable to the Investor
Shares and the e.Shares(TM) will not exceed 0.49% and 0.28%, respectively, of
the average daily net assets of that class of shares.

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").

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 the
aggregate average daily net assets of the Asset Director Funds, 0.06% of the
next $150 million, 0.04% of the next $600 million

32
<PAGE> 115

and 0.02% of the Funds' aggregate average daily net 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: for the fiscal years ended October 31, 1995
and 1994 and for the fiscal period from September 9, 1993 (commencement of
operations) to October 31, 1993, $143,000, $185,000, and $21,000 respectively.

Small-Cap Index Fund: for the fiscal year ended October 31, 1995 and
for the fiscal period from December 3, 1993 (commencement of operations) to
October 31, 1994, $36,000 and $51,000, respectively.

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
International Index Fund, the Small-Cap Index Fund and the Asset Director Funds.

PNC Bank, National Association, at the Airport Business Center, 200
Stevens Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for
the S&P 500 Fund. PFPC Inc., at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as Fund Accountant for the S&P 500 Fund.

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

33
<PAGE> 116
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, 1301 K Street, N.W., Suite 800 East, Washington, D.C.
20054, is counsel to the Trust.

PORTFOLIO 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 or any other
affiliated broker-dealer as its broker for executing orders for the Funds on
securities exchanges, the Investment Manager will consider (if relevant)

34
<PAGE> 117

whether the compensation to be paid Schwab or any other affiliated broker-dealer
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 or any other affiliated broker-dealer 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 or any other affiliated broker-dealer within the meaning of
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 or
any other affiliated broker-dealer have met the standards.

Brokerage services provided by Schwab 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 years ended October 31, 1995 and
1994 and for the fiscal period from September 9, 1993 (commencement of
operations) to October 31, 1993, the International Index Fund paid brokerage
commissions of $54,718, $86,127, $170,195, respectively. For the fiscal year
ended October 31, 1995 and for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994, the Small-Cap Index Fund paid
brokerage commissions of $142,785 and $165,997, respectively.

PORTFOLIO TURNOVER

For reporting purposes, each Fund's turnover rate is calculated by

35
<PAGE> 118
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 turnover rate may increase a
Fund's transaction costs. The International Index Fund's portfolio turnover rate
for the fiscal years ended October 31, 1995 and 1994 was 0% and 6%,
respectively. The Small-Cap Index Fund's portfolio turnover rate for the fiscal
year ended October 31, 1995 and for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994 was 24% and 16%, respectively.

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

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, U.S. government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. government securities or
securities of

36
<PAGE> 119

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
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 are subject to special tax rules. In a given case, these rules may
accelerate income to a Fund, defer its losses, cause adjustments in the holding
periods of the Fund's assets, convert short-term capital losses into long-term
capital losses or otherwise affect the character of the Fund's income. These
rules could therefore affect the amount, timing and character of distributions
to shareholders. 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 in which they were 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

37
<PAGE> 120
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 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,

38
<PAGE> 121

such equity investments. To the extent the International Index Fund and the
Asset Director Funds do invest in PFICs, 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.

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
daily based on their market value. Each security held by the Funds that 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

39
<PAGE> 122

such prices are believed to reflect fair market value.

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 year ended October 31, 1995 and for the
fiscal period from September 9, 1993 (commencement of operations) to October 31,
1995, the International Index Fund's average annual total return was 3.35% and
5.95%, respectively. For the fiscal year ended October 31, 1995 and for the
fiscal period from December 3, 1993 (commencement of operations) to October 31,
1995, the Small-Cap Index Fund's total return was 17.11% and 8.97%,
respectively.

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

40
<PAGE> 123
ratings of mutual fund rating services, various indices of investment
performance, United States government obligations, bank certificates of deposit,
the consumer price index, and other investments for which reliable data is
available.

The Asset Director 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 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
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

41
<PAGE> 124
& 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, while the Index does not have these
expenses. In addition, various factors, such as holding a cash balance, may
cause the Funds' performance to be higher or lower than that of the Index.

THE SCHWAB INTERNATIONAL INDEX(R)

The Schwab International Index(R) 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(R) 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, 1995 have been exceeded by very few
types of securities investments. Because the unmanaged performance of the U.S.
stock

42
<PAGE> 125

market 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. 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, returns in 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, have significantly exceeded
the returns of U.S. Treasury Bills, CDs, corporate bonds and inflation.

THE S&P 500 INDEX

The Standard and Poor's 500 Composite Stock Price Index, known as the
S&P 500 Index, is representative of the performance of the U.S. stock market.
The Index consists of 500 stocks chosen for market size, liquidity, and industry
group representation. It is a market-value weighted index (stock price times
number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The S&P does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
Index are among the largest, there are also some relatively small companies in
the Index. Those companies, however, are generally established companies within
their industry group. S&P identifies important industry groups within the U.S.
economy and then allocates a representative sample of stocks with each group to
the S&P 500. There are four major industry sectors within the Index:
Industrials, Utilities, Financial and Transportation.

ASSET ALLOCATION STRATEGIES USING SCHWABFUNDS(R)

Shareholders of SchwabFunds may wish to invest in the SchwabFunds as
components of their personal asset allocation plan. They may also choose to
invest in the Schwab Asset Director Funds, which offer the benefits of asset
allocation in a single fund. 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 ServiceTM ("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

43
<PAGE> 126
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
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
U.S. stock market.

44
<PAGE> 127

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(R)(2)

Schwab Asset Director(R)-High Growth Fund(2)
Schwab Asset Director(R)-Balanced Growth Fund(2)
SchwabAsset Director(R)-Conservative Growth Fund(2)

Schwab S&P 500 Fund-Investor Shares(2)

Schwab S&P 500 Fund-e.Shares(TM)(2,3)

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

MONEY MARKET FUNDS(5)

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 Shares(TM)

Schwab California Tax-Exempt Money Fund-Sweep Shares(4)

Schwab California Tax-Exempt Money Fund-Value Advantage Shares(TM)(4)

Schwab Retirement Money Fund(R)(6)

Schwab Institutional Advantage Money Fund(TM)(6)

Schwab New York Tax-Exempt Money Fund-Sweep Shares(7)

Schwab New York Tax-Exempt Money Fund-Value Advantage Shares(TM)(7)

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

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

3 Available only through SchwabLink(TM).

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

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

6 Designed for institutional investors only.

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

45
<PAGE> 128
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(R)
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 gain distributions. 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

46
<PAGE> 129

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

Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing trustees and until the election and
qualification of his or her successor or until death, resignation, retirement or
removal by a majority vote of the shares entitled to vote (as described below)
or of a majority of the Trustees. In accordance with the 1940 Act (i) the Trust
will hold a shareholder meeting for the election of trustees when less than a
majority of the trustees have been elected by shareholders, and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
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 a majority of shares entitled to vote shall be
a quorum for the transaction of business at a shareholders' meeting, except that
where any provision of law, of the Declaration of Trust or of these Bylaws
permits or requires that (i) holders of any series shall vote as a series, then
a majority of the aggregate number of shares of that series entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that series; or (ii) holders of any class shall vote as a class, then a majority
of the aggregate number of shares of that class entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that class.
Any lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. The Declaration of
Trust specifically authorizes the Board of Trustees to terminate the Trust (or
any of its investment portfolios) by notice to the shareholders without
shareholder approval.

Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the 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

47
<PAGE> 130
considered remote, because it is limited to circumstances in which a disclaimer
is 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 February 28, 1996, Charles Schwab and Co., Inc., 101 Montgomery
St., San Francisco, CA 94104 directly owned 100% of the outstanding shares of
the Schwab S&P 500 Fund--Investor Shares and the Schwab S&P 500
Fund--e.Shares(TM).

In addition, as of January 31, 1996, the officers and trustees of the
Trust, as a group, owned of record or beneficially 1.3%, 2.3% and 1.7% of the
outstanding voting securities of the Schwab Small-Cap Index Fund, the Asset
Director--High Growth Fund and the Asset Director--Conservative Growth,
respectively. As of January 31, 1996, the officers and trustees of the Trust, as
a group, owned of record or beneficially less than 1% of the outstanding voting
securities of the remaining series of Schwab Capital Trust.

PURCHASE AND REDEMPTION OF SHARES

Each Fund has set minimum initial investment requirements, as disclosed
in their respective Prospectuses. 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

48
<PAGE> 131
the securities offered by the Prospectuses. Certain portions of the Registration
Statement have been omitted from the Prospectuses and this Statement of
Additional Information pursuant to the rules and regulations of the SEC. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.

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

49
<PAGE> 132

COMPANIES IN THE SCHWAB INTERNATIONAL INDEX

The following is a list of Companies whose securities were included in
the Schwab International Index(R) calculation as of September 29, 1995:

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
ABBEY NATIONAL UNITED KINGDOM
ABN AMRO HOLDING NETHERLANDS
AEGON NETHERLANDS
AIR LIQUIDE FRANCE
AJINOMOTO CO JAPAN
AKZO NOBEL NETHERLANDS
ALCAN ALUMINIUM CANADA
ALCATEL ALSTHOM FRANCE
ALL NIPPON AIRWAYS CO JAPAN
ALLEANZA ASSICUR. ORD ITALY
ALLEANZA ASSICUR. RNC ITALY
ALLIED DOMECQ UNITED KINGDOM
AMCOR AUSTRALIA
ANZ BANKING GROUP AUSTRALIA
ARGENTARIA CORP BANCARIA SPAIN
ARGYLL GROUP UNITED KINGDOM
ASAHI BANK JAPAN
ASAHI BREWERIES JAPAN
ASAHI CHEMICAL IND CO JAPAN
ASAHI GLASS CO JAPAN
ASDA GROUP UNITED KINGDOM
ASEA A SWEDEN
ASEA B SWEDEN
ASS'D BR FOODS EX WESTON UNITED KINGDOM
ASSICURAZIONI GENERALI ITALY
ASTRA A SWEDEN
ASTRA B SWEDEN
AXA FRANCE
BAA UNITED KINGDOM
BANCO BILBAO VIZCAYA SPAIN
BANCO SANTANDER SPAIN
BANK FUKUOKA JAPAN
BANK MONTREAL CANADA
BANK NOVA SCOTIA CANADA
</TABLE>

50
<PAGE> 133

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
BANK TOKYO JAPAN
BANK YOKOHAMA JAPAN
BANKGESELLSCHAFT BERLIN GERMANY
BARCLAYS UNITED KINGDOM
BARRICK GOLD CORP CANADA
BASF GERMANY
BASS UNITED KINGDOM
BAT INDUSTRIES UNITED KINGDOM
BAYER GERMANY
BAYER HYPOTHEKEN BANK GERMANY
BAYER VEREINSBANK STAMM GERMANY
BBC BROWN BOVERI INH SWITZERLAND
BBC BROWN BOVERI NAMEN SWITZERLAND
BCE INC CANADA
BMW STAMM GERMANY
BNP ORD 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 SKY BROADCANADASTING UNITED KINGDOM
BRITISH STEEL UNITED KINGDOM
BRITISH TELECOM UNITED KINGDOM
BROKEN HILL PROP CO AUSTRALIA
BTR UNITED KINGDOM
BTR NYLEX AUSTRALIA
CANADABLE & WIRELESS UNITED KINGDOM
CANADADBURY SCHWEPPES UNITED KINGDOM
CANADANADIAN IMPERIAL BANK CANADA
CANADANADIAN PACIFIC LTD CANADA
CANADANON INC JAPAN
CANADARREFOUR FRANCE
CHEUNG KONG HONG KONG
CHIBA BANK JAPAN
CHINA LIGHT & POWER HONG KONG
CHUBU ELECTRIC POWER CO JAPAN
CHUGOKU ELECTRIC POWER JAPAN
</TABLE>

51
<PAGE> 134

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
CIBA-GEIGY INHABER SWITZERLAND
CIBA-GEIGY NAMEN SWITZERLAND
CITIC PACIFIC HONG KONG
CITY GERMANYVELOPMENTS SINGAPORE
COMMERCIAL UNION UNITED KINGDOM
COMMERZBANK AKTIE GERMANY
COMMONWEALTH BANK AUSTRALIA
CRA AUSTRALIA
CS HOLDING SWITZERLAND
DAI NIPPON PRINTING CO JAPAN
DAI-ICHI KANGYO BANK JAPAN
DAIEI JAPAN
DAIMLER-BENZ GERMANY
DAIWA BANK JAPAN
DAIWA HOUSE IND CO JAPAN
DAIWA SECURITIES CO JAPAN
DANONE (GROUPE) FRANCE
DDI CORP JAPAN
GERMANYUTSCHE BANK GERMANY
GERMANYVELOPMENT BK SINGAPORE SINGAPORE
DRESDNER BANK GERMANY
EAST JAPAN RAILWAY CO JAPAN
ELECTRABEL BELGIUM
ELECTRABEL VVPR BELGIUM
ELF AQUITAINE FRANCE
ELSEVIER NETHERLANDS
ENGERMANYSA SPAIN
ERICSSON (LM) B SWEDEN
FANUC JAPAN
FIAT ORD ITALY
FIAT PRIV ITALY
FIAT RNC ITALY
FUJI BANK JAPAN
FUJI PHOTO FILM CO JAPAN
FUJITSU JAPAN
GENERAL ELECTRIC PLC UNITED KINGDOM
GENERALE BELGIQUE BELGIUM
GENERALE EAUX (CIE) FRANCE
GLAXO WELLCOME UNITED KINGDOM
</TABLE>

52
<PAGE> 135

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
GRANADA GROUP UNITED KINGDOM
GRAND METROPOLITAN UNITED KINGDOM
GREAT UNIVERSAL STORES 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
HENGERMANYRSON LAND GERMANYV. HONG KONG
HENKEL VORZUG GERMANY
HITACHI JAPAN
HITACHI ZOSEN CORP JAPAN
HOECHST GERMANY
HOKKAIDO ELECTRIC POWER JAPAN
HOKURIKU ELECTRIC POWER JAPAN
HOLGERMANYRBANK INHABER SWITZERLAND
HOLGERMANYRBANK NAMEN SWITZERLAND
HONDA MOTOR CO JAPAN
HONGKONG ELECTRIC HLDGS HONG KONG
HONGKONG LAND HK (USD) SINGAPORE
HONGKONG TELECOM HONG KONG
HSBC HOLDINGS (GBP 0.75) UNITED KINGDOM
HSBC HOLDINGS (HKD 10) UNITED KINGDOM
HUTCHISON WHAMPOA HONG KONG
IBERDROLA SPAIN
IMPERIAL CHEMICANADAL ICI UNITED KINGDOM
IMPERIAL OIL CANADA
INA ITALY
INDUSTRIAL BANK OF JAPAN JAPAN
INT'LE NEGERMANYRLANGERMANYN GROEP NETHERLANDS
ISHIKAWAJIMA-HARIMA JAPAN
ITO-YOKADO CO JAPAN
ITOCHU CORP JAPAN
JAPAN AIRLINES CO JAPAN
JAPAN TELECOM CO JAPAN
JAPAN TOBACCO JAPAN
JARDINE MATHESON HK(USD) SINGAPORE
</TABLE>

53
<PAGE> 136

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
JOYO BANK JAPAN
JUSCO CO JAPAN
KAJIMA CORP JAPAN
KANSAI ELECTRIC POWER CO JAPAN
KAO CORP JAPAN
KAWASAKI HEAVY IND JAPAN
KAWASAKI STEEL CORP JAPAN
KDD JAPAN
KINGFISHER UNITED KINGDOM
KINKI NIPPON RAILWAY CO JAPAN
KIRIN BREWERY CO JAPAN
KOBE STEEL JAPAN
KOMATSU JAPAN
KON. PTT NEGERMANYRLAND NETHERLANDS
KUBOTA CORP JAPAN
KYOCERA CORP JAPAN
KYUSHU ELECTRIC POWER CO JAPAN
LAFARGE (LAFARGE COPPEE) FRANCE
LINGERMANY GERMANY
LLOYDS BANK UNITED KINGDOM
LONG-TERM CREDIT BANK JAPAN
LOREAL FRANCE
LUFTHANSA STAMM GERMANY
LUFTHANSA VORZUG GERMANY
LVMH FRANCE
LYONNAISE GERMANYS EAUX FRANCE
MANNESMANN GERMANY
MARKS & SPENCER UNITED KINGDOM
MARUBENI CORP JAPAN
MARUI CO JAPAN
MATSUSHITA COMMUNICANADATION JAPAN
MATSUSHITA ELECT IND'L JAPAN
MATSUSHITA ELECT WORKS JAPAN
MICHELIN B FRANCE
MITSUBISHI BANK JAPAN
MITSUBISHI CHEMICANADAL CORP JAPAN
MITSUBISHI CORP JAPAN
MITSUBISHI ELECTRIC CORP JAPAN
MITSUBISHI ESTATE CO JAPAN
</TABLE>

54
<PAGE> 137

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
MITSUBISHI HEAVY IND JAPAN
MITSUBISHI MATERIALS JAPAN
MITSUBISHI MOTORS CORP JAPAN
MITSUBISHI TRUST JAPAN
MITSUI & CO JAPAN
MITSUI FUDOSAN CO JAPAN
MITSUI MARINE & FIRE JAPAN
MITSUI TRUST & BANK CO JAPAN
MUNCHENER RUCK INH GERMANY
MUNCHENER RUCK NAM GERMANY
MURATA MANUFACTURING CO JAPAN
NAME CC
NATIONAL AUSTRALIA BANK AUSTRALIA
NATIONAL POWER UNITED KINGDOM
NATIONAL WESTMINSTER BK UNITED KINGDOM
NEC CORP JAPAN
NESTLE NOM SWITZERLAND
NEW OJI PAPER CO JAPAN
NEW WORLD GERMANYVELOPMENT HONG KONG
NEWS CORP AUSTRALIA
NEWS CORP PLVO AUSTRALIA
NIKKO SECURITIES CO JAPAN
NIKON CORP JAPAN
NINTENDO CO JAPAN
NIPPON CREDIT BANK JAPAN
NIPPON EXPRESS CO JAPAN
NIPPON OIL CO JAPAN
NIPPON PAPER IND CO JAPAN
NIPPON STEEL CORP JAPAN
NIPPON YUSEN K.K JAPAN
NIPPONGERMANYNSO CO JAPAN
NISSAN MOTOR CO JAPAN
NKK CORP JAPAN
NOMURA SECURITIES CO JAPAN
NORANDA INC CANADA
NORTHERN TELECOM CANADA
NTT CORP JAPAN
OBAYASHI CORP JAPAN
OCBC BANK SINGAPORE
</TABLE>

55
<PAGE> 138

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
ODAKYU ELECTRIC RAILWAY JAPAN
OKI ELECTRIC INDUSTRY CO JAPAN
OMRON CORP JAPAN
ONO PHARMACEUTICANADAL CO JAPAN
OSAKA GAS CO JAPAN
PARIBAS(CIE FINANCIERE)A FRANCE
PEARSON UNITED KINGDOM
PEN & ORIENTAL STEAM UNITED KINGDOM
PETROFINA BELGIUM
PEUGEOT SA FRANCE
PHARMACIA A SWEDEN
PHARMACIA B SWEDEN
PHILIPS ELECTRONICS NETHERLANDS
PLACER DOME CANADA
POLYGRAM NETHERLANDS
POWERGEN UNITED KINGDOM
PRUGERMANYNTIAL CORP UNITED KINGDOM
RANK ORGANISATION UNITED KINGDOM
REED INTERNATIONAL UNITED KINGDOM
RENAULT FRANCE
REPSOL SPAIN
REUTERS HOLDINGS UNITED KINGDOM
RHONE-POULENC ORD A FRANCE
RICHEMONT (FIN) A UNIT SWITZERLAND
RICOH CO JAPAN
ROCHE HOLDING GENUSS SWITZERLAND
ROCHE HOLDING INHABER SWITZERLAND
ROHM CO JAPAN
ROYAL BANK OF CANADANADA CANADA
ROYAL BANK OF SCOTLAND UNITED KINGDOM
ROYAL DUTCH PETROLEUM CO NETHERLANDS
RTZ CORP REG UNITED KINGDOM
RWE STAMM GERMANY
RWE VORZUG GERMANY
SAINSBURY (J) UNITED KINGDOM
SAINT-GOBAIN FRANCE
SAKURA BANK JAPAN
SANDOZ INHABER SWITZERLAND
SANDOZ NAMEN SWITZERLAND
</TABLE>

56
<PAGE> 139

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
SANDVIK A SWEDEN
SANDVIK B SWEDEN
SANKYO CO JAPAN
SANOFI FRANCE
SANWA BANK JAPAN
SANYO ELECTRIC CO JAPAN
SAP STAMM GERMANY
SAP VORZUG GERMANY
SCHERING GERMANY
SCHNEIGERMANYR(EX-SPIE BATIGN FRANCE
SCHWEIZ BANKGESELL INH SWITZERLAND
SCHWEIZ BANKGESELL NAMEN SWITZERLAND
SCHWEIZ BANKVEREIN INH SWITZERLAND
SCHWEIZ BANKVEREIN NAMEN SWITZERLAND
SCOTTISH & NEWCANADASTLE UNITED KINGDOM
SEAGRAM CO CANADA
SECOM CO JAPAN
SEIBU RAILWAY CO JAPAN
SEKISUI CHEMICANADAL 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 CHEMICANADAL CO JAPAN
SHIZUOKA BANK JAPAN
SIEMENS STAMM GERMANY
SINGAPORE AIRLINES SINGAPORE
SINGAPORE TELECOM SINGAPORE
SMITHKLINE BEECHAM A UNITED KINGDOM
SMITHKLINE BEECHAM UNIT UNITED KINGDOM
SOCIETE GENERALE FRANCE
SONY CORP JAPAN
SONY MUSIC ENTERTAINMENT JAPAN
STANDARD CHARTERED UNITED KINGDOM
STET ORD ITALY
STET RNC ITALY
SUEZ (COMPAGNIE GERMANY) FRANCE
</TABLE>

57
<PAGE> 140

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
SUMITOMO BANK JAPAN
SUMITOMO CHEMICANADAL CO JAPAN
SUMITOMO CORP JAPAN
SUMITOMO ELECTRIC IND JAPAN
SUMITOMO MARINE & FIRE JAPAN
SUMITOMO METAL IND JAPAN
SUMITOMO TRUST & BANK JAPAN
SUN HUNG KAI PROPERTIES HONG KONG
SUZUKI MOTOR CORP JAPAN
SWIRE PACIFIC A HONG KONG
TAISEI CORP JAPAN
TAISHO PHARMACEUTICANADAL CO JAPAN
TAKEDA CHEMICANADAL IND JAPAN
TDK CORP JAPAN
TEIJIN JAPAN
TELE DANMARK B GERMANYNMARK
TELECOM ITALIA MOB. ORD ITALY
TELECOM ITALIA MOB. RNC ITALY
TELECOM ITALIA ORD ITALY
TELECOM ITALIA RNC ITALY
TELEFONICANADA GERMANY 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 ELECTRON JAPAN
TOKYO GAS CO JAPAN
TOKYU CORP JAPAN
TONEN CORP JAPAN
TOPPAN PRINTING CO JAPAN
TORAY INDUSTRIES JAPAN
TORONTO-DOMINION BANK CANADA
TOSHIBA CORP JAPAN
TOSTEM CORP JAPAN
</TABLE>

58
<PAGE> 141

<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
TOTAL SA FRANCE
TOTO JAPAN
TOYO SEIKAN KAISHA JAPAN
TOYO TRUST & BANKING CO JAPAN
TOYODA AUTOMATIC LOOM JAPAN
TOYOTA MOTOR CORP JAPAN
TRACTEBEL BELGIUM
TRACTEBELGIUML VVPR BELGIUM
TSB GROUP UNITED KINGDOM
UAP (COMPAGNIE) FRANCE
UNILEVER NV CERT NETHERLANDS
UNILEVER PLC UNITED KINGDOM
UNITED OVERSEAS BANK SINGAPORE
VEBA GERMANY
VENDOME LUXURY GRP UNIT UNITED KINGDOM
VEW INH (VEREIN EL WEST GERMANY
VIAG GERMANY
VODAFONE GROUP UNITED KINGDOM
VOLKSWAGEN STAMM GERMANY
VOLKSWAGEN VORZUG GERMANY
VOLVO A SWEDEN
VOLVO B SWEDEN
WESTERN MINING CORP HLDG AUSTRALIA
WESTPAC BANKING AUSTRALIA
WHARF HOLDINGS HONG KONG
WINTERTHUR VERS. INHABELGIUMR SWITZERLAND
WINTERTHUR VERS. NAMEN SWITZERLAND
WOLTERS KLUWER NETHERLANDS
YAMAICHI SECURITIES CO JAPAN
YAMANOUCHI PHARM. JAPAN
YASUDA FIRE & MARINE JAPAN
YASUDA TRUST & BANK CO JAPAN
ZENECANADA GROUP UNITED KINGDOM
ZUERICH VERSICHERUNG SWITZERLAND
</TABLE>

59
<PAGE> 142

COMPANIES IN THE SCHWAB SMALL-CAP INDEX

The following is a list of Companies whose securities were included in
the Schwab Small-Cap Index(TM) calculation as of December 31, 1995:

1ST SOURCE CORP
3DO CO
AAMES FINL CORP
AAR CORP
ABM INDS INC
ABR INFORMATION SVCS
ACCESS HEALTH MARKET
ACCLAIM ENTMT INC NE
ACCUSTAFF INC
ACORDIA INC
ACUSON CORP
ACX TECHNOLOGIES INC
ACXIOM CORP
ADVANCED TECHNOLOGY
ADVANCED TISSUE SCIE
ADVO SYSTEM INC
AFFILIATED COMPUTER
AG CHEM EQUIP INC
AGOURON PHARMACEUTIC
AIR EXPRESS INTL COR
AIRBORNE FGHT CORP
ALANTEC CI2ORP
ALBANK FINL CORP
ALBANY INTL CORP
ALEX BROWN INC
ALEXANDER & ALEXANDE
ALFA CORP
ALLEN GROUP INC
ALLIANCE ENTMT CORP
ALLIANCE PHARMACEUTI
ALLIANCE SEMICONDUCT
ALLIANT TECHSYSTEMS
ALLIED GROUP INC
ALPHARMA INC
ALTERNATIVE RESOURCE
ALTRON INC
AMC ENTMT INC
AMCOL INTL CORP
AMCORE FINL INC
AMERCO
AMERICA WEST AIRLS I
AMERICAN ANNUITY GRO
AMERICAN BANKRS INS
AMERICAN BUSINESS IN
AMERICAN BUSINESS PR
AMERICAN FINL ENTPRI
AMERICAN FREIGHTWAYS
AMERICAN HERIT LF IN
AMERICAN MED RESPONS
AMERICAN MGMT SYS IN
AMERICAN MOBILE SATE
AMERICAN PRESIDENT
AMERICAN TRAVELLERS
AMERICREDIT CORP
AMETEK INC
AMRESCO INC
AMSCO INTL INC
ANCHOR GAMING
ANTEC CORP
ANTHONY INDS INC
APOLLO GROUP INC
APPLEBEES INTL INC
APPLIED MAGNETICS CO
APPLIED PWR INC
APPLIX INC
APS HLDG CORP
APTARGROUP INC
AQUILA GAS PIPELINE
ARBOR DRUGS INC
ARCH COMMUNICATIONS

60
<PAGE> 143

ARCTCO INC
ARGONAUT GROUP INC
ARMCO INC
ARMOR ALL PRODS CORP
ARNOLD INDS INC
ARVIN INDS INC
ASHLAND COAL INC
ASPECT TELECOMMUNICA
ASPEN TECHNOLOGY INC
ASSOCIATED BANC CORP
ASSOCIATED GROUP INC
AST RESEARCH INC
ASTORIA FINL CORP
ATLANTIC SOUTHEST AI
ATLAS AIR INC
ATMOS ENERGY CORP
ATRIA SOFTWARE INC
AUGAT INC
AURA SYS INC
AUSPEX SYS INC
AUTHENTIC FITNESS CO
AVATAR HLDS INC
AVID TECHNOLOGY INC
AZTAR CORP
BALDOR ELEC CO
BALL CORP
BALLARD MED PRODS
BALLY ENTMT CORP
BANCORPSOUTH INC
BANCTEC INC
BANKNORTH GRP INC DE
BARRETT RES CORP
BASSETT FURNITURE IN
BATTLE MTN GOLD CO
BAY ST GAS CO
BBN CORP
BEARINGS INC
BELDEN INC
BELL & HOWELL HLDGS
BELL BANCORP INC
BENSON EYECARE CORP
BENTON OIL & GAS CO
BEST BUY INC
BET HLDGS INC
BIO RAD LABS INC
BIRMINGHAM STL CORP
BISYS GROUP INC
BJ SVCS CO
BLACK BOX CORP DEL
BLACK HILLS PWR & LT
BLAIR CORP
BLANCH E W HLDGS INC
BLOCK DRUG INC
BLOUNT INTL INC
BMC INDS INC MINN
BOB EVANS FARMS INC
BOK FINL CORP
BOOLE & BABBAGE INC
BORG WARNER SEC CORP
BORG-WARNER AUTOMOTI
BORLAND INTL INC
BOSTON TECHNOLOGY IN
BOWNE & CO INC
BOYD GAMING CORP
BREED TECHNOLOGIES I
BROOKLYN BANCORP INC
BROWN GROUP INC
BRUSH WELLMAN INC
BT OFFICE PRODS INTL
BUFFETS INC
BURLINGTON COAT FACT
BURR BROWN CORP
BUSH BOAKE ALLEN INC
BUSINESS RECORDS COR
BWIP HLDG INC
C D I CORP
CABLE DESING TECHNOL
CABLEVISION SYS CORP
CABOT OIL & GAS CORP
CAL FED BANCORP INC

61
<PAGE> 144

CALGON CARBON CORP
CALIFORNIA BANCSHARE
CALIFORNIA MICROWAVE
CALMAT CO
CAMBREX CORP
CAMBRIDGE TECH PARTN
CAMCO INTL INC
CANANDAIGUA WINE INC
CAPITAL BANCORP FLA
CAPITAL RE CORP
CAPITOL AMERN FINL C
CAPSURE HLDGS CORP
CARAUSTAR INDS INC
CARLISLE CORP
CARMIKE CINEMAS INC
CARPENTER TECHNOLOGY
CARRINGTON LABS INC
CARSON PIRIE SCOTT &
CARTER WALLACE INC
CASEYS GEN STORES
CASTLE A M & CO
CATALINA MARKETING C
CATELLUS DEV CORP
CCB FINL CORP
CDW COMPUTER CTRS IN
CELLSTAR CORP
CENTENNIAL CELLULAR
CENTEX CONSTRUCTION
CENTRAL HUDSON GAS&E
CENTRAL LA ELEC INC
CENTRAL MAINE PWR CO
CENTRAL NEWSPAPERS I
CENTURA BKS INC
CENTURY COMMUNICATIO
CERNER CORP
CHAMPION ENTERPRISES
CHANTAL PHARMACEUTIC
CHAPARRAL STL CO
CHARMING SHOPPES INC
CHECKFREE CORP
CHECKPOINT SYS INC
CHEMED CORP
CHEMICAL FINL CORP
CHESAPEAKE CORP VA
CHESAPEAKE ENERGY CO
CHICAGO MINIATURE LA
CHIQUITA BRANDS INTL
CHITTENDEN CORP
CHURCH & DWIGHT INC
CHYRON CORP
CIDCO INC
CILCORP INC
CIRCLE K CORP DEL
CIRCON CORP
CITICASTERS INC
CITIZENS BANCORP MD
CITIZENS BKG CORP MI
CITIZENS CORP
CITY NATL CORP
CKE RESTAURANTS INC
CLAIRES STORES INC
CLARCOR INC
CLEVELAND CLIFFS INC
CMAC INVT CORP
CMG INFORMATION SVCS
CML GROUP INC
CNB BANCSHARES INC
CNS INC
COAST SVGS FINL INC
COASTAL PHYSICIAN GR
COBRA GOLF INC
COCA COLA BOTTLNG CO
COEUR D ALENE MINES
COHERENT COMMUNICATI
COHERENT INC
COLE KENNETH PRODTNS
COLE TAYLOR FINL GRO
COLLECTIVE FED SVGS&
COLLINS & AIKMAN COR
COLONIAL BANCGROUP I

62
<PAGE> 145

COLONIAL DATA TECHNO
COLTEC INDS INC
COMAIR CORP
COMMERCE GROUP INC M
COMMERCIAL FEDERAL C
COMMERCIAL INTERTECH
COMMERCIAL METALS CO
COMMNET CELLULAR INC
COMMONWEALTH ENERGY
COMMUNITY FIRST BANK
COMMUNITY HEALTH SYS
COMMUNITY PSYCHIATRI
COMPDENT CORP
COMPUSA INC
COMPUTER HORIZONS CO
COMPUTER PRODS INC
COMPUWARE CORP
COMSHARE INC
COMVERSE TECHNOLOGY
CONE MLS CORP N C
CONMED CORP
CONTINUUM INC
CONTROL DATA SYSTEMS
COORS ADOLPH CO
COPART INC
COPLEY PHARMACEUTICA
COPYTELE INC
COVENTRY CORP
CRAIG JENNY INC
CRAWFORD & CO
CRAWFORD & CO
CRAY RESH INC
CREDENCE SYS CORP
CROMPTON & KNOWLES
CROSS A T CO
CROSS TIMBERS OIL CO
CULLEN FROST BANKERS
CURTISS WRIGHT CORP
CYGNUS INC
CYRIX CORP
DAIG CORP
DALLAS SEMICONDUCTOR
DAMES & MOORE INC
DATA BROADCASTING CO
DATA GEN CORP
DATASCOPE CORP
DAVIDSON & ASSOC INC
DELPHI FINL GROUP IN
DELTA & PINE LD CO
DEPARTMENT 56 INC
DESTEC ENERGY INC
DETROIT DIESEL CORP
DEVON ENERGY CORP
DEVRY INC DEL
DEXTER CORP
DIAGNOSTIC PRODS CP
DIAL PAGE INC
DIALOGIC CORP
DIAMOND SHAMROCK R&M
DIGI INTL INC
DIMON INC
DIONEX CORP
DISCOUNT AUTO PTS IN
DOLLAR TREE STORES I
DONALDSON INC
DONNKENNY INC DEL
DOUBLETREE CORP
DOVATRON INTL INC
DOWNEY FINL CORP
DREYERS GRAND ICE CR
DSP COMMUNICATIONS I
DURIRON INC
DUTY FREE INTL INC
DYNATECH CORP
EASTERN ENTERPRISES
EASTERN UTILS ASSOC
EATON VANCE CORP
ECHOSTAR COMMUNICATI
ELECTRO RENT CORP
ELECTRO SCIENTIFIC

63
<PAGE> 146

ELECTROGLAS INC
EMMIS BROADCASTING C
EMPIRE DIST ELEC CO
ENERGEN CORP
ENERGY VENTURES INC
ENHANCE FINL SVCS GR
ENZO BIOCHEM INC
EPIC DESIGN TECHNOLO
ETHAN ALLEN INTERIOR
EVERGREEN MEDIA CORP
EXABYTE CORP
EXCALIBUR TECHNOLOGI
EXECUTIVE RISK INC
EXPEDITORS INTL WASH
EXPRESS SCRIPTS INC
F & M NATL CORP
FABRI CTRS AMER INC
FAIR ISAAC & CO INC
FALCON DRILLING INC
FAMILY DLR STORES IN
FARMER BROS CO
FEDERAL MOGUL CORP
FERRO CORP
FILENET CORP
FINANCIAL SEC ASSURN
FINGERHUT COS INC
FIRST AMERN FINL COR
FIRST CITIZENS BANCS
FIRST COML CORP
FIRST COMMERCE BANCS
FIRST COMWLTH FINL P
FIRST FINL BANCORP
FIRST FINL CORP WIS
FIRST MICH BK CORP
FIRST MIDWEST BANCOR
FIRST MISS CORP
FIRST NATL BANCORP
FIRSTBANK ILL CO
FIRSTIER INC
FIRSTMISS GOLD INC
FISHER SCIENTIFIC IN
FLEMING COS INC
FLORIDA EAST COAST R
FLORIDA ROCK INDS IN
FLOWERS INDS INC
FLUKE JOHN MFG INC
FMC GOLD CO
FOREMOST CORP OF AME
FOREST CITY ENTERPRI
FOXMEYER HEALTH CORP
FRANKLIN QUEST CO
FREMONT GEN CORP
FRESENIUS USA INC
FRONTIER INS GROUP I
FSI INTL INC
FT WAYNE NATL CORP I
FTP SOFTWARE INC
FULLER H B CO
FULTON FINL CORP PA
FUND AMERICAN COS IN
G & K SVCS INC
GAINSCO INC
GALLAGHER ARTHUR J &
GAYLORD CONTAINER CO
GC COS INC
GENCORP INC
GENERAL BINDING CORP
GENERAL DATACOMM IND
GENERAL MAGIC INC
GENESIS HEALTH VENTU
GENTEX CORP
GEON CO
GEOTEK INDS INC
GEOWORKS
GERBER SCIENTIFIC IN
GIBSON GREETINGS INC
GIDDINGS&LEWIS INC W
GILEAD SCIENCES INC
GLATFELTER P H CO
GLENDALE FED SVGS &

64
<PAGE> 147

GLOBAL INDL TECHNOLO
GLOBAL NAT RES INC
GLOBAL VILLAGE COMMU
GOULDS PUMPS INC
GRACO INC
GRANCARE INC
GRANITE CONSTR INC
GRC INTERNATIONAL IN
GREAT FINL CORP
GREENFIELD INDS INC
GREIF BROS CORP
GREYHOUND LINES INC
GRIFFON CORP
GUILFORD MLS INC
GULF SOUTH MEDICAL S
GYMBOREE CORP
HADCO CORP
HAEMONETICS CORP
HANCOCK HLDG CO
HARLAND JOHN H CO
HARLEYSVILLE GROUP I
HARMAN INTL INDS INC
HARPER GROUP
HARTE-HANKS COMMUNIC
HAYES WHEELS INTL IN
HCC INS HLDGS INC
HCIA INC
HEALTH MGMT SYS INC
HEALTHPLAN SVCS CORP
HEARTLAND EXPRESS IN
HEARTLAND WIRELESS C
HECLA MNG CO
HELENE CURTIS INDS
HELIX TECHNOLOGY COR
HELMERICH & PAYNE IN
HENRY JACK & ASSOC I
HERBALIFE INTL INC
HERITAGE MEDIA CORP
HNC SOFTWARE INC
HOLLYWOOD ENTMT CORP
HOME BEN CORP
HOME FINL CORP DEL H
HOME SHOPPING NETWOR
HON INDS INC
HORACE MANN EDUCATOR
HOUGHTON MIFFLIN CO
HUBCO INC
HUDSON FOODS INC
HUMAN GENOME SCIENCE
HUNT JB TRANS SVC IN
HUNT MFG CO
HYPERION SOFTWARE CO
I-STAT CORP
ICN PHARMACEUTICALS
IDEON GROUP INC
IDEX CORP
IES INDS INC
IHOP CORP
IMCO RECYCLING INC
IMMULOGIC PHARMACEUT
IMMUNEX CORP NEW
IMPERIAL BANCORP
IN FOCUS SYS INC
INDENTIX INC
INDIANA ENERGY INC
INFORMATION RES INC
INPHYNET MEDICAL MGM
INSIGNIA FINL GROUP
INSILCO CORP
INSITUFORM TECHNOLOG
INSO CORP
INTEGON CORP
INTEGRATED HEALTH SV
INTEGRATED PROCESS E
INTEGRATED SILICON S
INTEGRATED SYS INC
INTER REGL FINL GROU
INTERCO INC NEW
INTERDIGITAL COMMUNI
INTERFACE FLOORING

65
<PAGE> 148

INTERGRAPH CORP
INTERIM SVCS INC
INTERMAGNETICS GEN
INTERMET CORP
INTERNATIONAL DAIRY
INTERNATIONAL FAMILY
INTERNATIONAL MULTIF
INTERNEURON PHARMACE
INTERPOOL INC
INTERSOLV
INTERSTATE BAKERIES
INTERSTATE PWR CO
INTERVOICE INC
INTL CABLETEL INC
INVACARE CORP
IONICS INC
ISIS PHARMACEUTICALS
ISOLYSER INC
ITI TECHNOLOGIES INC
ITRON INC
ITT EDUCATIONAL SERV
J&L SPECIALTY STL IN
JACOBS ENGR GROUP IN
JACOR COMMUNICATIONS
JEFFERSON BANKSHARES
JLG INDS INC
JOHN ALDEN FINL CORP
JP FOODSERVICE INC
JSB FINANCIAL INC
JUNO LTG INC
JUST FOR FEET INC
JUSTIN INDS INC
K N ENERGY INC
KANSAS CITY LIFE INS
KATZ MEDIA GROUP INC
KAUFMAN&BROAD HOME C
KAYDON CORP
KEANE ASSOC INC
KELLWOOD CO
KENNAMETAL INC
KENT ELECTRS CORP
KEYSTONE FINANCIAL I
KEYSTONE INTL INC
KIMBALL INTL INC
KINDER-CARE LEARN CT
KINETIC CONCEPTS INC
KIRBY EXPL CO.
KRONOS INC
KULICKE & SOFFA INDS
LA Z BOY CHAIR CO
LACLEDE GAS CO
LANCE INC
LANDMARK GRAPHICS CO
LANDRYS SEAFOOD REST
LANDS END INC
LANDSTAR SYS INC
LATTICE SEMICONDUCTO
LAWSON PRODS INC
LAWTER CHEMS INC
LEADER FINL CORP
LEGATO SYS INC
LEGG MASON INC
LIBBEY INC
LIBERTY BANCORP INC
LIBERTY CORP S C
LIFE PARTNERS GROUP
LIFE RE CORP
LIFE TECHNOLOGIES IN
LIGAND PHARMACEUTICA
LILLY INDL COATINGS
LINCARE HLDGS INC
LINCOLN ELEC CO
LINCOLN ELEC CO
LINCOLN TELECOMMUNIC
LIPOSOME CO INC
LITTELFUSE INC
LIVING CTRS AMER INC
LOGICON INC
LONE STAR INDS INC
LONG IS BANCORP INC

66
<PAGE> 149

LONGVIEW FIBRE CO
LOUIS DREYFUS NAT GA
LTX CORP
LUBYS CAFETERIAS INC
LUKENS STL CO
LYDALL INC
M S CARRIERS INC
MACFRUGALS BARGAINS
MADISON GAS & ELEC
MAFCO CONS GROUP INC
MAGELLAN HEALTH SVCS
MAGNA GROUP INC
MAIC HLDGS INC
MARCUS CORP
MARINER HEALTH GROUP
MARK TWAIN BANCSHARE
MARKEL CORP
MARSHALL INDS
MASCOTECH INC
MAXICARE HEALTH PLAN
MAXIS INC
MAXXAM INC
MAYBELLINE INC
MCAFEE ASSOCS INC
MCCLATCHY NEWSPAPERS
MDU RESOURCES GROUP
MEASUREX CORP
MEDIA GEN INC
MEDIC COMPUTER SYS I
MEDIMMUNE INC
MEDISENSE INC
MEDPARTNERS/MULLIKIN
MEDUSA CORP
MENS WEARHOUSE INC
MENTOR CORP MINN
MERCURY INTERACTIVE
MESA AIRLS INC
METHODE ELECTRS INC
METROMEDIA INTL GROU
MEYER FRED INC DEL
MICHAEL'S STORES INC
MICROCOM INC
MICROS SYS INC
MID-AMERICAN NTL BK
MIDCOM COMMUNICATION
MIKASA INC
MILLER HERMAN INC
MINE SAFETY APPLIANC
MINERALS TECHNOLOGIE
MISSISSIPPI CHEM COR
MOBILEMEDIA CORP
MODINE MFG CO
MOHAWK INDS INC
MOLTEN METAL TECHNOL
MONEY STORE INC
MORGAN KEEGAN INC
MORRISON RESTAURANTS
MOVIE GALLERY INC
MUELLER INDS INC
MULTICARE COS INC
MYCOGEN CORP
MYERS INDS INC
NAC RE CORP
NACCO INDS INC
NATIONAL AUTO CR INC
NATIONAL BANCORP ALA
NATIONAL COMM BANCOR
NATIONAL COMPUTER SY
NATIONAL DATA CORP
NATIONAL ED CORP
NATIONAL INSTRS CORP
NATIONAL MEDIA CORP
NATIONAL PRESTO INDS
NATIONAL STL CORP
NATL RE HOLDING CORP
NATURES SUNSHINE PRO
NAVISTAR INTL CORP N
NCH CORP
NEOPROBE CORP
NETCOM ON-LINE COMMU

67
<PAGE> 150

NETWORK EQUIP TECHNO
NETWORK GEN CORP
NEUROGEN CORP
NEW ENG BUSINESS SVC
NEW JERSEY RES
NEW WORLD COMMUNICAT
NEW YORK BANCORP INC
NEWFIELD EXPL CO
NEXGEN INC
NEXSTAR PHARMACEUTIC
NL INDS INC
NN BALL & ROLLER INC
NORRELL CORP GA
NORTH AMERN MTG CO
NORTH AMERN VACCINE
NORTH FORK BANCORP
NORTHWEST NAT GAS CO
NORTHWESTERN PUB SVC
NOVACARE CORP
NU-KOTE HLDG INC
NUEVO ENERGY CO
O REILLY AUTOMOTIVE
OAK INDS INC
OAK TECHNOLOGY INC
OCCUSYSTEMS INC
OCTEL COMMUNICATIONS
OEA INC
OFFSHORE LOGISTICS
OIS OPTICAL IMAGING
OLD NATL BANCP IND
OLYMPIC FINL LTD
OM GROUP INC
ONBANCORP INC
ONE VY BANCORP WV IN
ONEOK INC
OPTICAL DATA SYS INC
ORANGE & ROCKLAND UT
ORBITAL SCIENCES COR
OREGON STL MLS INC
ORGANOGENESIS INC
ORION CAP CORP
ORTHODONTIC CTRS AME
OSMONICS INC
OTTER TAIL PWR CO
OUTBOARD MARINE CORP
OUTLET COMMUNICATION
OVERSEAS SHIPHOLDNG
OWEN HEALTHCARE INC
OWENS & MINOR INC NE
P-COM INC
PACIFIC SCIENTIFIC
PAIRGAIN TECHNOLOGIE
PAPA JOHNS INTL INC
PARAGON TRADE BRANDS
PARK ELECTROCHEMICAL
PARK NATL CORP
PARKER & PARSLEY PET
PARKER DRILLING CO
PATTERSON DENTAL CO
PAXAR CORP
PAXSON COMMUNICATION
PDT INC
PEAK TECHNOLOGIES GR
PENNCORP FINL GROUP
PEOPLES BK BRIDGEPOR
PEOPLES HERITGE SV B
PETCO ANIMAL SUPPLIE
PETROLITE CORP
PHH GROUP INC
PHILADELPHIA SUBN CO
PHILLIPS VAN HEUSEN
PHOENIX RESOURCE COS
PHOTRONIC LABS INC
PHP HEALTHCARE CORP
PHYSICIAN COMPUTER N
PHYSICIAN CORP AMER
PHYSICIAN RELIANCE N
PHYSICIANS HEALTH SV
PIEDMONT NAT GAS INC
PIER I IMPORTS INC

68
<PAGE> 151

PIONEER GROUP INC
PIONEER STD ELECTRS
PLANTRONICS INC NEW
PLAYERS INTL INC
PLAYTEX PRODS INC
PLC SYS INC
PMT SERVICES INC
POLARIS INDS INC
PRECISION CASTPARTS
PRESIDENTIAL LIFE CO
PRI AUTOMATION INC
PRICE ENTERPRISES IN
PRIDE PETE SVCS INC
PRIMADONNA RESORTS I
PRIMARK CORP
PRIME HOSPITALITY CO
PRODUCTION OPERATORS
PROFFITTS INC
PROGRESS SOFTWARE CO
PROTEIN DESIGN LABS
PROVIDENT BANCORP IN
PSINET INC
PUBLIC SVC CO N C IN
PUBLIC SVC CO N MEX
PULITZER PUBG CO
PYXIS CORP
QUAKER ST CORP
QUALITY FOOD CTRS IN
QUANEX CORP
QUARTERDECK OFFICE S
QUEENS CNTY BANCORP
QUICK & REILLY GROUP
RALCORP HLDGS INC
RATIONAL SOFTWARE CO
RAYMOND JAMES FINL I
RCSB FINL INC
REGAL BELOIT CORP
REGAL CINEMAS INC
REGENERON PHARMACEUT
REGIS CORP MINN
REINSURANCE GROUP AM
RENAISSANCE COMMUNIC
RENAL TREATMENT CTRS
RESEARCH INDS CORP
RESPIRONICS INC
REXALL SUNDOWN INC
REXEL INC
RICHFOOD HLDGS INC
RIGS NATL CORP WASH
RIO HOTEL & CASINO I
RIVER FOREST BANCORP
ROBERTS PHARMACEUTIC
ROBOTIC VISION SYS
ROCK-TENN CO
ROHR INDS INC
ROLLINS INC
ROLLINS TRUCK LEASIN
ROOSEVELT FINL GROUP
ROPER INDS INC NEW
ROSS STORES INC
ROTECH MED CORP
ROUGE STL CO
ROWAN COS INC
RUDDICK CORP
RUSS BERRIE & CO
RYANS FAMILY STK HSE
RYKOFF S E & CO
S & T BANCORP INC
S3 INC
SAFEGUARD SCIENTIFIC
SALICK HEALTH CARE I
SANIFILL INC
SANMINA CORP
SAVANNAH FOODS & IND
SBARRO INC
SCHULMAN A INC
SCIENTIFIC GAMES HLD
SCOTTS CO
SEABOARD CORP
SEAGULL ENERGY CORP

69
<PAGE> 152

SECURITY CAP CORP WI
SECURITY DYNAMICS TE
SEI CORP
SEITEL INC
SELECTIVE INS GROUP
SEPRACOR INC
SEQUA CORP
SEQUENT COMPUTER SYS
SEQUUS PHARMECEUTICA
SERVICE MERCHANDISE
SFFED CORP
SHONEYS INC
SHOPKO STORES INC
SHOREWOOD PACKAGING
SHOWBOAT INC
SHURGARD STORAGE CTR
SIERRA HEALTH SVCS I
SIERRA ON-LINE INC
SIERRA PAC RES
SIGCORP INC
SILICON VY GROUP INC
SILICONIX INC
SILVER KING COMMUNIC
SITHE ENERGIES INC
SMART & FINAL INC
SMITH A O CORP 'B'
SMITHFIELD FOODS INC
SMITHS FOOD&DRUG CTR
SMUCKER J M CO
SMUCKER J M CO
SNYDER OIL CORP
SOFAMOR/DANEK GROUP
SOFTKEY INTL INC
SOLA INTL INC
SOLV EX CORP
SOMATOGEN INC
SONIC CORP
SOTHEBYS HLDGS INC
SOUTH JERSEY INDS IN
SOUTHDOWN INC
SOUTHERN UN CO NEW
SOUTHWEST GAS CORP
SOUTHWESTERN ENERGY
SOVEREIGN BANCORP IN
SPACELABS MED INC
SPEEDWAY MOTORSPORTS
SPIEGEL INC
SPORTS AUTH INC
SPRINGS INDS INC
SPS TECHNOLOGIES INC
SPS TRANSACTION SVCS
ST JOHN KNITS INC
ST PAUL BANCORP INC
STAC ELECTRS
STANDARD FINL INC
STANDARD PRODS CO
STANDARD REGISTER CO
STANDEX INTL CORP
STANHOME INC
STATE AUTO FINL CORP
STATION CASINOS INC
STEIN MART INC
STERIS CORP
STERLING CHEMS INC
STEWART&STEVENSON SV
STILLWATER MNG CO
STONE & WEBSTER INC
STRATOSPHERE CORP
STRATUS COMPUTER INC
STRAWBRIDGE & CLOTHI
STRIDE RITE CORP
STUDENT LN CORP
STURM RUGER & CO INC
SUMITOMO BANK CALIF
SUN HEALTHCARE GROUP
SUNRISE MED INC
SUNSHINE MNG CO
SUPERIOR INDS INTL
SUSQUEHANNA BKSHS PA
SWIFT TRANSN CO

70
<PAGE> 153

SYNETIC INC
SYSTEMS & COMPTR TEC
T R FINL CORP
TARGET THERAPEUTICS
TCA CABLE TV INC
TECH DATA CORP
TECNOL MED PRODS INC
TEJAS GAS CORP DEL
TELEFLEX INC
TELXON CORP
TENCOR INSTRS
TEXAS INDS INC
THERMO ECOTEK CORP
THIOKOL CORPDEL
TIFFANY & CO NEW
TITAN WHEEL INTL INC
TJ INTL INC
TNT FREIGHTWAYS CORP
TOLL BROTHERS INC
TOM BROWN INC NEW
TOPPS INC
TORO CO
TOY BIZ INC
TRANS WORLD AIRLS IN
TRANSACTION SYS ARCH
TREDEGAR INDS INC
TRENWICK GROUP INC
TRIANGLE PAC CORP DE
TRIARC COS INC
TRIDENT MICROSYSTEMS
TRIMAS CORP
TRIMBLE NAVIGATION L
TRINOVA CORP
TRUE NORTH COMMUNICA
TRUST CO NJ JERSEY C
TRUSTCO BK CORP N Y
TRUSTMARK CORP
TUCSON ELEC & POWER
U S AIR GROUP INC
U S DELIVERY SYS INC
U S HOME CORP NEW
U S TR CORP NEW
UGI CORP NEW
ULTRATECH STEPPER IN
UMB FINL CORP
UNIFIRST CORP
UNITED BANKSHS INC W
UNITED CAROLINA BANC
UNITED COS FINL CORP
UNITED DENTAL CARE I
UNITED ILLUM CO
UNITED INS COS INC
UNITED INTL HLDGS IN
UNITED MERIDIAN CORP
UNITED STATES FILTER
UNITED STATIONERS IN
UNITED WASTE SYS INC
UNITED WIS SVCS INC
UNITED WTR RES INC
UNITRODE CORP
UNIVERSAL HEALTH SVC
UNR INDS INC
US ORDER INC
UST CORP
VALASSIS COMMUNICATI
VALHI INC NEW
VALMONT INDS INC
VALUE LINE INC
VANGUARD CELLULAR SY
VARCO INTL INC
VENTRITEX INC
VERIFONE INC
VERITAS SOFTWARE CO
VERTEX PHARMACEUTICA
VESTA INS GROUP INC
VICOR CORP
VICTORIA BANKSHARES
VIDEOSERVER INC
VINTAGE PETE INC
VISX INC DEL

71
<PAGE> 154

VITAL SIGNS INC
VITALINK PHARMACY SV
VIVUS INC
VLSI TECHNOLOGY
VOLT INFORMATION SCI
WABAN INC
WABASH NATL CORP
WANG LABS INC NEW
WASHINGTON ENERGY CO
WASHINGTON NATL CORP
WATKINS JOHNSON CO
WATTS INDS INC
WAUSAU PAPER MLS CO
WD 40 CO
WEBB DEL E CORP
WELLMAN INC
WERNER ENTERPRISES I
WEST INC
WESTAMERICA BANCORP
WESTCORP
WESTCOTT COMMUNICATN
WESTERN GAS RES INC
WESTERN WASTE INDS
WESTINGHOUSE AIR BRA
WESTPOINT STEVENS IN
WESTWOOD ONE INC
WFS FINL INC
WHITNEY HLDG CORP
WHX CORP
WICOR INC
WILEY JOHN & SONS IN
WILLIAMS SONOMA INC
WIND RIVER SYSTEMS I
WLR FOODS INC
WMS INDUSTRIES INC
WOLVERINE TUBE INC
WOLVERINE WORLD WIDE
WPS RESOURCES CORP
WYLE LABS
WYMAN GORDON CO
X-RITE INC
XTRA INC
YANKEE ENERGY SYS IN
YELLOW CORP
ZALE CORP NEW
ZEBRA TECHNOLOGIES C
ZEIGLER COAL HLDG CO
ZENITH ELECTRS CORP
ZENITH NATL INS CORP
ZERO CORP
ZILOG INC
ZURN INDS INC

<PAGE> 155

SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
COMMON STOCK--97.3%
AUSTRALIA--2.4%
Australia & New Zealand
Banking Group 53,322 $ 223
BTR Nylex, Ltd. 116,332 316
Broken Hill Proprietary Co.,
Ltd. 83,813 1,135
CRA 27,600 426
Coles Myer, Ltd. 51,855 179
Commonwealth Bank Group 41,124 313
National Australia Bank 63,258 542
News Corp., Ltd. 91,896 463
Western Mining Corp. 53,600 344
Westpac Banking Corp. 79,986 328
--------
4,269
--------
BELGIUM--0.6%
Electrabel 2,000 449
Electrabel, AFV1 500 114
Petrofina SA 1,100 341
Societe Generale de Belgique 3,040 230
--------
1,134
--------
CANADA--3.0%
Alcan Aluminum 10,050 322
BCE Inc. 14,279 481
Bank of Montreal 11,886 268
Bank of Nova Scotia 8,524 184
Barrick Gold Corp. 16,500 385
Canadian Imperial Bank of
Commerce 9,595 260
Canadian Pacific Ltd. 16,700 266
Imperial Oil Ltd. 8,919 327
Newbridge Networks Corp.* 3,300 101
Northern Telecom Ltd. 12,000 433
Nova Corp. 19,200 149
PanCanadian Petroleum Ltd. 5,000 168
Placer Dome Inc. 21,200 467
Royal Bank of Canada 15,200 342
Seagram Co. Ltd. 17,400 633
Thomson Corp. 27,100 367
Toronto-Dominion Bank 14,000 248
--------
5,401
--------
DENMARK--0.4%
D/S 1912 Series B 10 196
D/S Svendborg Series B 5 140
Tele Danmark AS Series B 5,910 308
--------
644
--------
FRANCE--7.2%
AXA Groupe SA 13,366 742
Alcatel Alsthom Cie Generale
d'Electricite SA 6,954 594
Alcatel Cable 1,723 100
Assurances Generales de
France 15,800 456
Banque Nationale de Paris 10,161 418
Canal Plus 819 142
Carrefour 1,200 705
Cie Financiere de Paribas
(Bearer) 5,425 298
Cie Generale des Eaux 5,221 485
Compagnie de Saint-Gobain SA 3,931 469
Danone Groupe 3,350 535
Elf Aquitaine 12,835 874
L'Air Liquide 3,073 515
L'Oreal SA 2,900 709
LVMH Moet Hennessy Louis
Vuitton 7,100 1,413
Lafarge Coppee SA 8,596 570
Lyonnaise des Eaux-Dumez 2,780 271
Michelin Class B (Reg.) 5,300 214
PSA Peugeot Citroen 2,200 287
Renault (Regie Nationale) 10,500 329
Rhone-Poulenc SA A Shares 15,400 336
Sanofi 4,510 288
Schneider SA 8,900 343
Societe Generale 3,978 456
Suez Group 7,455 281
TOTAL Class B 10,604 655
Union des Assurances de Paris 14,389 374
--------
12,859
--------
GERMANY--8.1%
BASF Group 2,653 582
Bankgesellschaft Berlin 1,206 356
Bayer AG 3,167 842
Bayerische Hypotheken &
Wechsel Bank AG 11,380 275
Bayerische Motoren Werke AG 910 488
Bayerische Vereinsbank AG 11,590 328
Commerzbank AG 1,535 355
Daimler-Benz AG 2,721 1,312
Deutsche Bank AG 21,400 968
Dresdner Bank AG 20,130 538
Hoechst AG 2,762 725
Linde AG 400 246
Lufthansa AG (Bearer) 1,600 223
Mannesmann AG 1,734 571
Muenchener Rueckversicherung 11 19
Muenchener Rueckversicherung
(Reg.) 744 1,544
Preussag AG 721 205
RWE AG 1,581 563
SAP AG 2,840 450
Schering AG 3,500 244
Siemens AG 2,610 1,368
Thyssen AG 1,411 254
VIAG AG 970 394
Veba AG 22,470 923
Vereinigte Elektrizitatswerke
Westfalen Series B 903 300
Volkswagen AG 1,246 393
--------
14,466
--------
HONG KONG--3.7%
CITIC Pacific 98,000 306
Cathay Pacific Airways 141,000 208
Cheung Kong Holdings 50,000 282
China Light & Power 94,900 506
Hang Seng Bank Ltd. 88,900 745
Henderson Land
Development Co. 76,000 455
Hongkong Electric Holdings
Ltd. 99,000 337
Hongkong Telecom
International 520,000 908
Hutchison Whampoa Ltd. 165,000 909
New World Development Co. 69,709 271
Sun Hung Kai Properties 107,500 859
Swire Pacific Ltd. Class A 75,500 566
Wharf Holdings 101,000 341
--------
6,693
--------
</TABLE>

See accompanying Notes to Financial Statements.

F-1
<PAGE> 156

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
ITALY--2.3%
Alleanza Assicurazioni 22,500 $ 192
Alleanza Assicurazioni
(Non-Convertible) 3,750 26
Assicurazioni Generali 37,200 867
Banco di Roma SpA 141,900 127
Fiat Finance SpA 113,000 368
Fiat Finance SpA
(Non-Convertible) 42,000 79
First Bank San Paolo di
Torino 27,700 153
IMI 24,800 136
INA 201,000 264
Montedison SpA 213,000 147
RAS Assicurazioni 6,310 63
RAS Assicurazioni
(Non-Convertible) 2,790 15
STET 177,000 501
STET (Non-Convertible) 66,000 144
Telecom Italia 260,000 395
Telecom Italia
(Non-Convertible) 65,000 77
Telecom Italia Mob* 260,000 436
Telecom Italia Mob di Risp* 65,000 72
--------
4,062
--------
JAPAN--30.4%
Ajinomoto Co., Inc. 14,000 138
All Nippon Airways Co., Ltd. 31,000 300
Asahi Bank 48,000 479
Asahi Breweries 8,000 87
Asahi Chemical Industry Co. 28,000 197
Asahi Glass Co., Ltd. 24,000 235
Ashikaga Bank 15,000 89
Bank of Fukuoka 11,000 81
Bank of Tokyo 58,000 845
Bank of Yokohama 24,000 170
Bridgestone Corp. 15,000 208
Canon Inc. 18,000 308
Chiba Bank 16,000 133
Chubu Electric Power Co. 16,100 375
Chugoku Electric Power
Co., Inc. 7,854 183
Cosmo Oil Co. 11,000 54
DDI Corp. 100 810
Dai Nippon Printing Co. 15,000 239
Dai-Ichi Kangyo Bank, Ltd. 97,000 1,640
Daiei Inc. 14,000 146
Daiichi Pharmaceutical Co. 5,000 70
Daiwa Bank 33,000 197
Daiwa House Industry Co. 11,000 165
Daiwa Securities Co. 29,000 340
East Japan Railway Co. 100 472
Ebara Corp. 5,000 69
Eisai Co. 5,000 85
Fanuc 5,000 217
Fuji Bank, Ltd. 93,000 1,727
Fuji Photo Film Co. 11,000 272
Fujitsu Ltd. 38,000 453
Furukawa Electric Co., Ltd. 13,000 58
Gunma Bank 10,000 102
Hachijuni Bank 13,000 145
Hankyu Corp. 17,000 88
Hanwa Co. 5,000 15
Hiroshima Bank 13,000 64
Hitachi Ltd. 96,000 985
Hitachi Zosen 19,000 93
Hokkaido Electric Power Co. 4,080 95
Hokkaido Takushoku Bank 12,000 30
Hokuriku Bank 13,000 76
Hokuriku Electric Power Co. 4,080 94
Honda Motor Co., Ltd. 20,000 348
Industrial Bank of Japan,
Ltd. 76,000 2,073
Ishikawajima-Harima Heavy
Industries 25,000 101
Isuzu Motors Ltd. 20,000 81
Ito-Yokado Co., Ltd. 9,000 492
Itochu Corp. 28,000 166
Japan Airlines Co., Ltd. 35,000 210
Japan Energy Co. 21,000 60
Japan Telecom Co. 10 222
Japan Tobacco Inc. 100 854
Joyo Bank 18,000 129
Jusco Co. 6,000 141
Kajima Corp. 20,000 185
Kandenko Co., Ltd. 5,000 62
Kansai Electric Power Co. 20,200 474
Kao Corp. 12,000 145
Kawasaki Heavy Industries 25,000 105
Kawasaki Steel Co. 72,000 239
Keio Teito Railway Co. 8,000 45
Kinden Co. 3,000 52
Kinki Nippon Railway Co. 35,000 270
Kirin Brewery Co., Ltd. 22,000 222
Kobe Steel 59,000 155
Kokusai Denki 1,500 121
Komatsu Ltd. 22,000 172
Kubota Corp. 27,000 167
Kyocera Corp. 4,000 328
Kyowa Hakko Kogyo 6,000 56
Kyushu Electric Power Co. 9,797 232
Kyushu Matsushita Electric
Co. 3,000 48
Long-Term Credit Bank of
Japan 52,000 406
Marubeni Corp. 34,000 166
Marui Co. 7,000 121
Matsushita Communication
Industrial 4,000 90
Matsushita Electric
Industrial Co., Ltd. 61,000 865
Matsushita Electric Works 15,000 148
Matsushita-Kotokuki
Electronics 3,000 61
Mazda Motor Corp. 21,000 66
Mitsubishi Bank 82,000 1,603
Mitsubishi Chemical Corp. 34,000 154
Mitsubishi Corp. 33,000 365
Mitsubishi Electric Corp. 43,000 321
Mitsubishi Estate Co. 28,000 298
Mitsubishi Heavy Industries 71,000 548
Mitsubishi Materials Co. 21,000 95
Mitsubishi Motors 17,000 142
Mitsubishi Oil Co. 8,000 64
Mitsubishi Trust & Banking
Corp. 27,000 377
Mitsui & Co. 34,000 271
Mitsui Fudosan Co. 16,000 183
Mitsui Marine & Fire
Insurance 14,000 84
Mitsui O.S.K. Lines 14,000 37
Mitsui Trust & Banking Co. 25,000 200
Mitsukoshi Ltd. 9,000 71
Murata Manufacturing Co. 5,000 175
NEC Corp. 34,000 449
NGK Insulators 5,000 46
</TABLE>

See accompanying Notes to Financial Statements.

F-2
<PAGE> 157

SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
NKK Corp. 67,000 $ 162
Nagoya Railroad Co. 10,000 47
New Oji Paper Co. 16,000 147
Nichii Co. 4,000 47
Nikko Securities Co. 29,000 270
Nikon Corp. 11,000 157
Nintendo Co., Ltd. 3,000 221
Nippon Credit Bank 34,000 133
Nippon Express Co. 21,000 170
Nippon Fire & Marine
Insurance Co. 7,000 38
Nippon Oil Co. 26,000 138
Nippon Paper Industries Co. 39,000 268
Nippon Steel Corp. 145,000 481
Nippon Telegraph &
Telephone Corp. 596 4,888
Nippon Yusen Kabushiki Kaisha 27,000 144
Nippondenso 17,000 311
Nissan Motor Co., Ltd. 54,000 364
Nisshin Steel Co. 20,000 74
Nomura Securities Co., Ltd. 51,000 932
Obayashi Corp. 17,000 126
Odakyu Electric Railway Co. 14,000 94
Oki Electric Industry Co.,
Ltd. 12,000 111
Omron Corp. 8,000 187
Ono Pharmaceutical Co. 3,000 119
Osaka Gas Co. 53,000 178
Pioneer Electronic Corp. 4,000 61
Ricoh Co., Ltd. 13,000 140
Rohm Co. 4,000 243
SEGA Enterprises, Ltd. 2,000 106
Sakura Bank 86,000 832
Sankyo Co. 7,000 154
Sanwa Bank 92,000 1,565
Sanyo Electric Co., Ltd. 40,000 207
Secom Co. 3,000 195
Seibu Railway Co. 11,000 484
Sekisui Chemical Co. 11,000 143
Sekisui House 14,000 161
Seven-Eleven Japan Co. 7,000 467
Sharp Corp. 22,000 305
Shikoku Electric Power Co. 6,222 145
Shimizu Corp. 17,000 158
Shin-Etsu Chemical Co. 6,000 123
Shiseido Co., Ltd. 8,000 81
Shizuoka Bank 16,000 189
Showa Shell Sekiyu 8,000 64
Sony Corp. 8,000 360
Sony Music Entertainment
(Japan) 2,100 90
Sumitomo Bank 90,000 1,592
Sumitomo Chemical Co. 35,000 163
Sumitomo Corp. 21,000 191
Sumitomo Electric Industries 15,000 173
Sumitomo Marine & Fire
Insurance Co. 13,000 93
Sumitomo Metal Industries 60,000 162
Sumitomo Metal Mining Co. 11,000 87
Sumitomo Trust & Banking Co. 25,000 288
Suzuki Motor Corp. 10,000 101
TDK 3,000 155
Taisei Corp. 19,000 113
Taisho Pharmaceutical Co. 8,000 145
Takeda Chemical Industries 17,000 239
Teijin Ltd. 19,000 87
Tobu Railway Co. 16,000 91
Tohoku Electric Power Co. 10,100 237
Tokai Bank 42,000 439
Tokio Marine & Fire
Insurance Co. 33,000 339
Tokyo Electric Power Co.,
Inc. 39,087 1,024
Tokyo Electron 3,000 130
Tokyo Gas & Electric
Industrial 57,000 201
Tokyu Corp. 23,000 146
Tonen 13,000 184
Toppan Printing Co. 15,000 198
Toray Industries 29,000 181
Toshiba Corp. 68,000 493
Tostem Corp. 5,000 153
Toto 8,000 108
Toyo Seikan 4,000 115
Toyo Trust & Banking Co. 17,000 115
Toyoda Automatic Loom 6,000 94
Toyota Motor Corp. 118,000 2,192
Yamaichi Securities Co. 25,000 131
Yamanouchi Pharmaceutical Co. 6,000 134
Yamazaki Baking Co. 5,000 88
Yasuda Fire & Marine
Insurance Co. 20,000 121
Yasuda Trust & Banking Co. 23,000 103
--------
54,676
--------
NETHERLANDS--5.1%
ABN-AMRO Holding NV 12,240 514
Aegon NV 11,115 422
Akzo Nobel NV 3,300 376
Elsevier NV 31,600 409
Heineken NV 2,250 399
Internationale Nederlanden
Groep 13,042 778
Koninklijke PTT Nederland 22,140 779
Philips Electronics NV 15,400 595
PolyGram NV 8,700 543
Royal Dutch/Shell Group
(Bearer) 25,200 3,129
Unilever NV 7,500 983
Wolters Kluwer CVA 3,139 286
--------
9,213
--------
SINGAPORE--2.2%
Development Bank Singapore 45,000 516
Hong Kong Land Holdings 233,331 420
Jardine Matheson Holdings
Ltd. 35,811 218
OCBC Bank 41,833 491
Singapore Airlines Ltd. 62,000 575
Singapore Telecom 709,000 1,445
United Overseas Bank 39,600 348
--------
4,013
--------
SPAIN--1.6%
Argentaria 5,700 201
Banco Central SA (Reg.) 5,500 114
Banco Espanol de Credito 26,000 176
Banco de Bilbao Vizcaya SA
(Reg.) 11,200 342
Banco de Santander SA (Reg.) 6,800 296
Empresa Nacional de
Electricidad 11,700 582
Iberdrola SA 39,600 298
Repsol, SA 12,800 382
Telefonica Internacional de
Espana, SA 42,300 534
--------
2,925
--------
</TABLE>

See accompanying Notes to Financial Statements.

F-3
<PAGE> 158

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
SWEDEN--2.2%
ASEA AB Series A Free shares 3,300 $ 330
ASEA AB Series B Free shares 800 79
Astra AB Series A Free shares 22,400 823
Astra AB Series B Free shares 3,400 123
Branded Consumer Products
(Compulsory Acquisition)
Series A* 5,300 75
Branded Consumer Products
(Compulsory Acquisition)
Series B* 2,800 39
Ericsson(LM) Telephone* 6,280 133
Ericsson(LM) Telephone
Series B 62,800 1,333
Pharmacia AB Series A
Free shares 5,300 184
Pharmacia AB Series B
Free shares 2,800 98
Sandvik AB Series A
Free shares 8,600 161
Volvo AB Series A Free shares 5,000 114
Volvo AB Series B Free shares 20,700 466
--------
3,958
--------
SWITZERLAND--8.0%
BBC Brown Boveri 370 429
BBC Brown Boveri (Reg.) 189 43
CS Holding (Reg.) 13,670 1,397
Ciba-Geigy Ltd. (Bearer) 170 147
Ciba-Geigy Ltd. (Reg.) 1,175 1,017
Cie Financiere Richemont
Series A (Bearer) 259 360
Holderbank Fn Glarus (Bearer) 1,000 803
Nestle Ltd. (Reg.) 1,823 1,911
Roche Group 323 2,347
Roche Group (Bearer) 75 960
SMH AG (Bearer) 156 97
SMH AG (Reg.) 682 92
Sandoz Ltd. (Bearer) 491 409
Sandoz Ltd. (Reg.) 1,673 1,381
Schweizerische
Bankgesellschaft (Bearer) 979 1,061
Schweizerische
Bankgesellschaft (Reg.) 950 218
Schweizerische Bankverein
(Bearer) 1,129 463
Schweizerische Bankverein
(Reg.) 1,251 256
Winterthur (Reg.) 500 329
Zurich Versicherun (Reg.) 2,095 600
--------
14,320
--------
UNITED KINGDOM--20.1%
Abbey National 61,900 524
Allied-Lyons 48,700 393
Argyll Group 54,708 278
BAA PLC 48,456 377
BAT Industries PLC 144,756 1,188
BOC Group 21,850 300
BTR PLC 165,615 880
Barclays PLC 75,223 883
Bass PLC 42,400 444
Boots Co. PLC 46,648 413
British Airways PLC 46,400 334
British Gas PLC 201,400 767
British Petroleum Co. PLC 259,375 1,907
British Sky Broadcast 76,400 457
British Steel 94,600 244
British Telecommunications
PLC 294,200 1,749
Cable & Wireless PLC 146,900 959
Cadbury Schweppes PLC 40,210 332
Commercial Union
Assurance Co. 31,400 304
General Accident 17,300 177
General Electric Co. PLC 125,200 622
Glaxo PLC 149,529 2,017
Grand Metropolitan PLC 98,003 679
Great Universal Stores 47,800 431
Guinness PLC 93,500 749
HSBC Holdings PLC 40,757 606
HSBC Holdings PLC
(Hong Kong) 82,896 1,217
Hanson PLC 240,444 737
Imperial Chemical
Industries PLC 32,100 393
Inchcape 22,221 110
J. Sainsbury PLC 85,028 569
Kingfisher 29,415 221
Lloyds Abbey Life 26,700 193
Lloyds Bank 59,098 727
Marks & Spencer PLC 127,500 855
National Power Development 59,600 465
National Westminster Bank PLC 75,443 753
Pearson PLC 25,137 250
Peninsular & Oriental Steam
Navigation Co. 26,291 200
Powergen PLC 37,400 336
Prudential Corp. 85,865 537
RTZ Corp. PLC (Reg.) 48,503 672
Rank Organisation PLC 40,800 272
Redland 22,248 123
Reed International PLC 26,000 395
Reuters Holdings PLC 86,500 804
Royal Bank of Scotland 36,413 295
Scot & Newcastle 20,100 186
Scottish Power 31,400 173
Shell Transport & Trading
Co. (Reg.) 157,000 1,837
SmithKline Beecham PLC
Series A 65,635 685
SmithKline Beecham PLC
(units) 62,700 642
Standard Chartered PLC 10,264 84
Sun Alliance Group 31,988 191
TSB Group PLC 76,700 452
Tesco 95,403 453
Thorn EMI PLC 19,666 458
Tomkins 47,801 189
Unilever PLC 36,900 717
Vendome (units) 34,050 301
Vodafone Group PLC 146,192 604
Waste Management
International* 16,000 75
Zeneca Group 45,200 842
--------
36,027
--------
TOTAL COMMON STOCK
(Cost $162,414) 174,660
--------
</TABLE>

See accompanying Notes to Financial Statements.

F-4
<PAGE> 159

SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
PREFERRED STOCK--0.7%
AUSTRALIA--0.1%
News Corp. Ltd. (Limited
Voting Shares) 39,718 $ 182
--------
GERMANY--0.6%
Henkel KGaA 629 235
RWE AG (Non Voting) 1,832 519
SAP AG Non Voting Preference 2,010 308
Volkswagen AG (Non Voting) 350 80
--------
1,142
--------
ITALY--0.0%
Fiat Finance SpA 38,800 77
--------
TOTAL PREFERRED STOCK
(Cost $1,168) 1,401
--------
WARRANTS--0.0%
UNITED KINGDOM--0.0%
BTR Nylex Ltd.
(expire 11/26/98)* 4,019 2
--------
TOTAL WARRANTS
(Cost $3) 2
--------
</TABLE>

<TABLE>
<CAPTION>
Maturity Value
(000s) (000s)
-------- ------
<S> <C> <C>
REPURCHASE AGREEMENT--1.2%
UNITED STATES--1.2%
State Street Bank & Trust
4.75%
Dated 10/31/95
Due 11/01/95
Collateralized By:
U.S. Treasury Bond
$1,440,000 Par; 12%
Due 8/15/13 $ 2,144 2,144
--------
TOTAL REPURCHASE AGREEMENT
(Cost $2,144) 2,144
--------
TOTAL INVESTMENTS--99.2%
(Cost $165,729) 178,207
--------
OTHER ASSETS AND LIABILITIES--0.8%
Other Assets 1,793
Liabilities (388)
--------
1,405
--------
NET ASSETS--100.0%
Applicable to 16,137,640
outstanding $0.00001
par value shares
(unlimited shares
authorized) $179,612
========
NET ASSET VALUE PER SHARE $11.13
=====
</TABLE>

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

*Non-Income Producing Security

See accompanying Notes to Financial Statements.

F-5
<PAGE> 160

SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF OPERATIONS (in thousands)
For the year ended October 31, 1995
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax withheld of $515) $ 3,386
Interest 161
-------
Total investment income 3,547
-------
Expenses:
Investment advisory and administration fee 1,080
Transfer agency and shareholder service fees 386
Custodian fees 206
Registration fees 45
Professional fees 50
Shareholder reports 46
Trustees' fees 43
Amortization of deferred organization costs 24
Insurance and other expenses 6
-------
1,886
Less expenses reduced (577)
-------
Total expenses incurred by Fund 1,309
-------
Net investment income 2,238
-------
Net realized gain (loss) on investments and foreign currency
transactions:
Proceeds from sales of investments 9,597
Cost of investments sold (9,437)
-------
Net realized gain on investments from changes in market
value 160
Net realized loss on investments from changes in foreign
exchange rates (137)
-------
Net realized gain on investments sold 23
Net realized gain on foreign currency transactions 170
-------
Net realized gain on investments sold and foreign
currency transactions 193
-------
Change in net unrealized gain (loss) on investments and foreign
currency translation:
Changes in market value:
Beginning of period unrealized gain 413
End of period unrealized gain 4,832
-------
Increase in net unrealized gain in market value 4,419
-------
Changes in foreign exchange rates:
Beginning of period unrealized gain 9,494
End of period unrealized gain 7,646
-------
Decrease in net unrealized gain in foreign exchange rates (1,848)
-------
Increase in net unrealized gain on investments from
changes in market value and foreign exchange rates 2,571
Decrease in net unrealized gain on translating assets
and liabilities into the reporting currency (14)
-------
Increase in net unrealized gain on investments and
foreign currency translation 2,557
-------
Net gain on investments 2,750
-------
Increase in net assets resulting from operations $ 4,988
=======
</TABLE>

See accompanying Notes to Financial Statements.

F-6
<PAGE> 161

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

<TABLE>
<CAPTION>
For the year ended
October 31,
1995 1994
-------- --------
<S> <C> <C>
Operations:
Net investment income $ 2,238 $ 1,412
Net realized gain (loss) on investments sold
and foreign currency transactions 193 (580)
Increase in net unrealized gain on investments
and foreign currency translation 2,557 8,889
-------- --------
Increase in net assets resulting from
operations 4,988 9,721
-------- --------
Distributions to Shareholders From:
Net investment income (1,532) (433)
Capital gains -- (188)
-------- --------
Total distributions to shareholders (1,532) (621)
-------- --------
Capital Share Transactions:
Proceeds from shares sold 73,349 61,237
Net asset value of shares issued in
reinvestment of distributions 1,372 560
Early withdrawal fees 49 129
Less payments for shares redeemed (40,969) (34,756)
-------- --------
Increase in net assets from capital share
transactions 33,801 27,170
-------- --------
Total increase in net assets 37,257 36,270
Net Assets:
Beginning of period 142,355 106,085
-------- --------
End of period (including undistributed
net investment income of $2,051 and
$1,306, respectively) $179,612 $142,355
======== ========
Number of Fund Shares:
Sold 6,778 5,947
Reinvested 134 56
Redeemed (3,840) (3,392)
-------- --------
Net increase in shares outstanding 3,072 2,611
Shares Outstanding:
Beginning of period 13,066 10,455
-------- --------
End of period 16,138 13,066
======== ========
</TABLE>

See accompanying Notes to Financial Statements.

F-7
<PAGE> 162

SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
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(R), the Schwab Asset Director(R)-High Growth Fund, the Schwab Asset
Director(R)-Conservative Growth Fund and the Schwab Asset Director(R)-Balanced
Growth Fund. 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(R), 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.

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 investment manager 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.

F-8
<PAGE> 163

SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------

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 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.

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, 1995, (for financial reporting and federal income tax purposes),
net unrealized gain aggregated $12,478,000, of which $22,819,000 related to
appreciated securities and $10,341,000 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
$1,080,000 during the year ended October 31, 1995, before the Investment Manager
reduced its fee (see Note 5).

Sub-advisory agreement -- Prior to June 30, 1995, the Investment Manager had a
sub-advisory agreement with Dimensional Fund Advisors Inc. ("Dimensional") under
which Dimensional performed day-to-day portfolio management for the Fund.
Dimensional did not receive compensation directly from the Fund. However, the
Investment Manager did pay 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. Effective June 30, 1995, the sub-advisory agreement for the
Fund was terminated and the Investment Manager assumed day-to-day portfolio
management responsibility for the Fund.

F-9
<PAGE> 164

SchwabFunds(R) 10
- --------------------------------------------------------------------------------

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

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, 1995, the Fund incurred transfer agency and shareholder
service fees of $386,000, 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 and/or Schwab.
During the year ended October 31, 1995, 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 $43,000
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 year ended October 31, 1995, 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. For the year
ended October 31, 1995, the total of such fees reduced by the Investment Manager
was $415,000 and the total of such fees reduced by Schwab was $162,000.

6. INVESTMENT TRANSACTIONS

Purchases and sales of investment securities, other than short-term obligations,
aggregated $43,932,000 and $9,597,000, respectively, for the year ended October
31, 1995.

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, 1995, total early withdrawal fees
retained by the Fund amounted to $49,000.

F-10
<PAGE> 165

SchwabFunds(R) 11
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------

8. COMPOSITION OF NET ASSETS

At October 31, 1995, net assets consisted of:

<TABLE>
<S> <C>
Capital paid in $165,464,000
Accumulated undistributed net investment income 2,051,000
Accumulated net realized loss on investments sold and
foreign currency transactions (402,000)
Net unrealized gain on investments 12,478,000
Net unrealized gain on translating assets and liabilities
into the reporting currency 21,000
------------
Total $179,612,000
============
</TABLE>

The Fund follows 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, certain
reclassifications to increase undistributed net investment income and net
realized loss on investments sold and foreign currency transactions by $39,000
and $15,000 respectively, and to decrease capital paid in by $24,000 have
occurred. These reclassifications have no impact on the net asset value of the
Fund.

At October 31, 1995, the Fund's Statement of Net Assets included liabilities of
$149,000 for Fund shares redeemed and $61,000 for investment advisory and
administration fee payable.

F-11
<PAGE> 166

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

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

9. FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
For the period
September 9,
1993
(commencement of
For the year ended operations) to
October 31, October 31,
1995 1994 1993
-------- -------- ----------------
<S> <C> <C> <C>
Net asset value at beginning of period $ 10.89 $ 10.15 $ 10.00
Income from Investment Operations
- -------------------------------
Net investment income .14 .11 .03
Net realized and unrealized gain on
investments and foreign currency
transactions .22 .69 .12
-------- -------- --------
Total from investment operations .36 .80 .15
Less Distributions
- ---------------
Dividends from net investment income (.12) (.04) --
Distributions from realized gain
on investments -- (.02) --
-------- -------- --------
Total distributions (.12) (.06) --
-------- -------- --------
Net asset value at end of period $ 11.13 $ 10.89 $ 10.15
======== ======== ========
Total return (%) 3.35 7.89 1.50
- --------------
Ratios/Supplemental Data
- -----------------------
Net assets, end of period (000s) $179,612 $142,355 $106,085
Ratio of expenses to
average net assets (%) .85 .90 .60*
Ratio of net investment income to
average net assets (%) 1.45 1.14 2.15*
Portfolio turnover rate (%) 0 6 2
</TABLE>

* Annualized

F-12
<PAGE> 167

SchwabFunds(R) 13
- --------------------------------------------------------------------------------

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

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, 1995, and 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 audits 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, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.

PRICE WATERHOUSE LLP
San Francisco, California
November 22, 1995

F-13
<PAGE> 168

SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
COMMON STOCK--99.0%
1st Source Corp. 2,433 $ 57
20th Century Industries 12,100 201
3COM Corp. 4,134 194
3DO Co.* 5,900 64
AAR Corp. 4,000 71
ACX Technologies, Inc. 6,200 98
ADVO, Inc. 4,500 115
AG Chemical Equipment Inc. 2,700 77
AGCO Corp. 6,150 275
ALANTEC Corp.* 2,200 78
ALBANK Financial Corp. 2,600 75
AMC Entertainment Inc.* 3,700 67
AMCORE Financial, Inc. 4,100 93
AMETEK, Inc. 7,700 136
AMP Inc. 1,792 70
APS Holding Corp. Class A* 3,200 66
AST Research, Inc.* 9,754 87
Acclaim Entertainment, Inc.* 10,000 237
Acme Metals Co.* 1,000 15
Acordia, Inc. 2,900 80
Actava Group Inc.* 4,100 71
Actel Corp.* 3,700 44
Acuson Corp.* 5,600 65
Acxiom Corp. 5,700 170
Addington Resources, Inc.* 3,100 39
Adobe Systems Inc. 1,600 91
Advanced Tissue Sciences,
Inc.* 7,800 70
Affiliated Computer Services
Inc.* 1,800 59
Air Express International
Corp. 4,000 82
Airborne Freight Corp. 4,700 123
Alaska Air Group, Inc.* 3,300 49
Albany International Corp.
Class A 7,100 147
Alberto-Culver Co. Class A 300 8
Alex. Brown Inc. 3,800 186
Alfa Farmers Federation Corp. 9,600 103
Allen Group Inc. 5,100 125
Alliance Entertainment Corp.* 8,200 55
Alliance Semiconductor Corp. 8,250 253
Alliant Techsystems Inc.* 2,900 135
Allied Group, Inc. 1,900 61
Alpharma, Inc. 4,600 110
Altera Corp. 3,000 182
Alternative Resources Corp. 4,100 126
Altron Inc. 2,500 73
Amcol International Corp. 3,900 67
Amerco* 10,500 190
America Online, Inc. 1,000 80
America West Airlines, Inc.* 10,200 139
American Annuity Group, Inc. 8,250 89
American Bankers Insurance
Group, Inc. 5,100 182
American Business
Information, Inc. 7,650 136
American Business Products,
Inc. 3,300 72
American Financial
Enterprises Inc. 1,500 35
American Freightways Corp.* 7,400 93
American Heritage Life
Investment Corp. 5,200 100
American Homepatient Inc.* 1,900 46
American Maize-Products Co. 2,700 107
American Management Systems,
Inc. 6,600 192
American Medical Response,
Inc.* 6,000 173
American Mobile Satellite
Corp.* 6,300 132
American Oncology Resources
Inc.* 6,400 224
American President Companies,
Ltd. 7,100 172
Americredit Corp.* 7,100 87
Amphenol Corp. Class A* 3,100 67
Amresco Inc. 5,700 61
Amsco International, Inc.* 10,700 171
Anchor Gaming* 2,500 55
Andrew Corp. 1,275 54
Angelica Corp. 2,000 45
AnnTaylor Stores Corp.* 5,500 61
Antec Corp.* 5,600 70
Anthony Industries, Inc. 6,415 119
Apogee Enterprises, Inc. 2,300 34
Apollo Group Inc. 4,650 121
Apple South, Inc. 6,650 138
Applebee's International,
Inc. 7,600 212
Applied Innovation Inc. 3,400 32
Applied Power Inc. Class A 2,800 85
Apria Healthcare Group Inc.* 11,600 252
Aptar Group, Inc. 4,500 154
Aquila Gas Pipeline Corp. 6,800 75
Arbor Drugs, Inc. 5,900 107
Arch Communications Group
Inc.* 2,600 71
Arctco, Inc. 6,150 70
Argosy Gaming Co.* 4,700 44
Armco Inc.* 28,000 172
Armor All Products Corp. 4,600 77
Arnold Industries Inc. 6,300 104
Arrow International, Inc. 1,000 42
Arthur J. Gallagher & Co. 3,300 117
Arvin Industries, Inc. 6,300 112
Ashland Coal, Inc. 2,900 69
Aspect Telecommunications
Corp. 5,600 194
Associated Banc-Corp 3,900 148
Associated Group Inc. Class
A* 4,100 73
Astoria Financial Corp. 4,000 172
Atlantic Southeast Airlines,
Inc. 6,300 157
Atmos Energy Corp. 4,000 73
Atria Software Inc. 3,200 115
Augat Inc. 4,100 65
Auspex Systems, Inc.* 7,600 108
Authentic Fitness Corp. 5,500 113
Avatar Holdings, Inc.* 2,400 89
Avid Technology, Inc.* 4,500 196
Aztar Corp.* 7,400 60
B W/I P Inc. Class A 5,100 84
BISYS Group, Inc.* 5,600 156
BJ Services Co.* 6,900 162
BMC Industries, Inc. 3,100 120
Baldor Electric Co. 6,540 157
Baldwin & Lyons, Inc. Class B 3,300 49
Ballard Medical Products 9,900 171
Bally Entertainment Corp. 10,100 111
</TABLE>

See accompanying Notes to Financial Statements.

F-14
<PAGE> 169

SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Bancorp South, Inc. 2,300 $ 108
Banta Corp. 5,050 220
Banyan Systems, Inc.* 2,800 22
Barnes Group Inc. 1,600 60
Barrett Resources Corp.* 6,900 160
Bassett Furniture Industries,
Inc. 3,600 73
Bay State Gas Co. 2,800 70
Bearings, Inc. 1,600 58
Belden Inc. 12,300 297
Bell Bancorp, Inc. 1,800 53
Ben Franklin Retail Stores,
Inc.* 912 3
Benton Oil & Gas Co.* 5,000 61
Berkley (W.R.) Corp. 4,000 173
Best Products Inc. (New)* 7,300 36
Big B, Inc. 4,700 69
Bio Rad Laboratories Inc.* 1,700 65
Biocraft Laboratories, Inc. 2,800 43
Birmingham Steel Corp. 7,100 108
Black Box Corp. 4,000 66
Black Hills Corp. 3,200 80
Blair Corp. 1,900 56
Blanch (E.W.) Holdings, Inc. 3,500 67
Block Drug Co., Inc. Class A 4,957 191
Blount, Inc. Class A 2,900 126
Blount, Inc. Class B 1,000 48
Blyth Industries Inc.* 3,600 182
Boise Cascade Office Products
Co.* 7,600 275
Bok Financial Corp. 5,000 108
Bolt Beranek and Newman Inc.* 4,300 133
Bombay Company, Inc.* 7,850 46
Books-A-Million, Inc. 3,500 45
Boole & Babbage, Inc. 500 18
Borg Warner Automotive Inc. 5,400 159
Borland International, Inc.* 9,300 126
Boston Scientific Corp.* 3,073 129
Boston Technology, Inc.* 8,400 117
Bowne & Co., Inc. 3,800 71
Brady (W.H.) Co. Class A 1,700 124
Breed Technologies, Inc. 8,300 155
BroadBand Technologies, Inc.* 2,600 46
Broderbund Software, Inc. 100 7
Brooklyn Bancorp Inc.* 3,200 126
Brooktree Corp.* 3,500 42
Brown (Tom), Inc.* 4,600 52
Brown Group, Inc. 3,700 51
Bruno's Inc.* 402 4
Brush Wellman Inc. 4,000 67
Buffets, Inc.* 6,900 87
Burlington Coat Factory
Warehouse Corp.* 8,800 98
Burlington Industries, Inc.* 16,400 182
Burr-Brown Corp. 3,200 102
Bush Boake Allen Inc.* 4,600 126
Business Records Corp.
Holding Co.* 1,200 45
C-COR Electronics, Inc. 2,400 56
C-Cube Microsystems, Inc.* 4,100 283
C-TEC Corp. 6,800 145
CCB Financial Corp. 3,550 175
CCH Inc. Class A 4,800 113
CCH Inc. Class B 8,700 202
CDI Corp.* 4,000 59
CDW Computer Centers, Inc. 3,500 172
CFW Communications Co. 2,400 44
CIDCO, Inc.* 3,300 97
CILCORP Inc. 3,300 129
CLARCOR Inc. 3,000 68
CMAC Investment Corp. 2,900 138
CML Group, Inc. 11,350 65
CNB Bancshares, Inc. 3,801 103
CPI Corp. 2,800 51
CSF Holdings, Inc. 2,375 93
Cabot Oil & Gas Corp. Class A 4,600 62
Cadence Design Systems, Inc. 2,700 87
CalMat Co. 9,100 154
Caldor Corp.* 3,400 17
Calgon Carbon Corp. 9,500 108
California Federal Bank 12,600 186
California Federal Bank
Goodwill Certificates* 960 4
California Microwave, Inc.* 3,500 76
Cambridge Technology
Partners, Inc.* 3,200 183
Camco International Inc. 6,000 137
Canandaigua Wine Co., Inc.
Class B* 1,000 48
Capital Re Corp. 5,400 153
Capitol American Financial
Corp. 6,500 128
Caraustar Industries, Inc. 6,600 122
Carlisle Companies Inc. 3,400 140
Carmike Cinemas, Inc.* 2,500 52
Carpenter Technology Corp. 3,600 136
Carson Pirie Scott & Co.
Illinois* 4,100 69
Carter-Wallace, Inc. 9,800 103
Casey's General Stores, Inc. 6,000 139
Casino America, Inc.* 3,350 23
Castech Aluminum Group Inc.* 2,400 34
Catalina Marketing Corp.* 2,200 111
Catellus Development Corp.* 28,300 156
Cato Corp. (New) Class A 6,200 37
Cellstar Corp.* 4,700 129
Cellular Communications, Inc.
Class A (Redeemable)* 4,500 242
Cellular Technical Services
Inc.* 2,100 35
Centex Construction Products
Inc.* 6,000 76
Central Hudson
Gas & Electric Corp. 3,700 113
Central Louisiana Electric
Co., Inc. 4,800 129
Central Maine Power Co. 7,900 110
Central Newspapers, Inc.
Class A 6,400 189
Centura Banks, Inc. 5,000 169
Century Communications Corp.
Class A* 19,100 166
Cephalon Inc.* 5,600 168
Cerner Corp. 5,400 139
Champion Enterprises, Inc. 4,200 109
Chaparral Steel Co. 6,000 59
Charming Shoppes, Inc. 26,100 74
Charter Medical Corp.* 6,100 110
Charter One Financial, Inc. 5,700 161
Chase Manhattan Corp. 1,360 78
Checkpoint Systems, Inc.* 5,700 165
Cheesecake Factory, Inc.* 2,400 51
Chemed Corp. 2,000 70
</TABLE>

See accompanying Notes to Financial Statements.

F-15
<PAGE> 170

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Chemical Financial Corp. 1,995 $ 79
Chesapeake Corp. 6,700 205
Chesapeake Energy Corp. 2,600 76
Cheyenne Software, Inc.* 9,450 197
Chips & Technologies Inc.* 3,900 34
Chiquita Brands
International, Inc. 13,000 211
Church & Dwight Co., Inc. 4,100 84
Citicasters Inc. 3,000 94
Citizens Bancorp 3,700 122
Citizens Banking Corp. 3,600 110
Citizens Corp. 8,800 160
City National Corp. 11,200 148
Claire's Stores, Inc. 4,500 88
Clear Channel Communications,
Inc. 475 39
Cleveland-Cliffs Inc. 2,700 101
Coast Savings Financial,
Inc.* 4,600 121
Coastal Physician Group Inc.* 6,200 81
Cobra Golf, Inc. 4,300 113
Coca-Cola Bottling Co.
Consolidated 2,000 67
Coeur d'Alene Mines Corp. 3,000 51
Cognex Corp.* 3,900 234
Coherent, Inc.* 2,800 80
Cole Taylor Financial Group
Inc. 3,600 95
Collective Bancorp, Inc. 4,400 103
Collins & Aikman Corp.* 15,700 126
Colonial BancGroup, Inc. 3,400 98
Colonial Data Technologies
Corp.* 3,600 50
Comair Holdings, Inc. 7,400 209
Comdata Holdings Corp.* 4,000 98
Commerce Group Inc.
Massachusetts 8,500 173
Commercial Federal Corp. 3,800 125
Commercial Intertech Corp. 3,450 58
Commercial Metals Co. 3,233 83
Commonwealth Energy System 2,600 110
Community Health Systems,
Inc.* 4,500 143
Community Psychiatric Centers 10,100 110
Comnet Cellular, Inc.* 3,700 93
CompUSA Inc.* 5,100 195
Computer Network Technology* 5,000 33
ComputerVision Corp.* 12,400 146
Comverse Technology Inc.* 5,000 113
Concord Efs Inc.* 10,300 355
Cone Mills Corp.* 10,300 112
Conner Peripherals, Inc.* 14,100 254
Consolidated Stores Corp.* 6,100 141
Continental Airlines, Inc.
Class B* 6,400 228
Continuum Company, Inc.* 5,000 197
Coors (Adolph) Co. Class B 9,000 163
Copley Pharmaceutical, Inc.* 4,764 78
Coram Healthcare Corp.* 9,262 37
Corrections Corp. of America 3,800 207
Coventry Corp. 8,000 158
Crawford & Co. Class A 4,300 67
Crawford & Co. Class B 8,500 132
Cray Research, Inc.* 6,400 133
Creative Computers Inc.* 2,100 60
Credence Systems Corp. 6,750 253
Crompton & Knowles Corp. 13,600 172
Cross (A.T.) Co. Class A 5,800 83
Cross Timbers Oil Co. 4,900 71
Cullen/Frost Bankers, Inc. 2,700 137
Culligan Water Technologies
Inc.* 3,500 60
Curtiss-Wright Corp. 1,400 62
Cypress Semiconductor Corp. 900 32
Cyrix Corp.* 4,500 144
Cytec Industries Inc.* 3,000 164
DSP Group, Inc.* 1,500 24
Daig Corp. 5,000 113
Dallas Semiconductor Corp. 9,500 202
Dames & Moore, Inc. 4,700 64
Data General Corp.* 7,900 91
Datascope Corp.* 4,200 101
Dauphin Deposit Corp. 8,400 245
Dave & Busters Inc.* 840 13
Davidson & Associates, Inc. 8,700 312
DeVRY Inc. 7,000 158
Dekalb Genetics Corp. 1,200 51
Dell Computer Corp. 6,300 293
Delta & Pine Land Co. 2,100 81
Department 56 Inc.* 300 14
Deposit Guaranty Corp. 4,400 194
Detroit Diesel Corp.* 8,900 158
Devon Energy Corp. 4,700 102
Devon Group, Inc. (New)* 1,600 62
Dexter Corp. 5,800 138
Diagnostic Products Corp. 4,300 159
Dial Page, Inc.* 5,000 74
Dialogic Corp.* 3,400 98
Diamond Multimedia Systems
Inc.* 7,200 214
Diamond Shamrock, Inc. 7,800 201
Digi International Inc.* 3,000 81
Digital Link Corp.* 1,900 30
Dimon Inc. 8,400 123
Dionex Corp.* 1,500 80
Discount Auto Parts, Inc.* 2,900 78
Discovery Zone, Inc.* 11,900 42
Dollar Tree Stores Inc.* 4,100 109
Donaldson Co., Inc. 5,800 141
Doubletree Corp.* 4,300 94
Downey Financial Corp. 3,200 65
Dreyer's Grand Ice Cream,
Inc. 3,300 115
Duriron Co., Inc. 4,400 118
Duty Free International, Inc. 6,800 97
Dynatech Corp. 3,400 52
Eastern Enterprises 4,800 143
Eastern Utilities Assoc. 4,800 113
Eaton Vance Corp. (Non
Voting) 2,100 76
Edison Brothers Stores, Inc. 4,200 15
Egghead, Inc.* 3,000 21
Electro Scientific Industries
Inc.* 2,200 69
Electroglas Inc. 2,300 163
Electronics for Imaging, Inc. 2,800 232
Empire District Electric Co. 3,200 59
Energen Corp. 2,800 63
Enhance Financial Services
Group, Inc. 7,100 145
Envoy Corp. (New)* 2,000 26
Enzo Biochem, Inc. 5,775 92
</TABLE>

See accompanying Notes to Financial Statements.

F-16
<PAGE> 171

SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Ethan Allen Interiors, Inc.* 3,700 $ 73
Exabyte Corp.* 4,900 63
Exar Corp. 2,000 48
Expeditors International of
Washington, Inc. 3,900 104
Express Scripts, Inc. Class A 3,400 131
F & M National Corp. 3,955 71
FHP International Corp.* 1,056 26
FMC Gold Co. 17,500 68
FSF Financial Corp. 5,100 68
FTP Software Inc.* 6,600 179
Fab Industries, Inc. 400 12
Fair, Issac & Co., Inc. 3,000 83
Farmer Bros. Co. 400 52
Fastenal Co. 1,400 49
Fedders Corp. 825 4
Federal-Mogul Corp. 8,800 157
Federated Department Stores,
Inc.* 2,700 69
Ferro Corp. 7,700 178
FileNet Corp.* 2,800 127
Financial Security Assured
Holdings Ltd. 6,400 166
Fingerhut Companies, Inc. 10,600 144
FirsTier Financial, Inc. 6,200 265
First Alert, Inc. 5,600 86
First American Financial
Corp. 3,600 84
First Bank System, Inc. 3,809 189
First Citizens BancShares,
Inc. Class A 2,600 138
First Commerce Bancshares
Inc. 3,000 54
First Commercial Corp. 5,640 169
First Commonwealth Financial
Corp. 5,300 87
First Data Corp. 501 33
First Financial Bancorp 2,800 95
First Financial Corp. 6,900 147
First Michigan Bank Corp. 4,906 132
First Midwest Bancorp, Inc. 2,900 82
First Mississippi Corp. 4,900 100
First National Bancorp 5,200 146
First Union Corp. 2,220 110
FirstFed Michigan Corp. 5,100 173
Firstbank of Illinois Co. 2,600 78
Firstmiss Gold Inc.* 7,571 138
Fisher Scientific
International, Inc. 3,600 113
Flagstar Companies, Inc.* 8,300 35
Florida East Coast
Industries, Inc. 2,400 161
Florida Rock Industries, Inc. 2,000 54
Fluke Corp. 1,600 59
Foremost Corp. of America 2,400 110
Forest City Enterprises, Inc.
Class A 2,100 78
Fort Wayne National Corp. 2,700 85
Fossil, Inc.* 2,200 23
FoxMeyer Health Corp. 5,473 125
Frame Technology Corp.* 3,800 107
Franklin Quest Co.* 5,700 136
Fremont General Corp. 4,280 124
Fresenius U.S.A. Inc.* 4,500 74
Fritz Cos., Inc. 5,200 181
Frontier Insurance Group,
Inc. 3,050 87
Fuller (H.B.) Co. 3,300 104
Fulton Financial Corp. 6,560 141
Fund American Enterprises
Holdings, Inc.* 1,909 132
Fusion Systems Corp.* 1,800 50
G&K Services, Inc. Class A 5,250 119
GC Companies Inc.* 1,680 54
Gartner Group Inc. Class A 5,800 253
Gasonics International Corp. 2,000 66
Gaylord Container Corp. Class
A* 11,400 87
GenCorp Inc. 8,100 85
General Binding Corp. 3,400 67
General DataComm Industries,
Inc.* 5,000 76
General Magic Inc.* 6,300 80
Genesis Health Ventures,
Inc.* 3,300 95
Geneva Steel Class A* 6,200 45
Gentex Corp.* 5,000 113
Geon Co. 6,300 157
Geotek Communications Inc.* 14,400 120
Gerber Scientific, Inc. 5,100 86
Giddings & Lewis, Inc. 8,800 143
Gilead Sciences, Inc.* 4,900 94
Glendale Federal
Bank, F.S.B. (New)* 9,100 146
Global Natural Resources
Inc.* 6,600 66
Global Village
Communications* 3,600 62
Goulds Pumps, Inc. 5,300 127
Graco Inc. 2,650 89
Grand Casinos, Inc. 4,600 183
Granite Construction Inc. 3,100 88
Great Financial Corp. 3,500 72
Greenfield Industries Inc. 3,500 104
Greif Brothers Corp. 5,600 141
Grey Advertising Inc. 100 19
Griffon Corp.* 7,600 64
Guaranty National Corp. (New) 3,500 50
Guilford Mills, Inc. 2,900 64
Gulf South Medical Supply
Inc. 3,000 63
Gymboree Corp. 6,000 136
HBO & Co. 2,600 184
HCC Insurance Holdings, Inc.* 2,900 101
HCIA Inc.* 1,600 43
Hadco Corp.* 2,400 67
Haemonetics Corp.* 7,700 145
Hancock Holding Co. 2,300 84
Handleman Co. 6,300 49
Hanover Direct Inc.* 26,800 45
Harland (John H.) Co. 7,600 158
Harleysville Group Inc. 4,600 129
Harman International
Industries, Inc. 3,675 170
Harnischfeger Industries
Corp. 4,369 138
Harper Group, Inc. 3,800 67
Harte Hanks Communications 5,000 151
Hawkeye Bancorporation 2,900 71
Hayes Wheels International,
Inc. 4,400 116
Health Management Systems,
Inc. 2,400 77
Heart Technology, Inc.* 4,100 116
Heartland Express, Inc.* 2,900 79
Heartland Wireless
Communications, Inc.* 3,500 91
</TABLE>

See accompanying Notes to Financial Statements.

F-17
<PAGE> 172

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Hechinger Co. Class A 9,100 $ 39
Hecla Mining Co.* 10,400 77
Helene Curtis Industries,
Inc. 2,400 72
Helix Technology Corp. 2,100 78
Helmerich & Payne, Inc. 5,600 145
Herbalife International, Inc. 6,400 48
Heritage Media Corp. Class A* 4,500 125
Hollywood Entertainment Corp. 7,900 210
Hollywood Park Inc. (New)* 4,100 39
Home Beneficial Corp. Class B 4,400 108
Home Financial Corp. 5,400 83
Horace Mann Educators Corp. 5,200 138
Horizon Healthcare Corp.* 11,695 237
Hudson Foods, Inc. 6,250 88
Human Genome Sciences Inc.* 3,300 64
Hunt (J.B.) Transport
Services, Inc. 9,150 141
Hunt Manufacturing Co. 3,000 53
Huntco Inc. Class A 1,200 16
Hutchinson Technology Inc.* 1,500 95
Hyperion Software Corp.* 1,800 88
I-Stat Corp.* 2,300 71
ICN Pharmaceuticals, Inc. 7,802 160
IDEX Corp. 4,350 164
IDEXX Laboratories, Inc. 6,800 275
IES Industries Inc. 8,300 221
IHOP Corp.* 2,200 48
INDRESCO Inc.* 5,000 86
INSO Corp. 3,400 121
INTERCO Inc. 10,300 76
INTERSOLV Inc.* 4,200 67
Ideon Group Inc. 5,600 50
Immunex Corp. (New)* 9,300 117
Imperial Bancorp 3,300 74
In Focus Systems, Inc.* 2,200 72
Indiana Energy, Inc. 5,500 116
Information Resources, Inc.* 6,600 72
Inphynet Medical Management
Inc.* 3,400 62
Input/Output, Inc. 4,500 168
Insignia Financial Group
Class A (New)* 2,100 57
Insilco Corp.* 2,100 71
Insurance Auto Auctions,
Inc.* 2,200 16
Integon Corp. 3,900 64
Integrated Device Technology,
Inc. 800 15
Integrated Health Services,
Inc. 5,300 121
Integrated Systems Inc.* 2,200 78
Intelligent Electronics, Inc. 8,200 64
Inter-Regional Financial
Group, Inc. 1,700 60
InterVoice, Inc.* 3,200 58
Interdigital Communications
Corp.* 9,300 68
Interface Systems, Inc. Class
A 4,400 67
Intergraph Corp.* 11,900 146
Interim Services Inc.* 2,800 83
Intermet Corp.* 9,200 110
International CableTel, Inc. 7,033 188
International Dairy Queen,
Inc. Class A* 5,400 115
International Family
Entertainment, Inc. Class B* 9,300 172
International Multifoods
Corp. 3,900 80
International Rectifier
Corp.* 5,200 235
Interneuron Pharmaceuticals,
Inc.* 7,500 113
Interpool, Inc.* 4,100 66
Interstate Bakeries Corp. 8,600 184
Interstate Power Co. 2,000 58
Intuit Inc. 1,200 87
Invacare Corp. 8,400 210
Iomega Corp. 4,300 102
Ionics, Inc. 4,200 171
Isis Pharmaceuticals, Inc.* 4,000 40
Isolyser Inc. 5,400 96
Itron, Inc.* 2,600 76
J & L Specialty Steel, Inc. 10,200 167
JSB Financial, Inc. 2,800 86
Jacobs Engineering Group
Inc.* 9,500 208
Jacor Communications, Inc.
Class A* 4,600 72
Jefferson Bankshares, Inc. 3,200 72
John Alden Financial Corp. 5,700 118
John Wiley & Sons, Inc. Class
A 5,800 173
Jones Intercable, Inc. Class
A* 7,500 94
Juno Lighting, Inc. 4,600 67
Just for Feet Inc. 3,350 80
Justin Industries, Inc. 5,800 59
K N Energy, Inc. 6,568 168
KCS Energy, Inc. 1,900 22
KLA Instruments Corp. 1,200 52
Kaiser Aluminum Corp.* 12,800 144
Kaman Corp. Class A 4,700 51
Kaufman & Broad Home Corp. 7,700 90
Kaydon Corp. 3,500 101
Keane, Inc. 4,500 122
Kelley Oil & Gas Corp.* 10,100 24
Kellwood Co. 5,000 94
Kemet Corp. 7,800 267
Kenetech Corp.* 8,900 28
Kennametal Inc. 5,400 168
Kent Electronics Corp. 3,050 149
KeyCorp, Inc. 2,200 74
Keystone Financial, Inc. 6,100 199
Keystone International, Inc. 8,700 194
Kimball International, Inc.
Class B 5,000 129
Kinder-Care Learning
Centers, Inc. (New)* 5,000 68
Kinetic Concepts, Inc. 10,300 116
Kirby Corp.* 6,000 99
Komag, Inc.* 5,100 291
Kulicke & Soffa Industries
Inc. 6,000 212
LCI International Inc. 16,200 292
LTX Corp.* 6,400 78
La Quinta Inns, Inc. 2,250 58
La-Z-Boy Chair Co. 4,000 119
Laclede Gas Co. 3,800 77
Lance, Inc. 7,200 123
Landmark Graphics Corp.* 4,000 87
Landry's Seafood Restaurants,
Inc. 4,000 56
Lands' End, Inc. 8,000 120
Landstar Systems, Inc.* 2,700 72
Lattice Semiconductor Corp.* 4,400 172
Lawson Products, Inc. 2,800 68
</TABLE>

See accompanying Notes to Financial Statements.

F-18
<PAGE> 173

SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Lawter International, Inc. 9,500 $ 101
Leader Financial Corp. 3,500 125
Learning Co.* 1,600 95
Lechters, Inc.* 3,300 31
Legg Mason, Inc. 3,500 101
Lennar Corp. 8,800 201
Level One Communications
Inc.* 2,650 61
Libbey Inc. 3,200 66
Liberty Bancorp, Inc. 2,000 72
Liberty Corp. 4,800 161
Life Partners Group, Inc. 5,900 107
Life Re Corp. 3,300 68
Life Technologies, Inc. 3,800 95
Lillian Vernon Corp. 3,800 51
Lilly Industries, Inc. Class
A 5,350 68
Lincare Holdings, Inc.* 7,200 180
Lincoln Electric Co. 2,600 64
Lincoln Telecommunications
Co. 9,900 172
Liposome Co., Inc.* 7,200 110
Liqui-Box Corp. 300 8
Littlefuse, Inc.* 3,400 111
Living Centers of America,
Inc.* 4,700 122
Logicon, Inc. 3,400 78
Lojack Corp.* 7,200 111
Lone Star Industries, Inc. 6,300 144
Long Islands Bancorp Inc. 6,200 142
Louis Dreyfus Natural Gas
Corp.* 11,400 160
Loyola Capital Corp. 2,800 100
Luby's Cafeterias, Inc. 6,500 135
Lukens Inc. 4,150 128
Lydall, Inc. 5,800 132
M.S. Carriers, Inc.* 3,000 47
MAIC Holdings Inc.* 1,627 49
MAXXAM Inc.* 2,300 85
MDU Resources Group, Inc. 7,200 152
MESA Inc.* 12,400 53
MICROS Systems, Inc. 1,500 56
Mac Frugal's Bargains-
Close-outs, Inc.* 6,000 71
Macromedia Inc. 8,000 294
Madison Gas and Electric Co. 2,300 76
Mafco Consolidated Group
Inc.* 6,300 143
Magma Copper Co. (New) 12,000 201
Magna Group, Inc. 6,500 159
MagneTek, Inc.* 5,300 52
Manitowoc Co., Inc. 1,600 45
Marcus Corp. 3,700 128
Mariner Health Group, Inc.* 4,300 42
Mark Twain Bancshares, Inc. 4,100 143
Markel Corp.* 1,300 95
Marquette Electronics, Inc.
Class A* 9,400 172
Marshall Industries* 4,300 152
Mascotech, Inc. 16,500 169
Material Sciences Corp. 3,300 55
Maxicare Health Plans Inc.* 4,200 74
Maxim Integrated Products,
Inc. 2,100 157
Maxtor Corp.* 10,700 54
Maybelline, Inc. 2,900 69
McAfee Associates, Inc. 3,500 205
McClatchy Newspapers, Inc.
Class A 6,900 136
Measurex Corp. 3,600 111
Medic Computer Systems, Inc.* 2,900 155
Medicine Shoppe
International, Inc. 1,800 78
Medisense Inc.* 3,800 81
Medpartners Inc.* 4,700 131
Medusa Corp. 3,400 85
Men's Wearhouse, Inc. 3,200 126
Mentor Corp. 5,800 129
Mercury Interactive Corp.* 3,700 77
Meredith Corp. 6,800 243
Merisel, Inc.* 6,500 39
Mesa Airlines, Inc.* 7,900 75
Methode Electronics, Inc.
Class A 5,300 123
Meyer (Fred), Inc.* 7,200 134
Michaels Stores, Inc.* 5,600 77
Microchip Technology, Inc. 2,100 83
Microdyne Corp.* 2,700 75
Mid-Am, Inc. 3,320 55
Midamerican Energy Co. 9,261 148
Mikasa Inc.* 4,900 64
Miller (Herman), Inc. 6,300 188
Mine Safety Appliances Co. 1,200 61
Minerals Technologies, Inc. 4,900 195
Mississippi Chemical Corp. 5,800 139
Mohawk Industries, Inc.* 8,200 122
Molten Metal Technology,
Inc.* 5,100 198
Money Store Inc. 4,950 197
Morrison Knudsen Corp. 8,000 52
Movie Gallery Inc.* 3,000 115
Mueller Industries, Inc. 4,600 108
Multicare Cos., Inc.* 3,800 71
Musicland Stores Corp.* 6,800 44
Myers Industries, Inc. 5,450 78
NAC Re Corp. 4,900 172
NACCO Industries, Inc. Class
A 2,300 132
NCH Corp. 1,800 98
NL Industries, Inc.* 12,500 163
NYMAGIC, Inc. 2,000 32
Nabors Industries, Inc.* 21,100 182
National Auto Credit Inc.* 5,500 89
National Bancorp of Alaska,
Inc. 1,800 113
National Commerce Bancorp 6,200 160
National Computer Systems,
Inc. 3,400 64
National Data Corp. 5,800 154
National Instruments Corp.* 5,100 97
National Presto Industries,
Inc. 1,600 65
National RE Holdings Corp. 4,300 145
National Steel Corp. Class B* 9,600 127
Nautica Enterprises, Inc. 4,650 160
Neiman Marcus Group, Inc. 9,800 168
Nellcor Inc.* 7,296 421
Neostar Retail Group Inc.* 3,500 53
Netcom Online Communications* 2,500 145
Netmanage Inc. 10,800 221
Network Equipment
Technologies, Inc.* 4,400 144
Network General Corp.* 5,100 211
Network Peripherals Inc.* 2,400 25
New England Business Service,
Inc. 3,200 62
New Jersey Resources Corp. 3,700 93
</TABLE>

See accompanying Notes to Financial Statements.

F-19
<PAGE> 174

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Newfield Exploration Co.* 5,900 $ 174
Nexgen Inc.* 7,500 139
Nextel Communications, Inc.* 3,877 54
Noble Drilling Corp.* 22,975 162
Norand Corp.* 1,600 27
North American Mortgage Co. 3,800 78
North Fork Bancorp, Inc. 5,700 125
Northwest Natural Gas Co. 3,400 110
Norwest Corp. 3,680 109
NovaCare, Inc.* 14,080 88
Novellus Systems, Inc.* 600 41
Nu-Kote Holding, Inc. 4,900 101
Nuevo Energy Co.* 4,300 95
O'Reilly Automotive, Inc.* 2,100 69
OEA, Inc. 5,100 139
OM Group Inc. 2,700 79
ONBANCorp, Inc. 3,600 106
Oak Industries Inc.* 4,500 94
Oak Technology* 4,400 242
Oakwood Homes Corp. 6,200 233
Octel Communications Corp.* 5,600 191
Offshore Logistics, Inc.* 4,200 53
Olympic Financial Ltd.* 5,100 92
Omnicare, Inc. 6,600 239
One Valley Bancorp of
West Virginia, Inc. 4,700 157
Oneok Inc. 6,900 168
Opti Inc.* 2,400 24
Optical Data Systems, Inc. 3,900 117
OrNda Healthcorp* 9,760 173
Orange & Rockland Utilities,
Inc. 3,400 119
Orbital Sciences Corp.* 5,300 77
Oregon Steel Mills, Inc. 6,300 90
Orion Capital Corp. 3,200 131
Ostex International Inc.* 2,700 53
Otter Tail Power Co. 2,500 86
Outboard Marine Corp. 4,400 91
Outlet Communications Inc.* 1,800 83
Overseas Shipholding Group,
Inc. 9,200 156
Owens & Minor, Inc. 6,600 78
Oxford Health Plans, Inc. 2,200 173
PAXAR Corp. 4,687 59
PDT Inc. 2,400 91
PHH Corp. 3,900 171
PLATINUM technology, inc.* 12,300 225
Pairgain Technologies Inc.* 3,400 145
Papa John's International,
Inc.* 2,400 93
Park Electrochemical Corp. 2,600 81
Park National Corp. 1,500 68
Parker & Parsley Petroleum
Co. 8,300 154
Parker Drilling Co.* 21,100 111
Patlex Corp. (New)* 550 3
Patterson Dental Co. 3,850 95
Paxson Communications Corp. 6,500 80
Payless Cashways Inc.* 9,300 53
Penn Traffic Co.* 2,600 28
PennCorp Financial Group,
Inc. 6,900 165
People's Bank 8,600 171
People's Choice TV Corp.* 2,600 54
PeopleSoft, Inc. 600 52
Peoples Heritage Financial
Group, Inc. 3,800 73
Performance Systems
International Inc.* 7,100 126
Petrie Stores Corp. 12,300 35
Petrolite Corp. 2,400 58
Phillips-Van Heusen Corp. 5,700 58
Phoenix Resource Cos Inc. 3,200 57
Photronic, Inc. 2,950 88
Phycor, Inc. 6,900 253
Physician Reliance Network
Inc.* 5,300 176
Physician Sales & Service
Inc. 4,500 73
Physicians Corp. of America* 9,900 150
Physicians Health Services,
Inc.* 2,000 67
Picturetel Corp. 3,300 217
Piedmont Natural Gas Co.,
Inc. 9,400 207
Pier 1 Imports, Inc. 9,745 94
Pioneer Group, Inc. 6,100 160
Pioneer-Standard Electronics,
Inc. 5,025 69
Piper Jaffray Inc. 4,600 55
Pittway Corp. 800 48
Pittway Corp. Class A 3,200 192
Planar Systems, Inc.* 2,700 47
Players International Inc. 6,900 73
Playtex Products, Inc.* 12,300 86
Ply-Gem Industries, Inc. 2,800 48
Pogo Producing Co. 9,000 181
Polaris Industries Inc. 6,900 193
Policy Management Systems
Corp.* 2,000 94
Pratt & Lambert United, Inc. 2,100 44
Precision Castparts Corp. 4,800 172
Premier Bancorp, Inc. 7,900 163
Presidential Life Corp. 6,800 65
Presstek Inc. 3,350 160
Price Enterprises Inc. 5,300 78
Primadonna Resorts Inc.* 7,400 116
Primark Corp.* 4,600 105
Prime Hospitality Corp.* 6,900 68
Production Operators Corp. 2,200 65
Proffitt's, Inc.* 2,100 49
Progress Software Corp. 1,600 104
Protective Life Corp. 600 17
Protein Design Labs, Inc.* 3,300 55
Provident Bancorp, Inc. 3,700 155
Public Service Co. of
New Mexico* 10,200 171
Public Service Co. of
North Carolina, Inc. 6,000 95
Pulitzer Publishing Co. 4,025 182
Pulte Corp. 7,300 231
Quaker State Corp. 7,400 97
Quality Food Centers, Inc. 3,600 73
Quanex Corp. 2,800 55
Quantum Health Resources,
Inc.* 3,000 32
Quarterdeck Corp.* 5,200 111
Quick & Reilly Group, Inc. 5,580 133
Quintiles Transnational Corp. 2,500 159
RCSB Financial Inc. 3,600 80
Raymond James Financial, Inc. 4,400 95
Reading & Bates Corp.* 20,600 237
Regal Cinemas, Inc. 3,200 125
Regal-Beloit Corp. 4,500 81
Reinsurance Group of America,
Inc. 4,400 151
</TABLE>

See accompanying Notes to Financial Statements.

F-20
<PAGE> 175

SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Reliance Group Holdings, Inc. 26,400 $ 195
Renaissance Commerce Corp. 6,600 148
Renal Treatment Centers Inc.* 2,200 79
Republic Waste Industries
Inc. 14,600 316
Respironics, Inc. 3,900 86
Rexel Inc.* 5,200 60
Rexene Corp.* 3,200 29
Richfood Holdings, Inc. 8,500 214
Riggs National Corp.* 11,100 145
Rio Hotel and Casino, Inc.* 4,900 62
River Forest Bancorp, Inc. 3,200 75
RoTech Medical Corp.* 3,100 72
Robert Half International
Inc. 6,900 252
Roberts Pharmaceutical Corp.* 4,600 89
Rock Tennessee Co. 6,700 111
Rogers Corp. 1,400 32
Rohr Inc.* 6,600 98
Rollins Environmental
Services, Inc.* 15,100 51
Rollins Truck Leasing Corp. 9,800 94
Roosevelt Financial Group,
Inc. 10,200 163
Roper Industries, Inc. 3,800 135
Ross Stores, Inc. 5,700 89
Rouge Steel Co. 3,500 76
Rowan Companies, Inc.* 21,100 140
Ruddick Corp. 11,200 143
Russ & Berrie Co., Inc. 8,500 118
Ryan's Family Steak Houses,
Inc.* 21,100 165
Rykoff-Sexton, Inc. 6,250 141
Ryland Group, Inc. 2,900 42
S & T Bancorp, Inc. 2,100 54
S3 Inc. 9,000 153
SCI Systems, Inc.* 7,300 257
SEI Corp. 4,200 90
STERIS Corp. 4,100 138
Safeguard Scientifics Inc. 3,300 149
Salick Health Care, Inc.* 2,600 95
Samsonite Corp. (New) 3,500 35
Sanifill, Inc.* 3,800 120
Sanmina Corp.* 1,900 103
Santa Cruz Operations, Inc.* 6,200 37
Savannah Foods & Industries,
Inc. 5,400 68
Savoy Pictures Entertainment,
Inc.* 7,200 42
Sbarro, Inc. 8,000 167
Schuler Homes, Inc.* 8,300 100
Scientific Games Holdings
Corp. 3,400 113
Scotts Co. Class A* 7,400 146
Seaboard Corp. 300 79
Seafield Capital Corp. 1,400 50
Seagull Energy Corp.* 8,600 147
Security Capital Corp. 2,300 126
Security Dynamics Tech 3,400 110
Seitel, Inc.* 2,100 54
Selective Insurance Group,
Inc. 4,400 163
Semitool Inc. 2,700 43
Sepracor Inc.* 5,200 88
Sequa Corp. Class A* 2,600 67
Sequent Computer Systems,
Inc.* 8,000 140
Service Merchandise Co.,
Inc.* 23,562 127
Shiva Corp.* 3,100 186
Shoney's, Inc.* 10,200 113
ShopKo Stores, Inc. 12,800 138
Shorewood Packaging Corp.* 4,900 81
Showboat, Inc. 3,300 79
Shurgard Storage Centers Inc. 5,800 148
Sierra Health Services, Inc.* 3,100 89
Sierra On-Line, Inc. 4,300 161
Sierra Pacific Resources 7,000 164
Silicon Valley Group, Inc.* 5,700 184
Sithe Energies Inc.* 13,700 98
SkyWest Airlines, Inc. 2,300 39
Smart & Final Inc. 5,000 94
Smith International, Inc.* 8,600 138
Smith's Food & Drug Centers,
Inc. Class B 4,200 96
Smithfield Foods, Inc.* 3,400 86
Smucker (J.M.) Co. Class A 6,900 135
Smucker (J.M.) Co. Class B 3,500 63
Snyder Oil Corp. 6,500 67
Sofamor/Danek Group, Inc.* 5,800 142
Somatogen Inc.* 4,400 70
Sonat Offshore Drilling, Inc. 6,700 213
South Jersey Industries, Inc. 2,800 57
Southdown, Inc.* 6,400 104
Southern Indiana
Gas & Electric Co. 3,966 134
Southwest Gas Corp. 4,900 74
Southwestern Energy Co. 4,900 61
Sovereign Bancorp, Inc. 10,179 102
SpaceLabs Medical Inc.* 2,800 71
Spectrian Corp.* 1,700 37
Spectrum HoloByte, Inc.* 5,100 53
Sports & Recreation, Inc. 3,600 27
Sports Authority Inc.* 4,600 100
Springs Industries, Inc. 4,900 210
St. John's Knits, Inc. 2,100 101
St. Paul Bancorp, Inc. 4,500 108
Standard Financial Inc.* 4,300 60
Standard Motor Products, Inc. 2,500 41
Standard Products Co. 3,900 60
Standard Register Co. 7,700 175
Standex International Corp. 3,000 98
Stanhome Inc. 4,700 143
State Auto Financial Corp. 3,100 69
Station Casinos Inc* 8,100 104
Stein Mart, Inc.* 4,300 48
Sterling Chemicals, Inc.* 15,200 122
Stewart Enterprises, Inc.
Class A 5,300 179
Stillwater Mining Co.* 4,800 80
Stone & Webster, Inc. 3,100 104
Stone Container Corp. 6,112 101
Stratacom Inc. 1,400 86
Stratosphere Corp.* 7,200 72
Stratus Computer, Inc.* 6,600 205
Stride Rite Corp. 12,200 137
Structural Dynamics Research
Corp.* 7,300 134
Student Loan Corp. 5,000 158
Sturm, Ruger & Co., Inc. 2,700 73
Sumitomo Bank California 4,000 94
Summit Bancorp 7,860 222
Summit Technology Inc.* 5,100 226
Sun Healthcare Group, Inc.* 12,708 151
</TABLE>

See accompanying Notes to Financial Statements.

F-21
<PAGE> 176

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Sunglass Hut International,
Inc. 9,600 $ 260
Sunrise Medical Inc.* 4,300 78
Sunshine Mining Co.* 43,700 71
Surgical Care Affiliates,
Inc. 10,650 316
Susquehanna Bancshares, Inc. 2,500 73
Swift Transportation Co. 5,100 85
Symantec Corp.* 7,700 187
Symmetricom, Inc.* 2,900 54
Synetic, Inc.* 4,100 96
Synopsys, Inc. 400 15
System Software Associates,
Inc. 6,600 204
Systems & Computer Technology
Corp.* 2,600 47
TBC Corp.* 4,900 35
TCA Cable TV, Inc. 5,800 173
TJ International 4,900 85
TNT Freightways Corp. 5,500 100
TSX Corp. 2,100 41
Target Therapeutics Inc.* 1,700 131
Tech Data Corp.* 9,000 110
Tecnol Inc.* 4,400 82
Tejas Gas Corp. 2,530 119
Tekelec Inc. 2,800 41
Teleflex Inc. 3,950 167
Telular Corp.* 4,800 66
Telxon Corp. 4,000 92
Tencor Instruments 5,000 214
Tennant Co. 2,100 53
Terra Industries, Inc. 14,700 186
Tesoro Petroleum Corp.* 7,800 61
Tetra Tech, Inc. (New) 3,906 85
Texas Industries, Inc. 2,600 137
Theratx Inc.* 4,500 51
Thermedics Inc.* 8,200 151
Thermo Cardiosystems Inc.* 4,700 228
Thermo Fibertek Inc. 16,050 253
Thermotrex Corp. 4,500 161
Thiokol Corp. 5,100 177
Thomas Nelson, Inc. 4,125 69
Three-Five Systems, Inc. 1,700 31
Tiffany & Co. (New) 3,900 170
Timberland Co. Class A* 2,500 48
Titan Wheel International,
Inc. 5,225 76
Toll Brothers, Inc.* 7,300 130
Topps Co., Inc. 9,500 59
Toro Co. 2,600 75
Toy Biz Inc.* 3,800 85
Toys 'R' Us, Inc.* 730 16
Transpro Inc.* 1,275 14
Trenwick Group Inc. 1,400 70
Triangle Pacific Corp.* 3,200 50
Triarc Cos., Inc. Class A* 6,400 61
Trident Microsystems Inc.* 2,300 69
Trimble Navigation Ltd.* 5,000 99
True North Communications 5,500 111
Trust Co. of New Jersey (New) 3,900 51
TrustCo Bank Corp New York 3,904 84
Trustmark Corp. 8,200 157
Tuscon Electric Power Co.* 34,100 102
Tyco Toys, Inc.* 6,800 37
U S Delivery Systems Inc.* 4,500 93
U S Trust Corp. (New) 2,000 96
U.S. Home Corp. (New)* 2,200 59
U.S. Robotics, Inc. 6,800 632
UGI Corp. 7,800 164
UMB Financial Corp. 4,816 208
UNR Industries, Inc. 12,200 101
US Filter Corp. (New) 5,700 133
USA Waste Services, Inc.* 13,907 292
USAir Group, Inc.* 17,200 234
UST Corp.* 4,400 61
Ultratech Stepper Inc. 4,700 188
UniFirst Corp. 3,900 55
Unicom Corp. 2,400 79
Union Planters Corp. 7,788 239
Uniroyal Chemical Corp.* 5,400 42
United Bankshares, Inc. 2,500 76
United Carolina Bancshares
Corp. 3,300 118
United Companies Financial
Corp. 6,440 181
United Illuminating Co. 3,400 129
United Insurance Companies,
Inc. 9,300 156
United International Holdings
Inc.* 4,900 74
United Meridian Corp.* 6,600 111
United Stationers Inc. 3,990 155
United Television, Inc. 2,400 205
United Waste Systems, Inc.* 3,500 138
United Water Resources Inc. 9,300 117
United Wisconsin Services,
Inc. 2,500 62
Unitrode Corp.* 2,300 62
Univar Corp. 4,300 58
Universal Health Services,
Inc. Class B* 3,300 124
VLSI Technology, Inc.* 7,500 176
Valassis Communications,
Inc.* 10,600 147
Valley National Bancorp 7,824 191
Valmont Industries, Inc. 3,300 80
Value City Department Stores,
Inc.* 5,900 35
Value Health, Inc.* 2,338 53
Value Line, Inc. 2,100 70
Varco International, Inc.* 9,900 90
Vencor, Inc. 11,687 324
Ventritex, Inc.* 5,000 98
VeriFone, Inc.* 5,500 149
Vertex Pharmaceuticals, Inc.* 4,300 71
Vesta Insurance Group Inc. 4,500 182
Vicor Corp. 8,600 173
Vigoro Corp. 4,100 178
Vintage Petroleum, Inc. 5,200 105
Vital Signs Inc. 2,900 53
Vitalink Pharmacy Services,
Inc.* 2,600 48
Vivra, Inc. 5,400 178
WD-40 Co. 1,700 67
WHX Corp.* 11,700 121
WICOR, Inc. 3,600 107
WLR Foods, Inc. 3,450 48
WMS Industries Inc.* 5,800 114
WPS Resources Corp. 6,000 187
Waban, Inc.* 8,100 127
Wabash National Corp. 4,900 124
Wallace Computer Services,
Inc. 4,600 259
Wang Laboratories, Inc.* 8,300 140
</TABLE>

See accompanying Notes to Financial Statements.

F-22
<PAGE> 177

SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Washington Energy Co. 5,300 $ 97
Washington National Corp. 4,900 111
Watkins-Johnson Co. 2,500 120
Watson Pharmaceuticals Inc.* 8,556 385
Watts Industries, Inc. Class
A 6,600 136
Wausau Paper Mills Co. 7,056 171
Weatherford Enterra Inc.* 12,654 305
Webb (Del) Corp. 4,200 87
Weirton Steel Corp.* 8,300 37
Wellman, Inc. 300 7
Werner Enterprises, Inc. 6,300 119
West Company, Inc. 3,400 84
WestPoint Stevens, Inc. 8,100 173
Westamerica Bancorp 2,400 95
Westcorp, Inc. 5,596 94
Westcott Communications,
Inc.* 4,000 56
Western Gas Resources, Inc. 5,400 84
Western Publishing Group
Inc.* 4,800 39
Western Waste Industries* 6,200 122
Westinghouse Air Brake
Co. (New)* 6,600 58
Westwood One, Inc.* 7,900 125
Whitney Holding Corp. 3,200 98
Williams Companies, Inc. 206 8
Williams-Sonoma, Inc. 6,200 109
Winnebago Industries, Inc. 4,100 33
Wisconsin Central
Transportation Corp. 500 30
Wolverine Tube Inc.* 3,800 135
Wolverine World Wide, Inc. 3,600 108
Wonderware Corp.* 2,600 83
Work Recovery Inc.* 13,000 17
World Acceptance Corp. 5,300 69
Wyle Laboratories 3,000 128
Wyman-Gordon Co.* 8,700 110
X-Rite, Inc. 4,500 69
Yankee Energy System, Inc. 1,900 41
Yellow Corp. 7,100 94
Zale Corp. (New)* 8,000 119
Zebra Technologies Corp.
Class A* 3,200 190
Zeigler Coal Holding Co. 6,700 79
Zenith Electronics Corp.* 11,100 93
Zenith National Insurance
Corp. 4,300 100
Zero Corp. 3,600 55
Zilog, Inc.* 4,100 146
Zions Bancorp 3,500 243
Zurn Industries, Inc. 5,000 108
--------
TOTAL COMMON STOCK
(Cost $107,206) 120,832
--------

<CAPTION>
Maturity Value
(000s) (000s)
--------- --------
<S> <C> <C>
REPURCHASE AGREEMENT--1.1%
State Street Bank & Trust 4.75%
Dated 10/31/95
Due 11/01/95 Collateralized
By:
U.S. Treasury Bond
$940,000 Par; 12%
Due 8/15/13 $1,400 $ 1,400
--------
TOTAL REPURCHASE AGREEMENT
(Cost $1,400) 1,400
--------
TOTAL INVESTMENTS -- 100.1%
(Cost $108,606) 122,232
--------
OTHER ASSETS AND
LIABILITIES -- (0.1%)
Other Assets 325
Liabilities (483)
--------
(158)
--------
NET ASSETS -- 100.0%
Applicable to 10,431,988
outstanding $0.00001
par value shares
(unlimited shares authorized) $122,074
========
NET ASSET VALUE PER SHARE $11.70
======

</TABLE>

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

*Non-Income Producing Security

See accompanying Notes to Financial Statements.

F-23
<PAGE> 178

SchwabFunds(R) 11
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF OPERATIONS (in thousands)
For the year ended October 31, 1995
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Investment income:
Dividends $ 1,072
Interest 133
--------
Total investment income 1,205
--------
Expenses:
Investment advisory and administration fee 447
Transfer agency and shareholder service fees 223
Custodian fees 95
Registration fees 46
Professional fees 25
Shareholder reports 35
Trustees' fees 21
Amortization of deferred organization costs 15
Insurance and other expenses 5
--------
912
Less expenses reduced (303)
--------
Total expenses incurred by Fund 609
--------
Net investment income 596
--------
Net realized gain (loss) on investments:
Proceeds from sales of investments 27,327
Cost of investments sold (27,036)
--------
Net realized gain on investments sold 291
--------
Change in net unrealized appreciation on investments:
Beginning of period 597
End of period 13,626
--------
Increase in net unrealized appreciation on investments 13,029
--------
Net gain on investments 13,320
--------
Increase in net assets resulting from operations $ 13,916
========
</TABLE>

See accompanying Notes to Financial Statements.

F-24
<PAGE> 179

SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
For the period
For the December 3, 1993
year ended (commencement of
October 31, operations) to
1995 October 31, 1994
----------- ----------------
<S> <C> <C>
Operations:
Net investment income $ 596 $ 353
Net realized gain (loss) on
investments sold 291 (528)
Increase in net unrealized appreciation
on investments 13,029 597
-------- --------
Increase in net assets resulting from
operations 13,916 422
-------- --------
Dividends to shareholders from
net investment income (408) (57)
-------- --------
Capital Share Transactions:
Proceeds from shares sold 64,687 78,646
Net asset value of shares issued in
reinvestment of dividends 364 53
Early withdrawal fees 41 27
Less payments for shares redeemed (24,654) (10,963)
-------- --------
Increase in net assets from capital
share transactions 40,438 67,763
-------- --------
Total increase in net assets 53,946 68,128
Net Assets:
Beginning of period 68,128 --
-------- --------
End of period (including undistributed
net investment income of $484 and
$296, respectively) $ 122,074 $ 68,128
======== ========
Number of Fund Shares:
Sold 5,910 7,884
Reinvested 38 5
Redeemed (2,296) (1,109)
-------- --------
Net increase in shares outstanding 3,652 6,780
Shares Outstanding:
Beginning of period 6,780 --
-------- --------
End of period 10,432 6,780
======== ========
</TABLE>

See accompanying Notes to Financial Statements.

F-25
<PAGE> 180

SchwabFunds(R) 13
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
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.

In addition to the Fund, the Trust also offers -- the Schwab International Index
Fund(TM), the Schwab Asset Director(R)-High Growth Fund, the Schwab Asset
Director(R)-Conservative Growth Fund and the Schwab Asset Director(R)-Balanced
Growth Fund. 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

F-26
<PAGE> 181

SchwabFunds(R) 14
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------

At October 31, 1995, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $13,626,000, of which $22,090,000 related
to appreciated securities and $8,464,000 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 .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
$447,000 during the year ended October 31, 1995, before the Investment Manager
reduced its fee (see Note 5).

Sub-advisory agreement -- Prior to May 1, 1995, the Investment Manager had a
sub-advisory agreement with Dimensional Fund Advisors Inc. ("Dimensional"),
under which Dimensional performed day-to-day portfolio management for the Fund.
Dimensional did not receive compensation directly from the Fund. However, the
Investment Manager did pay 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.

Effective May 1, 1995, the sub-advisory agreement for the Fund was terminated
and the Investment Manager assumed day-to-day portfolio management
responsibility for the Fund.

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 the average daily net assets for
transfer agency services and .20% of such assets for shareholder services. For
the year ended October 31, 1995, the Fund incurred transfer agency and
shareholder service fees of $223,000, 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 and/or Schwab.
During the year ended October 31, 1995, 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 $21,000
related to the Trust's unaffiliated trustees.

F-27
<PAGE> 182

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

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

4. BORROWING AGREEMENT

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. For the year
ended October 31, 1995, the total of such fees reduced by the Investment Manager
was $115,000 and the total of such fees reduced by Schwab was $188,000.

6. INVESTMENT TRANSACTIONS

Purchases and sales of investment securities, other than short-term obligations,
aggregated $69,455,000 and $27,327,000, respectively, for the year ended October
31, 1995.

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 year ended October 31, 1995, total early withdrawal fees
retained by the Fund amounted to $41,000.

8. COMPOSITION OF NET ASSETS

At October 31, 1995, net assets consisted of:

<TABLE>
<S> <C>
Capital paid in $108,201,000
Accumulated undistributed net investment income 484,000
Accumulated net realized loss on investments sold (237,000)
Net unrealized appreciation on investments 13,626,000
------------

Total $122,074,000
============
</TABLE>

At October 31, 1995, the Fund's Statement of Net Assets included receivable for
Fund shares sold of $194,000 in addition to liabilities of $346,000 for
securities purchased, $48,000 for Fund shares redeemed and $29,000 for
investment advisory and administration fee payable.

F-28
<PAGE> 183

SchwabFunds(R) 16
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------

9. FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
For the period
December 3, 1993
For the (commencement of
year ended operations) to
October 31, 1995 October 31, 1994
---------------- ------------------
<S> <C> <C>
Net asset value at beginning of period $ 10.05 $ 10.00
Income from Investment Operations
- -----------------------------------
Net investment income .10 .06
Net realized and unrealized gain
on investments 1.61 --
-------- -------
Total from investment operations 1.71 .06
Less Distributions
- -----------------
Dividends from net investment income (.06) (.01)
Distributions from realized gain on
investments -- --
-------- -------
Total distributions (.06) (.01)
-------- -------
Net asset value at end of period $ 11.70 $ 10.05
======== =======
Total return (%) 17.11 .63
- ----------------
Ratios/Supplemental Data
- --------------------------
Net assets, end of period (000s) $122,074 $ 68,128
Ratio of expenses to average net assets
(%) .68 .67*
Ratio of net investment income to
average net assets (%) .68 .68*
Portfolio turnover rate (%) 24 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 periods ended
October 31, 1995 and 1994, would have been 1.02% and 1.19%*, respectively, and
the ratio of net investment income to average net assets would have been .34%
and .16%*, respectively.

* Annualized

F-29
<PAGE> 184

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

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

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

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
(one of the series constituting Schwab Capital Trust, hereafter referred to as
the "Trust") at October 31, 1995, and 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 audits 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, 1995 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

PRICE WATERHOUSE LLP
San Francisco, California
November 22, 1995

1995 SPECIAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------

NOTICE TO CORPORATE SHAREHOLDERS
100% of the Fund's distributions for the fiscal year ended October 31,
1995 qualify for the corporate dividends received deduction.
- --------------------------------------------------------------------------------

F-30
<PAGE> 185
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees and Shareholder
of the Schwab Asset Director(R) - High Growth Fund

In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the Schwab Asset
Director - High Growth Fund (the "Fund"), a series of Schwab Capital Trust, at
October 31, 1995, in conformity with generally accepted accounting principles.
This financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.

/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse
San Francisco, California
November 22, 1995

F-31
<PAGE> 186
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995

<TABLE>
<S> <C>
Cash $ 1,000

Deferred organization costs 17,810

Payable to Charles Schwab Investment Management, Inc. (17,810)
--------

Net Assets $ 1,000
========

Number of shares of beneficial interest issued and
outstanding, $0.00001 par value (unlimited shares authorized) 100
========

Net Asset Value and Offering Price Per Share at October 31, 1995 $ 10.00
========
</TABLE>

The Notes to the Statement of Assets and Liabilities are an integral part of
this financial statement.

F-32
<PAGE> 187
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES

1. ORGANIZATION

The Schwab Asset Director - High Growth Fund (the "Fund") is a series of Schwab
Capital Trust (the "Trust"), which is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end, no-load, management
investment company. The Trust was established on May 7, 1993 under the laws of
the Commonwealth of Massachusetts as a Massachusetts business trust. As of
October 31, 1995, the Fund has had no operations other than activities relating
to its organization and the registration of its shares of beneficial interest
under the Securities Act of 1933 and the sale and issuance of 100 shares to
Charles Schwab & Co., Inc. at $10.00 per share.

In addition to the Fund, the Trust also offers the Schwab International Index
Fund(TM), the Schwab Small-Cap Index Fund(R), the Schwab Asset Director-Balanced
Growth Fund and the Schwab Asset Director -Conservative Growth Fund.

2. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT

The Trust has an investment advisory and administration agreement with Charles
Schwab Investment Management, Inc. (the "Investment Manager") under which the
Fund will pay a fee for investment advisory and administrative services upon
commencement of the Fund. For advisory services and facilities furnished, the
Fund will pay an annual fee, payable, monthly, of .74% of the first $1 billion
of average daily net assets, .69% of such net assets over $1 billion, and .64%
of such net assets in excess of $2 billion.

The Investment Manager has executed a sub-advisory agreement with Symphony Asset
Management, Inc. ("Symphony"), a wholly-owned subsidiary of BARRA, Inc. Under
this agreement, Symphony will be responsible for recommending the target asset
allocation mix for the tactical asset allocation component of the Fund. Symphony
does not receive compensation directly from the Fund. However, the Investment
Manager will pay Symphony an annual fee, payable monthly, of .08% of the first
$100 million of aggregate average daily net assets of the three Asset Director
Funds, .06% of such net assets of the next $150 million, .04% of such net assets
of the next $600 million and .02% of such net assets over $850 million.

The Trust has transfer agency and shareholder service agreements with Charles
Schwab & Co., Inc. ("Schwab"), under which the Fund will pay fees for transfer
agency and shareholder services. Upon commencement of operations, Schwab will
receive an annual fee, payable monthly, of .05% of average daily net assets for
transfer agency services and .20% of such net assets for shareholder services.

F-33
<PAGE> 188
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES

The Investment Manager and Schwab are, respectively, direct and indirect
wholly-owned subsidiaries of The Charles Schwab Corporation.

3. DEFERRED ORGANIZATION COSTS

Costs incurred in connection with the Fund's organization have been incurred by
the Investment Manager and are an obligation to be paid by the Fund. These costs
will be amortized over the period of benefit, but not to exceed 60 months from
the commencement of operations of the Fund.

F-34
<PAGE> 189
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees and Shareholder
of the Schwab Asset Director(R) - Balanced Growth Fund

In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the Schwab Asset
Director - Balanced Growth Fund (the "Fund"), a series of Schwab Capital Trust,
at October 31, 1995, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Fund's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.

/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse
San Francisco, California
November 22, 1995

F-35
<PAGE> 190
SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995

<TABLE>
<S> <C>
Cash $ 1,000

Deferred organization costs 17,810

Payable to Charles Schwab Investment Management, Inc. (17,810)
--------

Net Assets $ 1,000
========

Number of shares of beneficial interest issued and
outstanding, $0.00001 par value (unlimited shares authorized) 100
========

Net Asset Value and Offering Price Per Share at October 31, 1995 $ 10.00
========
</TABLE>

The Notes to the Statement of Assets and Liabilities are an integral part of
this financial statement.

F-36
<PAGE> 191
SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES

1. ORGANIZATION

The Schwab Asset Director - Balanced Growth Fund (the "Fund") is a series of
Schwab Capital Trust (the "Trust"), which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end, no-load, management
investment company. The Trust was established on May 7, 1993 under the laws of
the Commonwealth of Massachusetts as a Massachusetts business trust. As of
October 31, 1995, the Fund has had no operations other than activities relating
to its organization and the registration of its shares of beneficial interest
under the Securities Act of 1933 and the sale and issuance of 100 shares to
Charles Schwab & Co., Inc. at $10.00 per share.

In addition to the Fund, the Trust also offers the Schwab International Index
Fund(TM), the Schwab Small-Cap Index Fund(R), the Schwab Asset Director - High
Growth Fund and the Schwab Asset Director - Conservative Growth Fund.

2. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT

F-37
<PAGE> 192
SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES

The Investment Manager and Schwab are, respectively, direct and indirect
wholly-owned subsidiaries of The Charles Schwab Corporation.

3. DEFERRED ORGANIZATION COSTS

F-38
<PAGE> 193
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees and Shareholder
of the Schwab Asset Director(R) - Conservative Growth Fund

In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the Schwab Asset
Director - Conservative Growth Fund (the "Fund"), a series of Schwab Capital
Trust, at October 31, 1995, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Fund's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.

/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse
San Francisco, California
November 22, 1995

F-39
<PAGE> 194
SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995

<TABLE>
<S> <C>
Cash $ 1,000

Deferred organization costs 17,810

Payable to Charles Schwab Investment Management, Inc. (17,810)
--------

Net Assets $ 1,000
========

Number of shares of beneficial interest issued and
outstanding, $0.00001 par value (unlimited shares authorized) 100
========

Net Asset Value and Offering Price Per Share at October 31, 1995 $ 10.00
========
</TABLE>

The Notes to the Statement of Assets and Liabilities are an integral part of
this financial statement.

F-40
<PAGE> 195
SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES

1. ORGANIZATION

The Schwab Asset Director - Conservative Growth Fund (the "Fund") is a series of
Schwab Capital Trust (the "Trust"), which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end, no-load, management
investment company. The Trust was established on May 7, 1993 under the laws of
the Commonwealth of Massachusetts as a Massachusetts business trust. As of
October 31, 1995, the Fund has had no operations other than activities relating
to its organization and the registration of its shares of beneficial interest
under the Securities Act of 1933 and the sale and issuance of 100 shares to
Charles Schwab & Co., Inc. at $10.00 per share.

2. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT

F-41
<PAGE> 196
SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES

The Investment Manager and Schwab are, respectively, direct and indirect
wholly-owned subsidiaries of The Charles Schwab Corporation.

3. DEFERRED ORGANIZATION COSTS

F-42

<PAGE> 197
PART C
OTHER INFORMATION

FEBRUARY 28, 1996

SCHWAB CAPITAL TRUST

Item 24. Financial Statements and Exhibits.

(a) Financial Statements for the Schwab International Index Fund(TM)
and the Schwab Small-Cap Index Fund(R)

-- Included in Part A for the Schwab International Index
Fund and the Schwab Small-Cap Index Fund

-- Financial Highlights

-- Included in Part B, Statement of Additional Information:

-- Statement of Net Assets for the Schwab
International Index Fund as of October 31, 1995
(Audited)

-- Statement of Operations for the Schwab
International Index Fund for the year ended
October 31, 1995 (Audited)

-- Statement of Changes in Net Assets for the
Schwab International Index Fund for the year
ended October 31, 1995 (Audited)

-- Notes to Financial Statements the for Schwab
International Index Fund for the year ended
October 31, 1995 (Audited)

-- Report of the Independent Accountants for the
Schwab International Index Fund, dated November
22, 1995

-- Statement of Net Assets for the Schwab Small-Cap
Index Fund for the year ended October 31, 1995
(Audited)

-- Statement of Operations for the Schwab Small-Cap
Index Fund for the year ended October 31, 1995
(Audited)

-- Statement of Changes in Net Assets for the
Schwab Small-Cap Index Fund for the year ended
October 31, 1995 (Audited)

-- Notes to Financial Statements for the Schwab
Small-Cap Index Fund for the year ended October
31, 1995 (Audited)

C-1
<PAGE> 198

-- Report of the Independent Accountants for Schwab
Small-Cap Index Fund, dated November 22, 1995

-- Statement of Assets and Liabilities for the
Schwab Asset Director--High Growth Fund as of
October 31, 1995 (Audited)

-- Notes to Statement of Assets and Liabilities for
the Schwab Asset Director--High Growth Fund as
of October 31, 1995 (Audited)

-- Report of the Independent Accountants for the
Schwab Asset Director--High Growth Fund, dated
November 22, 1995

-- Statement of Assets and Liabilities for the
Schwab Asset Director--Balanced Growth Fund as
of October 31, 1995 (Audited)

-- Notes to Statement of Assets and Liabilities for
the Schwab Asset Director--Balanced Growth Fund
as of October 31, 1995 (Audited)

-- Report of the Independent Accountants for the
Schwab Asset Director--Balanced Growth Fund,
dated November 22, 1995

-- Statement of Assets and Liabilities for the
Schwab Asset Director--Conservative Growth Fund
as of October 31, 1995 (Audited)

-- Notes to Statement of Assets and Liabilities for
the Schwab Asset Director--Conservative Growth
Fund as of October 31, 1995 (Audited)

-- Report of the Independent Accountants for the
Schwab Asset Director--Conservative Growth Fund,
dated November 22, 1995

(b) Exhibits:

(1) -- Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1) to
Registrant's Registration Statement on Form
N-1A, filed on May 10, 1993

(2) -- Amended and Restated Bylaws are filed
herewith

(3) -- Inapplicable

(4) (a) -- Article III, Section 5, Article V, Article
VI, Article VIII, Section 4 and Article IX,
Sections 1, 5 and 7 of the Agreement and
Declaration of Trust is incorporated by
reference to Exhibit (1) to Registrant's
Registration Statement on Form N-1A, filed on
May 10, 1993

(b) -- Articles 9 and 11 of the Amended and Restated
Bylaws are filed herewith under Exhibit (2)

C-2
<PAGE> 199
(5) (a) -- Investment Advisory and Administration
Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the
"Investment Manager") is incorporated by
reference to Exhibit (5)(a) to Post-Effective
Amendment No. 4 to Registrant's Registration
Statement on Form N-1A, filed on February 24,
1995

(b) -- Revised Schedules to Investment Advisory and
Administration Agreement referred to at
Exhibit (5)(a) above are filed herewith

(c) -- Investment Sub-Advisory Agreement between
Investment Manager and Symphony Asset
Management, Inc. ("Symphony") is
incorporated by reference to Exhibit (5)(c)
to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form
N-1A, filed on December 15, 1995

(6) (a) -- Distribution Agreement between Registrant and
Charles Schwab & Co., Inc. ("Schwab") is
incorporated by reference to Exhibit (6)(a)
to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A, filed on August 16, 1993

(b) -- Revised Schedule to the Distribution
Agreement referred to at Exhibit (6)(a) above
is filed herewith

(7) -- Inapplicable

(8) (a) -- Custodian Agreement between Registrant and
State Street Bank and Trust Company is
incorporated by reference to Exhibit (8)(a)
to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form
N-1A, filed on February 25, 1994

(b) -- Revised Schedules to the Custodian Agreement
referred to at Exhibit (8)(a) above are
incorporated by reference to Exhibit (8)(b)
to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form
N-1A, filed on December 15, 1995

(c) -- Custodian Services Agreement between
Registrant, on behalf of the Schwab S&P 500
Fund, and PNC Bank, National Association is
filed herewith

(d) -- Accounting Services Agreement between
Registrant, on behalf of the Schwab S&P 500
Fund, and PFPC Inc. is filed herewith

(e) -- Transfer Agency Agreement between Registrant
and Schwab is incorporated by reference to
Exhibit (8)(b) to Post-Effective Amendment
No. 1 to Registrant's Registration Statement
on Form N-1A, filed on August 16, 1993

C-3
<PAGE> 200

(f) -- Revised Schedules to the Transfer Agency
Agreement referred to at Exhibit (8)(e) above
are filed herewith

(g) -- Shareholder Service Agreement between
Registrant and Schwab is incorporated by
reference to Exhibit (8)(c) to Post-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N- 1A, filed on August 16,
1993

(h) -- Revised Schedules to the Shareholder Service
Agreement referred to at Exhibit (8)(g) above
are filed herewith

(9) -- License Agreement between Schwab Capital
Trust and Standard & Poor's is incorporated
by reference to Exhibit (9) to Post-Effective
Amendment No. 6 to Registrant's Registration
Statement on Form N- 1A, filed on December
15, 1995

(10) -- Opinion and Consent of Ropes & Gray as to
legality of the securities being registered
is incorporated by reference to Registrant's
Rule 24f-2 Notice, filed on December 18, 1995

(11) (a) -- Consent of Ropes & Gray is filed herewith

(b) -- Consent of Price Waterhouse LLP, Independent
Accountants, is filed herewith

(12) -- Inapplicable

(13) (a) -- Purchase Agreement for the Schwab
International Index Fund(TM) is incorporated
by reference to Exhibit (13) to
Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N- 1A, filed on August 16, 1993

(b) -- Purchase Agreement for the Schwab Small-Cap
Index Fund(R) is incorporated by reference to
Exhibit (13)(b) to Post-Effective Amendment
No. 2 to Registrant's Registration Statement
on Form N-1A, filed on February 25, 1994

(c) -- Purchase Agreement for the Asset Director
Funds is incorporated by reference to Exhibit
(13)(c) to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form
N-1A, filed on December 15, 1995

(d) -- Purchase Agreement for the Schwab S&P 500
Fund--Investor Shares and e.Shares is filed
herewith

(14) -- Inapplicable

(15) -- Inapplicable

C-4
<PAGE> 201

(16) (a) -- Performance calculation for the Schwab
International Index Fund is incorporated by
reference to Exhibit (16) to Post-Effective
Amendment No. 2 to Registrant's Registration
Statement on Form N- 1A, filed on February
25, 1994

(b) -- Performance calculation for the Schwab
Small-Cap Index Fund is incorporated by
reference to Exhibit (16)(b) to
Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form
N-1A, filed on February 24, 1995

(18) -- Multiple Class Plan for the Schwab S&P 500
Fund--Investor Shares and e.Shares dated
February 28, 1996 is filed herewith

(27) (a) -- Financial Data Schedule for the Schwab
International Index Fund is filed herewith

(b) -- Financial Data Schedule for the Schwab
Small-Cap Index Fund is filed herewith

(d) -- Financial Data Schedule for the Schwab Asset
Director--Balanced Growth Fund is filed
herewith

(e) -- Financial Data Schedule for the Schwab Asset
Director--Conservative Growth Fund is filed
herewith

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

The Charles Schwab Family of Funds, Schwab Investments and Schwab Annuity
Portfolios each are Massachusetts business trusts registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), are advised by the
Investment Manager, and employ Schwab as their principal underwriter, transfer
agent and shareholder services agent. As a result, The Charles Schwab Family
of Funds, Schwab Investments and Schwab Annuity Portfolios may be deemed to be
under common control with Registrant.

C-5
<PAGE> 202
Item 26. Number of Holders of Registrant's Securities.

As of January 31, 1996, the number of record holders of shares of
beneficial interest for the series of Registrant was:

<TABLE>
<CAPTION>
Name of Fund/Class Number of Record Holders
------------------ ------------------------
<S> <C>
Schwab International Index Fund(TM) 1 (for the benefit of 28,058
accounts)

Schwab Small-Cap Index Fund(R) 1 (for the benefit of 22,495
accounts)

Schwab Asset Director(R)--High Growth 1 (for the benefit of 13,010
Fund accounts)

Schwab Asset Director(R)--Balanced 1 (for the benefit of 7,762
Growth Fund accounts)

Schwab Asset Director(R)-Conservative 1 (for the benefit of 2,711
Growth Fund accounts)

Schwab S&P 500 Fund--Investor Shares 0

Schwab S&P 500 Fund--e.Shares 0
</TABLE>

Item 27. Indemnification.

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

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

C-6
<PAGE> 203
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.

Item 28. Business and Other Connections of Investment Manager.

(a) Information pertaining to business and other connections of
Registrant's Investment Manager is incorporated by reference to the Prospectus
section captioned "Management of the Fund" and to the section of the Statement
of Additional Information captioned "Management of the Trust" for the Schwab
International Index Fund(TM) and the Schwab Small-Cap Index Fund(R).

Information pertaining to business and other connections of
Registrant's Investment Manager and sub-adviser is incorporated by reference to
the Prospectus section captioned "Management Functions and Responsibilities"
and to the section of the Statement of Additional Information captioned
"Management of the Trust" for the Schwab Asset Director--High Growth Fund, the
Schwab Asset Director--Balanced Growth Fund and the Schwab Asset
Director--Conservative Growth Fund (collectively, the "Asset Director Funds").

Information pertaining to business and other connections of
Registrant's Investment Manager and is incorporated by reference to the
Prospectus section captioned "Management Functions and Responsibilities" and to
the section of the Statement of Additional Information captioned "Management of
the Trust" for the Schwab S&P 500 Fund.

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

Registrant's sub-investment adviser for the Asset Director Funds
is Symphony. Symphony was formed on March 30, 1994 and, as of January 31,
1996, manages over $600 million. BARRA, Inc. owns 100% of the outstanding
stock of Symphony.

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

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Founder, Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Chief Executive Officer
and Director
</TABLE>

C-7
<PAGE> 204

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Charles Schwab Investment Management, Chairman and Director
Inc.

The Charles Schwab Trust Chairman and Director
Company

Mayer & Schweitzer, Inc. Chairman and Director; Chairman
(officer position) until December
1995

The Gap, Inc. Director

Transamerica Corporation Director

AirTouch Communications Director

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

The Charles Schwab Corporation Vice Chairman and Director; Chief
Operating Officer until March 1994

Mayer & Schweitzer, Inc. Director until February 1995

The Charles Schwab Trust Director
Company

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

The Charles Schwab Corporation President, Chief Operating
Officer, and Director

Charles Schwab Investment Management, Director
Inc.

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

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

C-8
<PAGE> 205
E
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
The Charles Schwab Corporation Executive Vice President until
January 1996; Senior Executive
Vice President until January 1995

Mayer & Schweitzer, Inc. Director until January 1996

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

The Charles Schwab Corporation Executive Vice President - Schwab
Institutional

The Charles Schwab Trust Company Director and Executive Vice
President

A. John Gambs, Charles Schwab & Co., Inc. Executive Vice President, Chief
Treasurer and Principal Financial Financial Officer and Director
Officer
The Charles Schwab Corporation Executive Vice President and Chief
Financial Officer

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

The Charles Schwab Trust Chief Financial Officer
Company
Mayer & Schweitzer, Inc. Director

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

The Charles Schwab Corporation Executive Vice President and Chief
Information Officer

Daniel O. Leemon The Charles Schwab Corporation Executive Vice President -
Business Strategy

Charles Schwab & Co., Inc. Executive Vice President -
Business Strategy

Timothy F. McCarthy, Charles Schwab Investment Management, Chief Executive Officer
Trustee and President Inc.
</TABLE>

C-9
<PAGE> 206

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Charles Schwab & Co., Inc. Executive Vice President - Mutual
Funds

The Charles Schwab Corporation Executive Vice President - Mutual
Funds

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

Fidelity Investment Advisor Group President until 1994

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

The Charles Schwab Corporation Executive Vice President - Retail
Brokerage

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

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

The Charles Schwab Corporation Executive Vice President -
Electronic Brokerage

John N. Tognino Charles Schwab & Co., Inc. Executive Vice President - Capital
Markets and Trading until February
1996

The Charles Schwab Corporation Executive Vice President - Capital
Markets and Trading until February
1996

Mayer & Schweitzer, Inc. Director and Vice Chairman until
February 1996

Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President - Human
Resources and Corporate Support
</TABLE>

C-10
<PAGE> 207

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
The Charles Schwab Corporation Executive Vice President and
Chief Administrative Officer

Commercial Credit Corporation Managing Director until February
1994

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

The Charles Schwab Corporation Treasurer and Senior Vice
President

Mayer & Schweitzer, Inc. Treasurer

William J. Klipp, Charles Schwab & Co., Inc. Senior Vice President -
Trustee, Senior Vice President SchwabFunds
and Chief Operating Officer
Charles Schwab Investment Management, President and Chief Operating
Inc. Officer

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

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

Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary

Charles Schwab & Co., Inc. Assistant Corporate Secretary

Charles Schwab Investment Corporate Secretary
Management, Inc.

The Charles Schwab Trust Assistant Corporate Secretary
Company

David J. Neuman The Charles Schwab Trust Corporate Secretary
Company
</TABLE>

C-11
<PAGE> 208

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Mary B. Templeton Charles Schwab Investment Management, Assistant Corporate Secretary
Inc.

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

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

Mayer & Schweitzer Assistant Corporate Secretary

The Charles Schwab Trust Assistant Corporate Secretary
Company until February 1996

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

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

(c) The following information, which is believed to be accurate, is based
upon information provided by Symphony. The business, profession, vocation or
employment of a substantial nature in which each director and/or officer of
Symphony is or has been engaged during the past two fiscal years for his or her
own account in the capacity of director, officer, employee, partner or trustee
is as follows:

<TABLE>
<CAPTION>
Name Name of Company Capacity
- ---- --------------- --------
<S> <C> <C>
Andrew T. Rudd Symphony Asset Management, Inc. Director and Chairman

BARRA, Inc. Director, Chief Executive Officer and
Chairman

Jeffrey L. Skelton Symphony Asset Management, Inc. Director, Chief Executive Officer and
President

BARRA, Inc. President, BARRA Ventures Div. until
1994
James D. Kirsner Symphony Asset Management, Inc. Director

BARRA, Inc. Chief Financial Officer

Maria L. Hekker Symphony Asset Management, Inc. General Counsel and Secretary

BARRA, Inc. Chief Legal Officer
</TABLE>

C-12
<PAGE> 209

<TABLE>
<CAPTION>
Name Name of Company Capacity
- ---- --------------- --------
<S> <C> <C>
Neil L. Rudolph Symphony Asset Management, Inc. Chief Operating Officer/Chief Compliance
Officer

Wells Fargo Nikko Investment Advisors Managing Director, Chief Operating
Officer -- Mutual Fund Group until 1994

Praveen K. Gottipalli Symphony Asset Management, Inc. Director of Investments

BARRA, Inc. Director of Active Strategies, 1994

Michael J. Henman Symphony Asset Management, Inc. Director of Business Development

Wells Fargo Nikko Investment Advisors Managing Director until 1994
</TABLE>

Item 29. Principal Underwriter.

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

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

Item 30. Location of Accounts and Records.

All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of: Registrant (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's former sub-investment adviser, Dimensional Fund Advisors
Inc., 1299 Ocean Avenue, Suite 1100, Santa Monica, California 90401;
Registrant's sub-investment adviser for the Asset Director Funds is Symphony
Asset Management, Inc., 555 California Street, Suite 2975, San Francisco,
California 94104; Registrant's principal underwriter, Charles Schwab & Co.,
Inc., 101 Montgomery Street, San Francisco, California 94104; Registrant's
custodians and fund accountants, State Street Bank and Trust Company, 225
Franklin Street, Boston, MA 02180 and PNC Bank, National Association/PFPC Inc.,
400 Bellevue Parkway, Wilmington, DE 19809 (ledgers, receipts, and brokerage
orders); or Ropes & Gray, counsel to Registrant, 1301 K Street, N.W., Suite 800
East, Washington, D.C. 20005 (minute books, bylaws, and declaration of trust).

C-13
<PAGE> 210
Item 31. Management Services.

Not applicable.

Item 32. Undertakings.

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

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

(c) Registrant undertakes to file a post-effective amendment using
financial statements, which need not be audited, for the Asset Director Funds,
within four to six months from the commencement of operations for each the
Schwab Asset Director-High Growth Fund, the Schwab Asset Director-Balanced
Growth Fund and the Schwab Asset Director-Conservative Growth Fund.

(d) Registrant undertakes to file a post-effective amendment using
financial statements, which need not be audited, for the Schwab S&P 500 Fund,
within four to six months from the commencement of operations for the Schwab
S&P 500 Fund.

C-14
<PAGE> 211
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended,
Registrant has duly caused this Post-Effective Amendment No. 7 to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of San
Francisco, State of California, on the 27th day of February 1996.

SCHWAB CAPITAL TRUST
Registrant

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

Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 7 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 27th day
of February 1996.

<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- ------------------------------
Charles R. Schwab

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

/s/ William J. Klipp Senior Vice President, Chief
- ------------------------------
William J. Klipp Operating Officer and Trustee

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

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

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

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

A. John Gambs* Treasurer and Principal Financial Officer
- ------------------------------
A. John Gambs
</TABLE>

*By: /s/ William J. Klipp
----------------------------------------------------
William J. Klipp, Attorney-in-Fact pursuant
to Powers of Attorney filed previously

<PAGE> 212
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
(2) Amended and Restated Bylaws

(5)(b) Revised Schedules to the Investment Advisory and
Administration Agreement

(6)(b) Revised Schedule to the Distribution Agreement

(8)(c) Custodian Services Agreement

(8)(d) Accounting Services Agreement

(8)(f) Revised Schedules to the Transfer Agency Agreement

(8)(h) Revised Schedules to the Shareholder Service Agreement

(11)(a) Consent of Ropes & Gray

(11)(b) Consent of Price Waterhouse LLP

(13)(d) Purchase Agreement

(18) Multiple Class Plan

(27)(a) Financial Data Schedule for Schwab International Index
Fund

(27)(b) Financial Data Schedule for Schwab Small-Cap Index Fund

(27)(c) Financial Data Schedule for Schwab Asset Director--High
Growth Fund

(27)(d) Financial Data Schedule for Schwab Asset Director--
Balanced Growth Fund

(27)(e) Financial Data Schedule for Schwab Asset Director--
Conservative Growth Fund
</TABLE>

<PAGE> 1
EXHIBIT 2

AMENDED AND RESTATED BYLAWS
OF
THE CHARLES SCHWAB FAMILY OF FUNDS,
SCHWAB INVESTMENTS,
SCHWAB CAPITAL TRUST,
AND
SCHWAB ANNUITY PORTFOLIOS

* * * * *

ARTICLE 1
Agreement and Declaration of Trust,
Resident Agent and Principal Office

1.1 Applicability of Bylaws. These Bylaws are the Bylaws
of each of The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust, and Schwab Annuity Portfolios (each a "Trust"). With respect to
each Trust, the term "Declaration of Trust" as used herein shall mean the
Declaration of Trust establishing such Trust, in effect and as amended from time
to time.

1.2 Agreement and Declaration of Trust. With respect to
each Trust, these Bylaws shall be subject to the Declaration of Trust. Unless
otherwise specified herein, capitalized terms in these Bylaws shall have the
meaning given such terms in The Declaration of Trust.

1.3 Resident Agent of the Trust. Each Trust shall have an
agent for service of process residing in the Commonwealth of Massachusetts.

1.4 Principal Office of the Trust. The initial principal
office of each Trust shall be located in San Francisco, California. Each Trust
may have such other offices as the Trustees may determine or as they may
authorize.

ARTICLE 2
Meetings of Trustees

2.1 Regular Meetings. Regular meetings of the Trustees
may be held without call or notice at such places and at such times as the
Trustees may determine from time to time, provided that notice of the first
regular meeting following any such determination shall be given to absent
Trustees. A regular meeting of the Trustees may be held without call or notice
immediately after and at the same place as an annual meeting of the
Shareholders.

2.2 Special Meetings. Special meetings of the Trustees may
be held at any time and at any place designated in the call of the meeting when
called by the Chairman
<PAGE> 2
of the Board of the Trustees, the President, the Treasurer or by two or more
Trustees, sufficient notice thereof being given to each Trustee by the
Secretary, an Assistant Secretary or the officer or the Trustees calling the
meeting.

2.3 Notice. It shall be sufficient notice to the Trustee
of a special meeting to send notice by special delivery at least forty-eight
hours or by telegram, telex or telecopy or other electronic facsimile
transmission method at least twenty-four hours before the meeting addressed to
the Trustee at his or her usual or last known business or residential address or
to give notice to him or her in person or by telephone at least twenty-four
hours before the meeting. Notice of a meeting need not be given to any Trustee
if a written waiver of notice, executed by him or her before the meeting, is
filed with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him or her. Neither notice of a meeting nor a waiver of a notice need specify
the purposes of the meeting.

2.4 Quorum. At any meeting of the Trustees, a majority of
the Trustees then in office shall constitute a quorum. Any meeting may be
adjourned from time to time by a majority of the votes cast upon the question,
whether or not a quorum is present, and the meeting may be held as adjourned
without further notice.

ARTICLE 3
Officers

3.1 Enumeration: Qualification. The officers of each
Trust shall be a President; a Treasurer; and a Secretary, who shall also be the
Clerk; and such other officers including a Chairman of the Board of the
Trustees, if any, as the Trustees from time to time may in their discretion
elect. Each Trust may also have such agents as the Trustees may appoint at their
discretion from time to time. The Chairman of the Board of the Trustees, if one
is elected, shall be a Trustee and may but need not be a Shareholder; and any
other officer may but not need be a Trustee or a Shareholder. Any two or more
offices may be held by the same person.

3.2 Election. The President, the Treasurer and the
Secretary shall be elected by the Trustees upon the occurrence of a vacancy in
any such office. Other officers, if any, may be elected or appointed by the
Trustees at any time. Vacancies in any office may be filled at any time.

3.3 Tenure. The Chairman of the Board of the Trustees, if
one is elected; the President; the Treasurer and the Secretary shall hold office
until their respective successors are chosen and qualified, or in each case
until he or she sooner dies, resigns, is removed or becomes disqualified. Each
other officer shall hold office and each agent shall retain authority at the
pleasure of the Trustees.

-2-
<PAGE> 3
3.4 Powers. Subject to the other provisions of these
Bylaws, each officer shall have, in addition to the duties and powers herein and
as set forth in the Declaration of Trust, such duties and powers as are commonly
incident to the office occupied by him or her as if the Trust were organized as
a Massachusetts business corporation and such other duties and powers as the
Trustees may designate from time to time.

3.5 Chairman; President. Unless the Trustees otherwise
provide, the Chairman of the Board of the Trustees or, if there is none or in
the absence of the Chairman, the President shall preside at all meetings of the
Shareholders and of the Trustees. The Chairman of the Board of the Trustees, if
there is one, shall be the chief executive officer and, unless the Trustees
otherwise provide, the President shall be the chief operating officer. If there
is no Chairman of the Board of the Trustees, the President shall be the chief
executive officer.

3.6 Treasurer. Unless otherwise provided by the Trustees,
the Treasurer shall be the chief financial and accounting officer of the Trust,
and shall, subject to the provisions of the Declaration of Trust and to any
arrangement made by the Trustees with a custodian; investment adviser or
manager; or transfer, shareholder servicing or similar agent, be in charge of
the valuable papers, books of account and accounting records of the Trust, and
shall have such other duties and powers as may be designated from time to time
by the Trustees or by the President.

3.7 Secretary. The Secretary shall record all proceedings
of the Shareholders and the Trustees in books to be kept therefor, which books
or a copy thereof shall be kept at the principal office of the Trust. In the
absence of the Secretary from any meeting of the Shareholders or Trustees, an
assistant secretary, or if there be none or if he or she is absent, a temporary
secretary chosen at such meeting shall record the proceedings thereof in the
aforesaid books.

3.8 Resignations. Any officer may resign at any time by
written instrument signed by him or her and delivered to the Chairman of the
Board of the Trustees, the President, the Secretary or to a meeting of the
Trustees. Such resignation shall be effective upon receipt unless specified to
be effective at some other time. Except to the extent expressly provided in a
written agreement with a Trust, no officer resigning and no officer removed
shall have any right to any compensation for any period following his or her
resignation or removal, or any right to damages on account of such removal.

-3-
<PAGE> 4
ARTICLE 4
Committees

4.1 Quorum; Voting. A majority of the members of any
Committee of the Trustees shall constitute a quorum for the transaction of
business, and any action of such a Committee may be taken at a meeting by a vote
of a majority of the members present (a quorum being present) or evidenced by
one or more writings signed by such a majority. Members of a Committee may
participate in a meeting of such Committee by means of a conference telephone or
other communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting. The Trustees may not use
methods described herein to approve a Trust's Investment Advisory Agreement(s).

ARTICLE 5
Reports

5.1 General. The Trustees and officers shall render
reports at the time and in the manner required by the Declaration of Trust or
any applicable law. Officers and Committees shall render such additional reports
as they may deem desirable or as may from time to time be required by the
Trustees.

ARTICLE 6
Fiscal Year

6.1 General. Except as from time to time otherwise
provided by the Trustees, the initial fiscal year of the Trust shall end on such
date as is determined in advance or in arrears by the Treasurer, and subsequent
fiscal years shall end on such date in subsequent years.

ARTICLE 7
Seal

7.1 General. Absent adoption by Trustees, a Trust will
not have a seal.

ARTICLE 8
Execution of Papers

8.1 General. Except as the Trustees may generally or in
particular cases authorize the execution thereof in some other manner, all
deeds, leases, contracts, notes and other obligations made by the Trustees shall
be signed by the President, any Vice President, the Treasurer or the Secretary
and need not bear the seal of the Trust.

-4-
<PAGE> 5
ARTICLE 9
Issuance of Share Certificates

9.1 Share Certificates. In lieu of issuing certificates
for Shares, the Trustees or the transfer agent may either issue receipts
therefor or may keep accounts upon the books of a Trust for the record holders
of such Shares, who shall in either case be deemed, for all purposes hereunder,
to be the holders of certificates for such Shares as if they had accepted such
certificates and shall be held to have expressly assented and agreed to the
terms hereof.

The Trustees may at any time authorize the issuance of Share
certificates. In that event, each Shareholder shall be entitled to a
certificate stating the number of Shares owned by him or her, in such form as
shall be prescribed from time to time by the Trustees. Such certificates shall
be signed by the Chairman of the Board of the Trustees, the President or any
Vice President and by the Treasurer or Assistant Treasurer. Such signatures may
be facsimile if the certificate is signed by a transfer agent, or by a
registrar, other than a Trustee, officer or employee of a Trust. In case any
officer who has signed or whose facsimile signature has been placed on such
certificate shall cease to be such officer before such certificate is issued, it
may be issued by a Trust with the same effect as if he were such officer at the
time of its issue.

9.2 Loss of Certificates. In case of the alleged loss or
destruction or the mutilation of a Share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustees shall prescribe.

9.3 Issuance of New Certificates to Pledgee. A pledgee of
Shares transferred as collateral security shall be entitled to a new certificate
if the instrument of transfer substantially describes the debt or duty that is
intended to be secured thereby. Such new certificate shall express on its face
that it is held as collateral security, and the name of the pledgor shall be
stated thereon, who alone shall be liable as a Shareholder and entitled to vote
thereon.

9.4 Discontinuance of Issuance of Certificates. The
Trustees may at any time discontinue the issuance of Share certificates and may,
by written notice to each Shareholder, require the surrender of Share
certificates to a Trust for cancellation. Such surrender and cancellation shall
not affect the ownership of Shares in a Trust.

-5-
<PAGE> 6
ARTICLE 10
Provisions Relating to the Conduct of the Trust's Business

10.1 General. Each Trust shall at all times conduct its
business in accordance with applicable provisions of the Investment Company Act
of 1940 (the "1940 Act").

ARTICLE 11
Shareholders' Voting Powers and Meetings

11.1 Voting Powers. The Shareholders of a Trust shall have
power to vote only (i) for the election of Trustees as provided in the
Declaration of Trust, provided, however, that no meeting of Shareholders is
required to be called for the purpose of electing Trustees unless and until such
time as less than a majority of the Trustees have been elected by the
Shareholders, (ii) with respect to any Manager or Sub-Adviser as provided in the
Declaration of Trust to the extent required by the 1940 Act, (iii) with respect
to any termination of such Trust to the extent and as provided in the
Declaration of Trust, (iv) with respect to any amendment of the Declaration of
Trust to the extent and as provided in the Declaration of Trust, (v) to the same
extent as the stockholders of a Massachusetts business corporation as to whether
or not 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, and (vi) with respect to such additional matters relating to the
Trust as may be required by law, the Declaration of Trust, these Bylaws or any
registration of the Trust with the U.S. Securites and Exchange Commission (or
any successor agency) or any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. The Shareholders of any particular class or
series shall not be entitled to vote on any matters as to which such class or
series is not affected. Except with respect to matters as to which the Trustees
have determined that only the interests of one or more particular series or one
or more classes are affected or as required by law, all of the Shares of each
series shall, on matters as to which it is entitled to vote, vote with shares of
other series so entitled in the aggregate. Notwithstanding the foregoing, with
respect to matters which would otherwise be voted on by two or more series in
the aggregate, the Trustees may, in their sole discretion, submit such matters
to the Shareholders of any or all such series separately. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy. A proxy with respect to Shares held in the name of two or more persons
shall be valid if executed by any one of them unless at or prior to exercise of
the proxy the Trust receives a specific written notice to the contrary from any
one of them. A proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its exercise and the
burden of proving invalidity shall rest on the challenger. Until Shares are
issued, the

-6-
<PAGE> 7
Trustees may exercise all rights of Shareholders and may take any action
required by law, the Declaration of Trust or these Bylaws to be taken by
Shareholders.

11.2 Voting Power and Meetings. Meetings of the
Shareholders may be called by the Trustees for the purpose of electing Trustees
as provided in the Declaration of Trust and for such other purposes as may be
prescribed by law, by the Declaration of Trust or by these Bylaws. Meetings of
the Shareholders may also be called by the Trustees from time to time for the
purpose of taking action upon any other matter deemed by the Trustees to be
necessary or desirable. A meeting of Shareholders may be held at any place
designated by the Trustees. Written notice of any meeting of Shareholders shall
be given or caused to be given by the Trustees by mailing such notice at least
seven days before such meeting, postage prepaid, stating the time and place of
the meeting, to each Shareholder at the Shareholder's address as it appears on
the records of a Trust. Whenever notice of a meeting is required to be given to
a Shareholder under the Declaration of Trust or these Bylaws, a written waiver
thereof, executed before or after the meeting by such Shareholder or his
attorney thereunto authorized and filed with the records of the meeting, shall
be deemed equivalent to such notice.

11.3 Quorum and Required Vote. A majority of Shares
entitled to vote shall be a quorum for the transaction of business at a
Shareholders' meeting, except that where any provision of law, of the
Declaration of Trust or of these Bylaws permits or requires that (i) holders of
any series shall vote as a series, then a majority of the aggregate number of
Shares of that series entitled to vote shall be necessary to constitute a quorum
for the transaction of business by that series; or (ii) holders of any class
shall vote as a class, then a majority of the aggregate number of Shares of that
class entitled to vote shall be necessary to constitute a quorum for the
transaction of business by that class. Any lesser number shall be sufficient for
adjournments. Any adjourned session or sessions may be held, within a reasonable
time after the date set for the original meeting, without the necessity of
further notice. Except when a larger vote is required by any provision of law or
the Declaration of Trust or these Bylaws, a majority of the Shares voted shall
decide any questions and a plurality shall elect a Trustee, provided that where
any provision of law, of the Declaration of Trust or of these Bylaws permits or
requires that the holders of any series or class shall vote as a series or
class, then a majority of the Shares of that series or class, as the case may
be, voted on the matter (or a plurality with respect to the election of a
Trustee) shall decide that matter insofar as that series or class is concerned.

11.4 Action by Written Consent. Any action taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of law, of the Declaration of Trust or of
these Bylaws) consents to the action in writing and such written consents are
filed with the records of the meetings of Shareholders. Such consent shall be
treated for all purposes as a vote taken at a meeting of Shareholders.

11.5 Record Dates. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or any adjournment
thereof, or who are entitled to

-7-
<PAGE> 8
receive payment of any dividend or of any other distribution, the Trustees may
fix a date from time to time, which shall be not more than 90 days before the
date of any meeting of Shareholders or the date for the payment of any dividend
or other distribution, as the record date for determining the Shareholders
having the right to notice of and to vote at such meeting and any adjournment
thereof or the right to receive such dividend or distribution, and in such case
only Shareholders of record on such record date shall have such right
notwithstanding any transfer of Shares on the books of a Trust after the record
date; or without fixing such record date the Trustees may for any of such
purposes close the register or transfer books for all or any part of such
period.

ARTICLE 12
Amendments to the Bylaws

12.1 General. These Bylaws may be amended or repealed, in
whole or in part, by a majority of the Trustees then in office at any meeting of
the Trustees, or by one or more writings signed by such a majority.

Adopted as of February 7, 1996.

-8-

<PAGE> 1
EXHIBIT 5b

SCHEDULE A
TO THE INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT
FOR SCHWAB CAPITAL TRUST

<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund July 21, 1993
Schwab Small-Cap Index Fund October 14, 1993
Schwab Asset Director-High Growth Fund September 25, 1995
Schwab Asset Director-Balanced Growth Fund September 25, 1995
Schwab Asset Director-Conservative Growth Fund September 25, 1995
Schwab S&P 500 Fund February 28, 1996
</TABLE>

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
-------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.

By: /s/ Stephen B. Ward
-------------------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer

Dated: February 28, 1996

A-1
<PAGE> 2
SCHEDULE B
TO THE INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT
FOR SCHWAB CAPITAL TRUST

ADVISORY FEE SCHEDULE

<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab International Index Fund Seventy one-hundredths of one percent (0.70%)
of the Fund's average daily net assets not in
excess of $300,000,000 and sixty one-hundredths
of one percent (0.60%) of such assets over
$300,000,000

Schwab Small-Cap Index Fund Fifty one-hundredths of one percent (0.50%) of
the Fund's average daily net assets not in
excess of $300,000,000 and forty-five
one-hundredths of one percent (0.45%) of such
assets over $300,000,000

Schwab Asset Director-High Growth Fund Seventy-four one-hundredths of one percent
(0.74%) of the Fund's average daily net assets
not in excess of $1 billion; sixty-nine
one-hundredths of one percent (0.69%)of such
net assets over $1 billion, but not more than
$2 billion; and sixty-four one-hundredths of
one percent (0.64%) of such net assets over $2
billion

Schwab Asset Director-Balanced Growth Fund Seventy-four one-hundredths of one percent
(0.74%) of the Fund's average daily net assets
not in excess of $1 billion; sixty-nine
one-hundredths of one percent (0.69%)of such
net assets over $1 billion, but not more than
$2 billion; and sixty-four one-hundredths of
one percent (0.64%) of such net assets over $2
billion
</TABLE>

B-1
<PAGE> 3
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab Asset Director-Conservative Growth Fund Seventy-four one-hundredths of one percent
(0.74%) of the Fund's average daily net assets
not in excess of $1 billion; sixty-nine
one-hundredths of one percent (0.69%) of such
net assets over $1 billion, but not more than
$2 billion; and sixty-four one-hundredths of
one percent (0.64%) of such net assets over $2
billion

Schwab S&P 500 Fund Thirty-six one-hundredths of one percent
(0.36%) of the Fund's average daily net assets
not in excess of $1 billion; thirty-three one
hundredths of one percent (0.33%) of such net
asset over $1 billion, but not more than $2
billion; and thirty-one one hundredths of one
percent (0.31%) of such net asset over $2
billion.
</TABLE>

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
-----------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.

By: /s/ Stephen B. Ward
-----------------------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer

Dated: February 28, 1996

B-2

<PAGE> 1
EXHIBIT 6b

SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
FOR SCHWAB CAPITAL TRUST

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Colleen M. Hummer
--------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President

Dated: February 28, 1996

<PAGE> 1
Exhibit 8(c)

CUSTODIAN SERVICES AGREEMENT TERMS AND CONDITIONS

This Agreement is made as of February 21, 1996, by and between SCHWAB
CAPITAL TRUST, (the "Fund"), a Massachusetts business trust, and PNC BANK,
NATIONAL ASSOCIATION ("PNC Bank"), a national banking association.

The Fund is registered as an open-end investment company under the
Investment Company Act of 1940 (the "1940" Act), as amended.

The Fund wishes to retain PNC Bank to provide custody services, and PNC
Bank wishes to furnish such services to each of the Fund's investment portfolios
listed on Schedule A, as attached hereto ("Portfolio(s)"), either directly or
through an affiliate or affiliates, as more fully described herein.

In consideration of the promises and mutual covenants herein
contained, the parties agree as follows:

1. Definitions.

(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal agency
securities, its successor or successors, and its nominee or nominees and any
book-entry system maintained by an exchange registered with the SEC under the
1934 Act.
<PAGE> 2
(c) "CFTC". The term "CFTC" shall mean the Commodities
Futures Trading Commission.

(d) "Governing Board". The term "Governing Board" shall mean
the Fund's Board of Directors if the Fund is a corporation or the Fund's Board
of Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.

(e) "Oral Instructions". The term "Oral Instructions" shall
mean oral instructions received by PNC Bank from an Authorized Person or from a
person reasonably believed by PNC Bank to be an Authorized Person.

(f) "PNC Bank". The term "PNC Bank" shall mean PNC Bank or a
subsidiary or affiliate of PNC Bank.

(g) "SEC". The term "SEC" shall mean the Securities and
Exchange Commission.

(h) "Securities and Commodities Laws". The terms the "1933
Act" shall mean the Securities Act of 1933, the "1934 Act" shall mean the
Securities Exchange Act of 1934, the "1940 Act" shall mean the Investment
Company Act of 1940, as amended, and the "CEA" shall mean the Commodities
Exchange Act, as amended.

(i) "Shares". The term "Shares" shall mean the shares of
stock of any series or class of the Fund, or, where appropriate, units of
beneficial interest in a trust where the Fund is organized as a Trust.

(j) "Property". The term "Property" shall mean:

(i) any and all securities and other investment items
which the Fund may from time to time

2
<PAGE> 3
deposit, or cause to be deposited, with PNC
Bank or which PNC Bank may from time to time
hold for the Fund;

(ii) All income in respect of any of such securities or
other investment items;

(iii) all proceeds of the sale of any of such securities
or investment items; and

(iv) all proceeds of the sale of securities issued by
the Fund, which are received by PNC Bank from time
to time, from or on behalf of the Fund.

(k) "Written Instructions". The term "Written Instructions"
shall mean written instructions signed by two Authorized Persons and received
by PNC Bank. The instructions may be delivered by hand, mail, tested telegram,
cable, telex or facsimile sending device.

2. Appointment. The Fund hereby appoints PNC Bank to provide
custodian services to each of the Portfolios listed in Schedule A, hereto, and
PNC Bank accepts such appointment and agrees to furnish such services. The
Fund may from time to time issue separate series or classes or classify and
reclassify shares of such series or classes. PNC Bank shall identify to each
such series or class property belonging to such series or class and in such
reports, confirmations and notices to the Fund called for under this Agreement
shall identify the series or class to which such report, confirmation or notice
pertains, if applicable.

3
<PAGE> 4
3. Delivery of Documents. The Fund has provided or, where
applicable, will provide PNC Bank with the following:

(a) certified or authenticated copies of the resolutions
of the Fund's Governing Board, approving the
appointment of PNC Bank or its affiliates to provide
services;

(b) a copy of the Fund's most recent effective
registration statement;

(d) a copy of the Fund's distribution agreement or
agreements;

(e) a copy of the Fund's administration agreements if
PNC Bank is not providing the Fund with such services;

(f) copies of any shareholder servicing agreements made
in respect of the Fund; and

(g) certified or authenticated copies of any and all
amendments or supplements to the foregoing.

4. Compliance with Government Rules and Regulations.
PNC Bank undertakes to comply with all applicable requirements of the
1933 Act, the 1934 Act, the 1940 Act, and the CEA, and any laws, rules and
regulations of governmental authorities having jurisdiction with respect to all
duties to be performed by PNC Bank hereunder. Except as specifically set forth
herein, PNC Bank assumes no responsibility for such compliance by the Fund.

4
<PAGE> 5
5. Instructions. Unless otherwise provided in this Agreement, PNC
Bank shall act only upon Oral and Written Instructions. PNC Bank shall be
entitled to rely upon any Oral and Written Instructions it receives from an
Authorized Persons (or from a person reasonably believed by PNC Bank to be an
Authorized Person) pursuant to this Agreement. PNC Bank may assume that any
Oral or Written Instructions received hereunder are not in any way inconsistent
with the provisions of organizational documents or this Agreement or of any
vote, resolution or proceeding of the Fund's Governing Board or of the Fund's
shareholders.

The Fund agrees to forward to PNC Bank Written Instructions confirming
Oral Instructions so that PNC Bank receives the Written Instructions by the
close of business on the same day that such Oral Instructions are received. The
fact that such confirming Written Instructions are not received by PNC Bank
shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions.

The Fund further agrees that PNC Bank shall incur no liability to the
Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.

6. Right to Receive Advice.

(a) Advice of the Fund. If PNC Bank is in doubt as to any
action it should or should not take, PNC Bank may request directions or advice,
including Oral or Written Instructions, from the Fund.

5
<PAGE> 6
(b) Advice of Counsel. If PNC Bank shall be in doubt as to
any questions of law pertaining to any action it should or should not take, PNC
Bank may request advice at its own cost from such counsel of its own choosing
(who may be counsel for the Fund, the Fund's advisor or PNC Bank, at the option
of PNC Bank).

(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel.

(d) Protection of PNC Bank. PNC Bank shall be protected in
any action it takes or does not take in reliance upon directions, advice or
Oral or Written Instructions it receives from the Fund or from counsel to the
Fund and which PNC Bank believes, in good faith, to be consistent with those
directions, advice or Oral or Written Instructions.

Nothing in this paragraph shall be construed so as to impose an
obligation upon PNC Bank (I) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or Oral
or Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC Bank's properly taking or not taking
such action.

7. Records. The books and records pertaining to the Fund, which are
in the possession of PNC Bank, shall be the property of the Fund. Such books
and records shall be prepared and maintained

6
<PAGE> 7
as required by the 1940 Act and other applicable securities laws, rules and
regulations. The Fund, or the Fund's Authorized Persons, shall have access to
such books and records at all time during PNC Bank's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by PNC Bank to the Fund or to an Authorized Person of the
Fund, at the Fund's expense.

8. Confidentiality. PNC Bank agrees to keep confidential all
records of the Fund and information relative to the Fund and its Shareholders
(past, present and potential), unless the release of such records or information
is otherwise consented to, in writing, by the Fund. The Fund agrees that such
consent shall not be unreasonably withheld. The Fund further agrees that,
should PNC Bank be required to provide such information or records to duly
constituted authorities (who may institute civil or criminal contempt
proceedings for failure to comply), PNC Bank shall not be required to seek the
Fund's consent prior to disclosing such information.

9. Cooperation with Accountants. PNC Bank shall cooperate with the
Fund's independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the expression
of their opinion, as required by the Fund.

10. Disaster Recovery. PNC Bank shall enter into and shall maintain
in effect with appropriate parties one or more agreements

7
<PAGE> 8
making reasonable provision for emergency use of electronic data processing
equipment to the extent appropriate equipment is available. In the event of
equipment failures, PNC Bank shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions but shall have no liability
with respect thereto.

11. Compensation. As compensation for services rendered by PNC Bank
during the term of this Agreement, the Fund will pay to PNC Bank a fee or fees
as may be agreed to in writing by the Fund and PNC Bank from time to time.

12. Indemnification. The Fund agrees to indemnify and hold harmless
PNC Bank and its affiliates from all taxes, charges, expenses, assessment,
claims and liabilities (including, without limitation, liabilities arising
under the 1933 Act, the 1934 Act, the 1940 Act, the CEA, and any state and
foreign securities and blue sky laws, and amendments thereto), and expenses,
including (without limitation) reasonable attorneys' fees and disbursements,
arising directly or indirectly from any action which PNC Bank takes or does not
take (I) at the request or on the direction of or in reliance on the advice of
the Fund or (ii) upon Oral or Written Instructions. Neither PNC Bank, nor any
of its affiliates, shall be indemnified against any liability to the Fund or
its shareholders (or any expenses incident to such liability) arising out of
PNC Bank's or it's affiliates' own willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties and obligations under this
Agreement.

8
<PAGE> 9

13. Responsibility of PNC Bank. PNC Bank shall be under no duty to
take any action on behalf of the Fund except as specifically set forth herein
or as may be specifically agreed to by PNC Bank, in writing. PNC Bank shall be
obligated to exercise reasonable care and diligence in the performance of its
duties hereunder, to act in good faith and to use its best effort, within
reasonable limits, in performing Services provided for under this Agreement.
PNC Bank shall be responsible for damages arising out of its failure to perform
its duties under this Agreement arising out of PNC Bank's gross negligence.

Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC Bank, in connection with its duties under this
Agreement, shall not be under any duty or obligation to inquire into and shall
not be liable for (a) the validity or invalidity or authority or lack thereof
of any Oral or Written Instruction, notice or other instrument which conforms
to the applicable requirements of this Agreement, and which PNC Bank reasonably
believes to be genuine; or (b) losses, delays or errors or loss of data
occurring by reason of circumstances beyond PNC Bank's control, including
without limitation acts of civil or military authority, national emergencies,
labor difficulties, fire, flood or catastrophe, acts of God, insurrection, war,
riots or failure of the mails, transportation, communication or power supply.

9
<PAGE> 10
14. Description of Services.

(a) Delivery of the Property. The Fund will deliver or
arrange for delivery to PNC Bank, all the property it owns, including cash
received as a result of the distribution of its shares, during the period that
is set forth in this Agreement. PNC Bank will not be responsible for such
property until actual receipt.

(b) Receipt and Disbursement of Money. PNC Bank, acting upon
Written Instructions, shall open and maintain separate account(s) in the name
of each Portfolio using all cash received from or for the account of such
Portfolio, subject to the terms of this Agreement. In addition, upon Written
Instructions, PNC Bank shall open separate custodial accounts for each separate
series, portfolio or class of the Fund and shall hold in such account(s) all
cash received from or for the accounts of the Fund specifically designated to
each separate series, portfolio or class.

PNC Bank shall make cash payments from or for the account of the Fund
only for:

(i) purchases of securities in the name of each
Portfolio or PNC Bank or PNC Bank's nominee as
provided in sub-paragraph j and for which PNC Bank
has received a copy of the broker's or dealer's
confirmation or payee's invoice, as appropriate;

(ii) purchase or redemption of shares of each Portfolio
delivered to PNC Bank;

10
<PAGE> 11
(iii) payment of, subject to Written Instructions,
interest, taxes, administration, accounting,
distribution, advisory, management fees or similar
expenses which are to be borne by each Portfolio;

(iv) payment to, subject to receipt of Written
Instructions, the Fund's transfer agent, as agent
for the shareholders, an amount equal to the
amount of dividends and distributions stated in
the Written Instructions to be distributed in cash
by the transfer agent to shareholders, or, in lieu
of paying the Fund's transfer agent, PNC Bank may
arrange for the direct payment of cash dividends
and distributions to shareholders in accordance
with procedures mutually agreed upon from time to
time by and among the Fund, PNC Bank and the
Fund's transfer agent.

(v) payments, upon receipt Written Instructions, in
connection with the conversion, exchange or
surrender of securities owned or subscribed to
by each Portfolio and held by or delivered to
PNC Bank;

(vi) payments of the amounts of dividends received with
respect to securities sold short;

(vii) payments made to a sub-custodian pursuant to

11
<PAGE> 12
provisions in sub-paragraph c of this Agreement;
and

(viii) payments, upon Written Instructions made for
other proper Fund purposes. PNC Bank is hereby
authorized to endorse and collect all check,
drafts or other orders for the payment of money
received as custodian for the account of the Fund.

(i) PNC Bank shall hold all securities received by it
for or for the account of each Portfolio in a
separate account that physically segregates such
securities from those of any other persons, firms
or corporations. All such securities shall be
held or disposed of only upon Written Instructions
of the Fund pursuant to the terms of this
Agreement. PNC Bank shall have no power or
authority to assign, hypothecate, pledge or
otherwise dispose of any such securities or
investment, except upon the express terms of this
Agreement and upon Written Instructions,
accompanied by a certified resolution of the
Fund's Governing Board, authorizing the
transaction. In no case may any member of the
Fund's Board of Trustees, or any officer, employee
or agent of

12
<PAGE> 13
the Fund withdraw any securities.

At PNC Bank's own expense and for its own
convenience, PNC Bank may enter into sub-custodian
agreements with other United States banks or trust
companies to perform duties described in this
sub-paragraph c. Such bank or trust company shall
have an aggregate capital, surplus and undivided
profits, according to its last published report,
of at least one million dollars ($1,000,000), if
it is a subsidiary or affiliate of PNC Bank, or at
least fifty million dollars ($50,000,000) if such
bank or trust company is not a subsidiary or
affiliate of PNC Bank. In addition, such bank or
trust company must agree to comply with the
relevant provisions of the 1940 Act and other
applicable rules and regulations. PNC Bank shall
remain responsible for the performance of all of
its duties as described in this Agreement and
shall hold the Fund harmless from its own acts or
omissions, under the standards of care provided
for herein, or of any sub-custodian chosen by PNC
Bank under the terms of this sub-paragraph c.

13
<PAGE> 14
(d) Transactions Requiring Instructions. Upon receipt of
Oral or Written Instructions and not otherwise, PNC Bank, directly or through
the use of the Book-Entry System, shall:

(i) deliver any securities held for each Portfolio
against the receipt of payment for the sale of
such securities;

(ii) execute and deliver to such persons as may be
designated in such Oral or Written Instructions,
proxies, consents, authorizations, and any other
instruments whereby the authority of the Fund as
owner of any securities may be exercised;

(iii) deliver any securities to the issuer thereof, or
its agent, when such securities are called,
redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to PNC Bank;

(iv) deliver any securities held for each Portfolio
against receipt of other securities or cash issued
or paid in connection with the liquidation,
reorganization, refinancing, tender offer, merger,
consolidation or recapitalization of any
corporation, or the exercise of any conversion
privilege;

(v) deliver any securities held for each Portfolio

14
<PAGE> 15
to any protective committee, reorganization
committee or other person in connection with the
reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets
of any corporation, and receive and hold under the
terms of this Agreement such certificates of
deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such
delivery;

(vi) make such transfer or exchanges of the assets of
the Fund and take such other steps as shall be
stated in said Oral or Written Instructions to be
for the purpose of effectuating a duly authorized
plan of liquidation, reorganization, merger,
consolidation or recapitalization of such
Portfolio;

(vii) release securities belonging to a Portfolio to any
bank or trust company for the purpose of a pledge
or hypothecation to secure any loan incurred by
that Portfolio; provided, however, that securities
shall be released only upon payment to PNC Bank of
the monies borrowed, except that in cases where
additional collateral is required to secure a
borrowing already made subject to proper prior
authorization, further securities may be

15
<PAGE> 16
released for that purpose; and repay such loan
upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the
note or notes evidencing the loan;

(viii) release and deliver securities owned by a
Portfolio in connection with any repurchase
agreement entered into on behalf of a Portfolio,
but only on receipt of payment therefor; and pay
out moneys of a Portfolio in connection with such
repurchase agreements, but only upon the delivery
of the securities;

(ix) release and deliver or exchange securities owned
by a Portfolio in connection with any conversion
of such securities, pursuant to their terms, into
other securities;

(x) release and deliver securities owned by a
Portfolio for the purpose of redeeming in kind
shares of a Portfolio upon delivery thereof to PNC
Bank; and

(xi) release and deliver or exchange securities
owned by a Portfolio for other corporate purposes.
PNC Bank must also receive a certified resolution
describing the nature of the corporate purpose and
the name and address of

16
<PAGE> 17
the person(s) to whom delivery shall be made when
such action is pursuant to sub-paragraph d.(xi)
above.

(e) Use of Book-Entry System. The Fund shall deliver to PNC
Bank certified resolutions of the Fund's Governing Board approving, authorizing
and instructing PNC Bank on a continuous and on-going basis, to deposit in the
Book-Entry System all securities belonging to each Portfolio eligible for
deposit therein and to utilize the Book-Entry System to the extent possible in
connection with settlements of purchases and sales of securities by the Fund,
and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. PNC Bank shall
continue to perform such duties until it receives Written or Oral Instructions
authorizing contrary actions(s).

To administer the Book-Entry System properly, the following provisions
shall apply:

(i) With respect to securities of a Portfolio which
are maintained in the Book-Entry system,
established pursuant to this sub-paragraph e
hereof, the records of PNC Bank shall identify by
Book-Entry or otherwise those securities
belonging to a Portfolio. PNC Bank shall furnish
the Fund a detailed statement of the Property
held for the Fund under this Agreement at least
monthly and from

17
<PAGE> 18
time to time and upon written request.

(ii) Securities and any cash of a Portfolio
deposited in the Book-Entry System will at
all times be segregated from any assets and
cash controlled by PNC Bank in other than a
fiduciary or custodian capacity but may be
commingled with other assets held in such
capacities. PNC Bank and its sub-custodian,
if any, will pay out money only upon receipt
of securities and will deliver securities
only upon the receipt of money.

(iii) All books and records maintained by PNC Bank
which relate to the Fund's participation in
the Book-Entry System will at all times
during PNC Bank's regular business hours be
open to the inspection of the Fund's duly
authorized employees or agents, and the Fund
will be furnished with all information in
respect of the services rendered to it as it
may require.

(iv) PNC Bank will provide the Fund with copies of
any report obtained by PNC Bank on the system
of internal accounting control of the
Book-Entry System promptly after receipt of
such a report by PNC Bank.
PNC Bank will also provide the Fund with
such reports on its own system of internal
control

18
<PAGE> 19
as the Fund may reasonably request from time
to time.

(f) Registration of Securities. All Securities held for the
Fund which are issued or issuable only in bearer form, except such securities
held in the Book-Entry System, shall be held by PNC Bank in bearer form; all
other securities held for the Fund may be registered in the name of the Fund;
PNC Bank; the Book-Entry System; a sub-custodian; or any duly appointed
nominee(s) of the Fund, PNC Bank, Book-Entry system or sub-custodian. The Fund
reserves the right to instruct PNC Bank as to the method of registration and
safekeeping of the securities of each Portfolio. The Fund agrees to furnish to
PNC Bank appropriate instruments to enable PNC Bank to hold or deliver in
proper form for transfer, or to register its registered nominee or in the name
of the Book-Entry System, any securities which it may hold for the account of
each Portfolio and which may from time to time be registered in the name of the
Portfolio. PNC Bank shall hold all such securities which are not held in the
Book-Entry System in a separate account for each Portfolio in the name of each
Portfolio physically segregated at all times from those of any other person or
persons.

(g) Voting and Other Action. Neither PNC Bank nor its
nominee shall vote any of the securities held pursuant to this Agreement by or
for the account of the Fund, except in accordance with Written Instructions.
PNC Bank, directly or through the use of the Book-Entry System, shall execute
in blank and promptly

19
<PAGE> 20
deliver all notice, proxies, and proxy soliciting materials to the registered
holder of such securities. If the registered holder is not the Fund then
Written or Oral Instructions must designate the person(s) who owns such
securities.

(h) Transactions Not Requiring Instructions. In the absence
of contrary Written Instructions, PNC Bank is authorized to take the following
actions:

(i) Collection of Income and Other Payments.

(A) collect and receive for the account
of each Portfolio, all income,
dividends, distributions, coupons,
option premiums, other payments and
similar items, included or to be
included in the Property, and, in
addition, promptly advise the Fund
of such receipt and credit such
income, as collected, to the Fund's
custodian account;

(B) endorse and deposit for collection,
in the name of the applicable
Portfolio, checks, drafts, or other
orders for the payment of money;

(C) receive and hold for the account of
each Portfolio all securities
received as a distribution on the
portfolio securities as a result of
a stock dividend, share split-up or
reorganization, recapitali-

20
<PAGE> 21
zation, readjustment or other
rearrangement or distribution of
rights or similar securities issued
with respect to any portfolio
securities belonging to a Portfolio
held by PNC Bank hereunder;

(D) present for payment and collect the
amount payable upon all securities
which may mature or be called,
redeemed, or retired, or otherwise
become payable on the date such
securities become payable; and

(E) take any action which may be
necessary and proper in connection
with the collection and receipt of
such income and other payments and
the endorsement for collection of
checks, drafts, and other negotiable
instruments.

21
<PAGE> 22
(ii) Miscellaneous Transactions.

(A) PNC Bank is authorized to deliver or cause
to be delivered Property against payment or
other consideration or written receipt
therefor in the following cases:

(1) for examination by a broker or
dealer selling for the account of a
Portfolio in accordance with street
delivery custom;

(2) for the exchange of interim receipts
or temporary securities for
definitive securities; and

(3) for transfer of securities into the
name of a Portfolio or PNC Bank or
nominee of either, or for exchange
of securities for a different number
of bonds, certificates, or other
evidence, representing the same
aggregate face amount or number of
units bearing the same interest
rate, maturity date and call
provisions, if any; provided that,
in any such case, the new securities
are to be delivered to PNC Bank.

22
<PAGE> 23
(B) Unless and until PNC Bank receives Oral or
Written Instructions to the contrary, PNC
Bank shall:

(1) pay all income items held by it
which call for payment upon
presentation and hold the cash
received by it upon such payment for
the account of a Portfolio;

(2) collect interest and cash dividends
received, with notice to the Fund,
to the account of a Portfolio;

(3) hold for the account of a portfolio
all stock dividends, rights and
similar securities issued with
respect to any securities held by
us; and

(4) execute as agent on behalf of the
Fund all necessary ownership
certificates required by the
Internal Revenue Code or the Income
Tax Regulations of the United States
Treasury Department or under the
laws of any State now or hereafter
in effect, inserting the Fund's name
on such certificate as the owner of
the securities covered thereby, to

23
<PAGE> 24
the extent it may lawfully do so.
(i) Segregated Accounts.

(i) PNC Bank shall upon receipt of Written or Oral
Instructions establish and maintain a segregated
accounts(s) on its records for and on behalf of
each Portfolio. Such account(s) may be used to
transfer cash and securities, including securities
in the Book-Entry System:

(A) for the purposes of compliance by the
Fund with the procedures required by a
securities or option exchange, providing
such procedures comply with the 1940 Act
and any releases of the SEC relating to
the maintenance of segregated accounts by
registered investment companies; and

(B) Upon receipt of Written Instructions, for
other proper corporate purposes.

(ii) PNC Bank may enter into separate custodial
agreements with various futures commission
merchants ("FCMs") that the Fund uses ("FCM
Agreement"). Pursuant to an FCM Agreement, the
Fund's margin deposits in any transactions
involving futures contracts and options on futures
contracts will be held by PNC Bank in accounts
("FCM Account") subject to the disposition by the
FCM involved in such

24
<PAGE> 25
contracts and in accordance with the customer
contract between FCM and the Fund ("FCM
Contract"), SEC rules and the rules of the
applicable commodities exchange.
Such FCM Agreements shall only be entered into
upon receipt of Written Instructions from the
Fund which state that:

(A) a customer agreement between the FCM and
the Fund has been entered into; and

(B) the Fund is in compliance with all the
rules and regulations of the CFTC.
Transfers of initial margin shall be made
into a FCM Account only upon Written
Instructions; transfers of premium and
variation margin may be made into a FCM
Account pursuant to Oral Instructions.
Transfers of funds from a FCM Account to
the FCM for which PNC Bank holds such an
account may only occur upon certification
by the FCM to PNC Bank that pursuant to
the FCM Agreement and the FCM Contract,
all conditions precedent to its right to
give PNC Bank such instructions have been
satisfied.

(iii) PNC Bank shall arrange for the establishment of
IRA custodian accounts for such

25
<PAGE> 26
shareholders holding shares through IRA accounts,
in accordance with the Prospectus, the Internal
Revenue Code (including regulations), and with
such other procedures as are mutually agreed upon
from time to time by and among the Fund, PNC Bank
and the Fund's transfer agent.

(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the Fund or its
investment advisor(s) that specify:

(i) the name of the issuer and the title of the
securities, including CUSIP number if applicable;

(ii) the number of shares or the principal amount
purchased and accrued interest, if any;

(iii) the date of purchase and settlement;

(iv) the purchase price per unit;

(v) the total amount payable upon such purchase;

(vi) the name of the person from whom or the broker
through whom the purchase was made; and

(vii) the Portfolio to which such purchase applies.

PNC Bank shall upon receipt of securities
purchased by or for a Portfolio pay out of the
moneys held for the account of a Portfolio the
total amount payable to the person from whom

26
<PAGE> 27
or the broker through whom the purchase was made,
provided that the same conforms to the total
amount payable as set forth in such Oral or
Written Instructions.

(k) Sales of Securities. PNC Bank shall sell securities upon
receipt of Oral Instructions from the Fund that specify:

(i) the name of the issuer and the title of the
security, including CUSIP number if applicable;

(ii) the number of shares or principal amount sold, and
accrued interest, if any;

(iii) the date of trade, settlement and sale;

(iv) the sale price per unit;

(v) the total amount payable to the Fund upon
such sale;

(vi) the name of the broker through whom or the person
to whom the sale was made; and

(vii) the location to which the security must be
delivered and delivery deadline, if any.

PNC Bank shall deliver the securities upon receipt
of the total amount payable to the Fund upon such
sale, provided that the total amount payable is
the same as was set forth in the Oral or Written
Instructions. Subject to the foregoing, PNC Bank
may accept payment in

27
<PAGE> 28
such form as shall be satisfactory to it, and may
deliver securities and arrange for payment in
accordance with the customs prevailing among
dealers in securities.

(l) Reports.

(i) PNC Bank shall furnish the Fund the following
reports:

(A) such periodic and special reports as the
Fund may reasonably request;

(B) a monthly statement summarizing all
transactions and entries for the
account of each Portfolio, listing
the portfolio securities belonging
to each Portfolio with the adjusted
average cost of each issue and the
market value at the end of such
month, and stating the cash account
of the Portfolio including
disbursement;

(D) such other information as may be agreed
upon from time to time between the Fund
and PNC Bank.

(ii) PNC Bank shall transmit promptly to the Fund any
proxy statement, proxy material, notice of a call
or conversion or similar communication received by
it as custodian of

28
<PAGE> 29
the Property. PNC Bank shall be under no other
obligation to inform the Fund as to such actions
or events.

(m) Collections. All collections of monies or other
property, in respect, or which are to become part of the Property (but not the
safekeeping thereof upon receipt by PNC Bank) shall be at the sole risk of the
Fund. If payment is not received by PNC Bank within a reasonable time after
proper demands have been made, PNC Bank shall notify the Fund in writing,
including copies of all demand letters, any written responses, memoranda of all
oral responses and to telephonic demands thereto, and await instructions from
the Fund. PNC Bank shall not be obliged to take legal action for collection
unless and until reasonably indemnified to its satisfaction.

PNC Bank shall also notify the Fund as soon as reasonably practicable
whenever income due on securities is not collected in due course.

15. Duration and Termination. This Agreement shall continue in full
force and effect unless terminated as hereinafter provided or amended at any
time by mutual, written agreement of the parties hereto. This Agreement may be
terminated by either party by an instrument in writing delivered, faxed or
mailed, postage prepaid, to the other party, such termination to take effect on
the date stated therein, which date shall not be sooner than sixty (60) days
after the date of such delivery or mailing. In the event this Agreement is
terminated (pending appointment of a successor to PNC

29
<PAGE> 30
Bank or vote of the shareholders of any Portfolio of the Fund to dissolve or to
function without a custodian of its cash, securities or other property), PNC
Bank shall not deliver cash, securities or other property of the applicable
Portfolio to the Portfolio or the Fund. It may deliver them to a bank or trust
company of PNC Bank's, having an aggregate capital, surplus and undivided
profits, as shown by its last published report, of not less than twenty million
dollars ($20,000,000), as a custodian for such Portfolio to be held under terms
similar to those of this Agreement. PNC Bank shall not be required to make any
such delivery or payment until full payment shall have been made to PNC Bank of
all of its fees, compensation, costs and expenses. PNC Bank shall have a
security interest in and shall have a right of setoff against Property in such
Portfolio's possession as security for the payment of such fees, compensation,
costs and expenses.

16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address, Airport Business Center, International Court 2, 200 Stevens
Drive, Philadelphia, Pennsylvania 19113, marked for the attention of the
Custodian Services Department (or its successor) (b) if to the Fund, at the
address of the Fund; or (C) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such Notice or other
communication. If notice is sent by confirming telegram, cable, telex or
facsimile sending

30
<PAGE> 31
device, it shall be deemed to have been given immediately. If notice is sent
by first-class mail, it shall be deemed to have been given five days after it
has been mailed. If notice is sent by messenger, it shall be deemed to have
been given on the day it is delivered.

17. Amendments. This Agreement, or any term hereof, may be
changed or waived only by a written amendment, signed by the party
against whom enforcement of such change or waiver is sought.

18. Delegation. PNC Bank may, with the prior written consent of the
Fund, which consent may not be unreasonably withheld, assign its rights and
delegate its duties hereunder to any wholly-owned direct or indirect subsidiary
of PNC Bank or PNC Financial Corp, provided that (I) PNC Bank provides the Fund
a minimum of thirty (30) days in which to decide and to consent by written
notice; (ii) the delegate agrees with PNC Bank to comply with all relevant
provisions of this Agreement and the 1940 Act; and (iii) PNC Bank and such
delegate promptly provide such information as the Fund may request, and respond
to such questions as the Fund may ask, relative to the delegation, including
(without limitation) the capabilities of the delegate.

19. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

20. Further Actions. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.

31
<PAGE> 32
21. Miscellaneous. This Agreement embodies the entire agreement
and understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one more separate documents their agreement, if any, with respect
to delegated and/or Oral Instructions.

The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.

A copy of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts and notice is hereby given by
the Fund by the undersigned officer of the Fund in his/her capacity as an
Officer of the Fund. The obligations of this Agreement shall only be binding
upon the assets and property of the Fund and shall not be binding upon any
Trustee, officer or shareholder of the Fund individually.

This Agreement shall be deemed to be a contract made in California and
governed by California law. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby. This Agreement shall be
binding and shall inure to the benefit of the parties hereto and their
respective successors.

32
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below on the day and year first above
written.

PNC BANK, NATIONAL ASSOCIATION

By: /s/ Joseph T. Gramlich
---------------------------
Joseph T. Gramlich

Title: Vice President

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
---------------------------
William J. Klipp

Title: Senior Vice President and
Chief Operating Officer

33
<PAGE> 34

SCHEDULE A

Schwab S&P 500 Fund

<PAGE> 1
Exhibit 8(d)

ACCOUNTING SERVICES AGREEMENT
TERMS AND CONDITIONS

This Agreement is made as of February 21, 1996 by and between SCHWAB
CAPITAL TRUST, (the "Fund"), a Massachusetts business trust, and PFPC INC.
("PFPC"), a Delaware corporation which is an indirect wholly-owned subsidiary of
PNC Financial Corp.

The Fund is registered as an open-end diversified investment company
under the Investment Company Act of 1940 (the "1940" Act), as amended.

The Fund wishes to retain PFPC to provide accounting services to each
of the Fund's investment portfolios listed on Schedule A, as attached hereto
("Portfolio(s)"), and PFPC wishes to furnish such services.

In consideration of the promises and mutual covenants herein contained,
the parties agree as follows:

1. Definitions.

(a) "Authorized Person". The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by the
Fund's Governing Board, to give Oral and Written Instructions on behalf of the
Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix to each Services Attachment to this Agreement. If
<PAGE> 2
PFPC provides more than one service hereunder, the Fund's designation of
Authorized Persons may vary by service.

(d) "Governing Board". The Term "Governing Board" shall mean
the Fund's Board of Directors if the Fund is a corporation or the Fund's Board
of Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.

(e) "Oral Instructions". The term "Oral Instructions" shall
mean oral instructions received by PFPC from an Authorized Person or from a
person reasonably believed by PFPC to be an Authorized Person.

(f) "PNC Bank, National Association". The term "PNC Bank"
shall mean PNC Bank, National Association or a subsidiary or affiliate of PNC
Bank.

(g) "SEC". The term "SEC" shall mean the Securities and
Exchange Commission.

(h) "Securities and Commodities Laws". The terms the "1933
Act" shall mean the Securities Act of 1933, as amended, the "1934 Act" shall
mean the Securities Exchange Act of 1934, as amended, the "1940 Act" shall mean
the Investment Company Act 1940,

2
<PAGE> 3
as amended, and the "CEA" shall mean the Commodities Exchange Act, as amended.

(i) "Services". The term "Services" shall mean the service
provided to the Portfolios by PFPC.

(j) "Shares". The terms "Shares" shall mean the shares of
stock of any series or class of the Fund, or, where appropriate, units of
beneficial interest in a trust where the Fund is organized as a Trust.

(k) "Property". The term "Property" shall mean:

(i) any and all securities and other investment items
which the Fund may from time to time deposit, or
cause to be deposited, with PFPC or which PFPC may
from time to time hold for the Fund;

(ii) all income in respect of any of such securities or
other investment items;

(iii) all proceeds of the sale of any of such securities
or investment items; and

(iv) all proceeds of the sale of securities issued by the
Fund, which are received by PFPC from time to time,
from or on behalf of the Fund.

(1) "Written Instructions". The term "Written Instructions"
shall mean written instructions signed by two Authorized Persons and received by
PFPC. The instructions may be delivered by hand, mail, tested telegram, cable,
telex or facsimile

3
<PAGE> 4
sending device.

2. Appointment. The Fund hereby appoints PFPC to provide accounting
services to each of the Portfolios listed on Schedule A, hereto, in accordance
with the terms set forth in this Agreement. PFPC accepts such appointment and
agrees to furnish such services. The Fund may from time to time issue separate
series or classes or classify and reclassify shares of such series or classes.
PFPC shall identify to each such series or class property belonging to such
series or class and in such reports, confirmations and notices to the Fund
called for under this Agreement shall identify the series or class to which such
report, confirmation or notice pertains.

3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PFPC with the following:

(a) certified or authenticated copies of the resolutions of
the Fund's Governing Board, approving the appointment of PFPC or its affiliates
to provide services;

(b) a copy of the Fund's most recent effective registration
statement;

(d) a copy of the Fund's distribution agreement or agreements;

(e) copies of any shareholder servicing agreements made in
respect of the Fund; and

(f) certified or authenticated copies of any and all

4
<PAGE> 5
amendments or supplements to the foregoing.

4. Compliance with Government Rules and Regulations.

PFPC undertakes to comply with all applicable requirements of the 1933
Act, the 1934 Act, the 1940 Act, and the CEA, and any laws, rules and
regulations of governmental authorities having jurisdiction with respect to all
duties to be performed by PFPC hereunder. Except as specifically set forth
herein, PFPC assumes no responsibility for such compliance by the Fund.

5. Instructions. Unless otherwise provided in this Agreement, PFPC
shall act only upon Oral and Written Instructions.

PFPC shall be entitled to rely upon any Oral and Written Instructions
it receives from an Authorized Person (or from a person reasonably believed by
PFPC to be an Authorized Person) pursuant to this Agreement. In the exercise of
reasonable judgment, PFPC may assume that any Oral or Written Instruction
received hereunder is not in any way inconsistent with the provisions of
organizational documents or this Agreement or of any vote, resolution or
proceeding of the Fund's Governing Board or of the Fund's shareholders.

The Fund agrees to forward to PFPC Written Instructions confirming Oral
Instructions so that PFPC receives the Written Instructions by the close of
business on the same day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by PFPC shall in no way
invalidate the transactions or enforceability of the transactions authorized by
the Oral Instructions. The Fund further agrees that

5
<PAGE> 6
PFPC shall incur no liability to the Fund solely by reason of acting upon Oral
or Written Instructions provided such instructions reasonably appear to have
been received from an Authorized Person.

6. Right to Receive Advice.

(a) Advice of the Fund. If PFPC is in doubt as to any action
it should or should not take, PFPC may request directions or advice, including
Oral or Written Instructions, from the Fund.

(b) Advice of Counsel. If PFPC shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PFPC may
request advice at its own cost from such counsel of its own choosing (who may be
counsel for the Fund, the Fund's advisor or PFPC, at the option of PFPC).

(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PFPC receives from the Fund,
and the advice it receives from counsel, PFPC shall be entitled in good faith to
rely upon and follow the advice of counsel.

(d) Protection of PFPC. PFPC shall be protected in any action
it takes or does not take in reliance upon directions, advice or Oral or Written
Instructions it receives from the Fund or from counsel and which PFPC believes,
in good faith, to be consistent with those directions, advice and Oral or
Written Instructions.

Nothing in this paragraph shall be construed so as to impose an
obligation upon PFPC (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such

6
<PAGE> 7
directions, advice or Oral or Written Instructions unless, under the terms of
other provisions of this Agreement, the same is a condition of PFPC's properly
taking or not taking such action.

7. Records. The books and records pertaining to the Fund, which are in
the possession of PFPC, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons, shall have access to such books and records at all times
during PFPC's normal business hours. Upon the reasonable request of the Fund,
copies of any such books and records shall be provided by PFPC to the Fund or to
an Authorized Person of the Fund, at the Fund's expense.

PFPC shall keep the following records:

(a) all books and records with respect to the Fund's
books of account;

(b) records of the Fund's securities transaction;

(c) all other books and records as PFPC is required to
maintain pursuant to Rule 31a-1 of the 1940 Act and as specifically set forth in
Appendix A hereto.

8. Confidentiality. PFPC agrees to keep confidential all records of
the Fund and information relative to the Fund and its shareholders (past,
present and potential), unless the release of such records or information is
otherwise consented to, in writing, by the Fund. The Fund agrees that such
consent shall not be unreasonably withheld. The Fund further agrees that, should
PFPC

7
<PAGE> 8
be required to provide such information or records to duly constituted
authorities (who may institute civil or criminal contempt proceedings for
failure to comply), PFPC shall not be required to seek the Fund's prior written
consent before disclosing such information, but shall instead notify an officer
of the Fund and obtain the officer's oral consent, which consent shall be timely
and shall not be unreasonably withheld.

9. Liaison with Accountants. PFPC shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal year
summaries, and other audit-related schedules. PFPC shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Fund from time to
time.

10. Disaster Recovery. PFPC shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision of emergency use of electronic data processing equipment to the extent
appropriate equipment is available. In the event of equipment failures, PFPC
shall, at no additional expense to the Fund, take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.

11. Compensation. The fees for services rendered by PFPC during the
term of this Agreement shall be paid by the Fund to PFPC as may be agreed to in
writing by the Fund and PFPC from time to

8
<PAGE> 9
time.

12. Indemnification. The Fund agrees to indemnify and hold harmless
PFPC and its affiliates from all taxes, charges, expenses, assessments, claims
and liabilities (including, without limitation, liabilities arising under the
1933 Act, the 1934 Act, the 1940 Act, the CEA, and any state and foreign
securities and blue sky laws, and amendments thereto), and expenses, including
(without limitation) reasonable attorneys' fees and disbursements, arising
directly or indirectly from any action which PFPC takes or does not take (i) at
the request or on the direction of or in reliance on the advice of the Fund or
(ii) upon Oral or Written Instructions. Neither PFPC, nor any of its affiliates,
shall be indemnified against any liability to the Fund or its shareholders (or
any expenses incident to such liability) arising out of PFPC's or it's
affiliates' own willful misfeasance, gross negligence or reckless disregard of
its duties and obligations under this Agreement.

13. Responsibility of PFPC. PFPC shall be under no duty to take any
action on behalf of the Fund except as specifically set forth herein or as may
be specifically agreed to by PFPC, in writing. PFPC shall be obligated to
exercise care and diligence in the performance of its duties hereunder, to act
in good faith and to use its best efforts, within reasonable limits, in
performing services provided for under this Agreement. PFPC shall be responsible
for damages arising out of its failure to perform its duties under this
Agreement arising out of PFPC's gross negligence. Notwithstanding the foregoing,
PFPC shall not be responsible for

9
<PAGE> 10
losses beyond its reasonable control, provided that PFPC has acted in accordance
with the standard of care set forth above; and provided further that PFPC shall
only be responsible for that portion of losses or damages suffered by the fund
that are attributable to the gross negligence of PFPC.

Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC, in connection with its duties under this
Agreement, shall not be liable for (a) the validity or invalidity or authority
or lack thereof of any Oral or Written Instruction, notice or other instrument
which conforms to the applicable requirements of this Agreement, and which PFPC
reasonably believes to be genuine; or (b) losses, delays or errors or loss of
data occurring by reason of circumstances beyond PFPC's reasonable control,
including without limitation acts of civil or military authority, national
emergencies, labor difficulties, fire, flood or catastrophe, acts of God,
insurrection, war, riots or failure of the mails, transportation, communication
or power supply.

14. Description of Accounting Services.

(a) Services on a Continuing Basis. PFPC will perform the
following accounting functions if required:

(i) Journalize each Portfolio's investment, capital
share and income and expense activities;

(ii) Verify investment buy/sell trade tickets when
received from the Fund's investment advisor

10
<PAGE> 11
and transmit trades to the Fund's custodian for
proper settlement;

(iii) Maintain individual ledgers for investment
securities;

(iv) Maintain historical tax lots for each security;

(v) Reconcile cash and investment balances of the
Fund with the custodian, and provide the Fund's
investment advisor with the beginning cash
balance available for investment purposes;

(vi) Update the cash availability throughout the day
as required by the Fund's advisor;

(vii) Post to and prepare the Fund's Statement of
Assets and Liabilities and the Statement of
Operations;

(viii) Calculate various contractual expenses (e.g.,
advisory and custody fees);

(ix) Monitor the expense accruals and notify Fund
management of any proposed adjustments;

(x) Control all disbursements from the Fund and
authorize such disbursements upon Written
Instructions;

(xi) Calculate capital gains and losses;

(xii) Determine each Portfolio's net income;

(xiii) Obtain security market quotes from independent

11
<PAGE> 12
pricing services approved by the Advisor, or if
such quotes are unavailable, then obtain such
prices from the Advisor, and in either case
calculate the market value of each Portfolio's
investments;

(xiv) Transmit or mail a copy of the daily portfolio
valuation to the Advisor;

(xv) Compute the net asset value of each class or
series of shares in the Fund;

(xvi) As appropriate, compute each Portfolio's yields,
total return, expense ratios, portfolio turnover
rate, and, if required, portfolio average
dollar-weighted maturity; and

(xvii) Prepare a monthly financial statement, which will
include the following items:

Schedule of Investments

Statement of Assets and Liabilities

Statement of Operations

Statement of Changes in Net Assets
Cash Statement

Schedule of Capital Gains and Losses.

(b) PFPC will provide the Funds' Administrator with the
following services:

(i) Assist with preparation of:

Federal and State Tax Returns

12
<PAGE> 13
Excise Tax Returns

Annual and Semi-Annual Shareholder
Reports

Rules 24(e)-2 and 24(f)-2 Notices;

(ii) Assist in the Blue Sky and Federal registration
and compliance process;

(iii) Assist in the review of registration statements;
and

(iv) Assist in monitoring compliance with Sub-Chapter
M of the Internal Revenue Code.

15. Duration and Termination. This Agreement shall continue in full
force and effect with respect to each Portfolio, unless terminated as
hereinafter provided or amended by mutual, written agreement of the parties
hereto. This Agreement may be terminated by either party by an instrument in
writing delivered, faxed or mailed, postage prepaid, to the other party, such
termination to take effect on the date stated therein, which date shall not be
sooner than sixty (60) days after the date of such delivery or mailing.

16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable, telex
or facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
three days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is

13
<PAGE> 14
delivered. Notices shall be addressed (a) if to PFPC at PFPC's address, 103
Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the address
of the Fund; or (C) if to neither of the foregoing, at such other address as
shall have been notified to the sender of any such Notice or other
communication.

17. Amendments. This Agreement, or any term thereof, may be changed or
waived only by written amendment, signed by the party against whom enforcement
of such change or waiver is sought.

18. Delegation. PFPC may, with the prior written consent of the Fund,
which such consent may not be unreasonably withheld, assign its rights and
delegate its duties hereunder to any wholly-owned direct or indirect subsidiary
of PFPC or PNC Financial Corp, provided that (i) PFPC gives the Fund a minimum
of thirty (30) days in which to decide and consent by written notice; (ii) the
delegate agrees with PFPC to comply with all relevant provisions of this
Agreement and the 1940 Act; and (iii) PFPC and such delegate promptly provide
such information as the Fund may request, and respond to such questions as the
Fund may ask, relative to the delegation, including (without limitation) the
capabilities of the delegate.

19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

20. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof. A copy of the Declaration of the

14
<PAGE> 15
Fund is on file with the Secretary of the Commonwealth of Massachusetts and
notice is hereby given that the Fund by the undersigned officer of the Fund in
his/her capacity as an officer of the Fund. The obligations of this Agreement
shall only be binding upon the assets and property of the Fund and shall not be
binding upon any Trustee, officer or shareholder of the Fund individually.

21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to delegated and/or Oral Instructions.

A copy of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts and notice is hereby given by the
Fund by the undersigned officer of the Fund in his/her capacity as an Officer of
the Fund. The obligations of this Agreement shall only be binding upon the
assets and property of the Fund and shall not be binding upon any Trustee,
officer or shareholder of the Fund individually.

The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.

This Agreement shall be deemed to be a contract made in California and
governed by California law. If any provision of this Agreement shall be held or
made invalid by a court decision,

15
<PAGE> 16
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding and shall inure to the benefit
of the parties hereto and their respective successors.

16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.

PFPC INC.

By: /s/ Joseph T. Gramlich
--------------------------
Joseph T. Gramlich

Title: Senior Vice President

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------
William J. Klipp

Title: Senior Vice President and
Chief Operating Officer

17
<PAGE> 18
Appendix A
[List of Books and Records to be
Maintained by PFPC]

Subject to Section 7, PFPC will keep and maintain the following books
and records of each Portfolio pursuant to Rule 31a-1 under the Investment
Company Act of 1940 (the "Rule"):

a. Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of cash, and
all other debits and credits, as required by subsection (b) (1) of the Rule;

b. General and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest accrued and
interest received, as required by subsection (b) (2) (i) of the Rule;

c. Separate ledger accounts required by subsection (b) (2) (ii) and
(iii) of the Rule; and

d. A monthly trial balance of all ledger accounts (except shareholder
accounts) as required by subsection (b) (8) of the Rule.

18
<PAGE> 19
SCHEDULE A

Schwab S&P 500 Fund

<PAGE> 1
EXHIBIT 8f

SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
FOR SCHWAB CAPITAL TRUST

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Colleen M. Hummer
--------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President

Dated: February 28, 1996

A-1
<PAGE> 2
SCHEDULE B
TO THE TRANSFER AGENCY AGREEMENT
FOR SCHWAB CAPITAL TRUST

TRANSFER AGENCY SERVICES
I.
II. Record Maintenance.

Schwab will provide full maintenance of all shareholder records for
each account in the Trust. Such records will include:

A. Share balance;

B. Account transaction history, including dividends paid and the
date and price for all transactions;

C. Name and address of the record shareholder (including zip codes
and tax identification numbers but will not include
responsibility for obtaining certified tax identification
numbers or impending back-up withholding);

D. Records of distributions and dividend payments;

E. Transfer records; and

F. Overall control records.

III. Regular Daily Operations.

Schwab will perform the following functions:

A. Process new accounts on the shareholder file by processing
directly from the Trust's distributor or dealer;

B. Process additional purchases to the records of accounts already
on the shareholder file. In such instances, on the distributor's
or dealer's instructions, allocate investor payments among the
Funds;

C. Process purchases and redemptions to accounts already on the
shareholder file in accordance with the terms of all automatic
purchase and redemption provisions set forth in shareholders'
account relationship with the Trust's distributor;

D. Transfer shares upon the receipt of proper instructions from
distributor or dealer; and

E. Process changes of dealer/representative on accounts.

B-1
<PAGE> 3
IV. Periodic Operations.

A. Upon receipt of instructions as to payment of dividends and
distributions, which may be standing instructions, compute
distributions and inform the Trust of the amount to be
reinvested in additional shares.

B. Process redemptions as instructed by distributor or dealer.

C. Mail semi-annual and annual Trust and/or Fund reports and
prospectuses.

D. Produce transcripts of account history as requested by the Trust
or by the distributor or dealer.

E. Prepare and file Form 1099's with Internal Revenue Service.

F. Monitor sales of the Funds' shares in the various States and
other jurisdictions where the Funds' shares are registered for
sale, and report on such monitoring efforts to the Funds'
Investment Manager.

V. Controls.

A. Maintain all balance controls daily and produce monthly
summaries expressed in:

1. shares; and

2. dollar amounts.

B-2
<PAGE> 4
VI. Special Services Included.

A. Prepare envelopes/labels (from address data supplied by
distributor or dealer as to transmission accounts) and mail
proxy statements; tabulate and certify votes from returned
ballots.

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Colleen M. Hummer
--------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President

Dated: February 28, 1996

B-3
<PAGE> 5
SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
FOR SCHWAB CAPITAL TRUST

FEES

<TABLE>
<CAPTION>
FUND FEE
- ---- ---
<S> <C>
Schwab International Index Fund Five one-hundredths of one percent (.05%) of the Fund's
average daily net assets

Schwab Small-Cap Index Fund Five one-hundredths of one percent (.05%) of the Fund's
average daily net assets

Schwab Asset Director-High Growth Fund Five one-hundredths of one percent (.05%) of the Fund's
average daily net assets

Schwab Asset Director-Balanced Growth Fund Five one-hundredths of one percent (.05%) of the Fund's
average daily net assets

Schwab Asset Director-Conservative Growth Fund Five one-hundredths of one percent (.05%) of the Fund's
average daily net assets

Schwab S&P 500 Fund - Investor Shares Five one-hundredths of one percent (.05%) of the Fund's
average daily net assets

Schwab S&P 500 Fund - e.Shares Five one-hundredths of one percent (.05%) of the Fund's
average daily net assets
</TABLE>

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Colleen M. Hummer
--------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President

Dated: February 28, 1996

C-1
<PAGE> 6
SCHEDULE D
TO THE TRANSFER AGENCY AGREEMENT
FOR SCHWAB CAPITAL TRUST

REPORTS

VII. Daily Activity Report (liquidations processed that day)

VIII. Daily Share Summary Report (by Fund)

A. Beginning balance

B. Liquidations

C. Payments

D. Exchanges

E. Adjustments

F. Ending Balance

G. Sales by each State and jurisdiction

IX. Daily Proof Sheet Summary and Transaction Register

X. Daily Share Reconciliation Report (reconciling Share Summary Report to
Daily Proof Summary Sheet)

XI. Weekly Position Reports (showing all account balances)

XII. Monthly Dividend Reports

D-1
<PAGE> 7
XIII. Report by independent public accountants concerning Schwab's accounting
system and internal accounting controls, at such times, as the Trust
may reasonably require. These reports shall be of sufficient detail and
scope to provide reasonable accuracy that any material inadequacies
would be disclosed by such examination, and, if there are no such
inadequacies, shall state.

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Colleen M. Hummer
--------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President

Dated: February 28, 1996

D-2

<PAGE> 1
EXHIBIT 8h

SCHEDULE A
TO THE SHAREHOLDER SERVICE AGREEMENT
FOR SCHWAB CAPITAL TRUST

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Colleen M. Hummer
--------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President

Dated: February 28, 1996

A-1
<PAGE> 2
SCHEDULE B
TO THE SHAREHOLDER SERVICE AGREEMENT
FOR SCHWAB CAPITAL TRUST

Schwab will maintain accounts for, and serve as a customer liaison to,
the shareholders of each Fund, and through its employees will perform various
services in relation thereto, which services shall include responding to
requests for information and other types of shareholder account inquiries, both
by telephone and in writing. With respect to e.Shares, such services will be
provided through electronic means. The parties hereto expressly agree that the
services provided under this Agreement shall not include, and the amounts
payable hereunder shall not constitute compensation for, services relating to
transfer agency or sub-accounting services for the Trust or any Fund thereof.

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Colleen M. Hummer
--------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President

Dated: February 28, 1996

B-1
<PAGE> 3
SCHEDULE C
TO THE SHAREHOLDER SERVICE AGREEMENT
FOR SCHWAB CAPITAL TRUST

<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab International Index Fund Twenty one-hundredths of one percent (.20%) of the Fund's average
daily net assets

Schwab Small-Cap Index Fund Twenty one-hundredths of one percent (.20%) of the Fund's average
daily net assets

Schwab Asset Director-High Growth Fund Twenty one-hundredths of one percent (.20%) of the Fund's average
daily net assets

Schwab Asset Director-Balanced Growth Fund Twenty one-hundredths of one percent (.20%) of the Fund's average
daily net assets

Schwab Asset Director-Conservative Growth Twenty one-hundredths of one percent (.20%) of the Fund's average
Fund daily net assets

Schwab S&P 500 Fund - Investor Shares Twenty one-hundredths of one percent (.20%) of the class' average
daily net assets

Schwab S&P 500 Fund - e.Shares Five one-hundredths of one percent (0.05%) of the class' average
daily net assets
</TABLE>

SCHWAB CAPITAL TRUST

By: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer

CHARLES SCHWAB & CO., INC.

By: /s/ Colleen M. Hummer
--------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President

Dated: February 28, 1996

C-1

<PAGE> 1
Exhibit 11a

CONSENT OF COUNSEL

We hereby consent to the use of our name and to the reference to our
firm under the caption "Legal Counsel" included in or made a part of
Post-Effective Amendment No. 7 to the Registration Statement of Schwab Capital
Trust on Form N-1A (Nos. 33-62420 and 811-07704) under the Securities Act of
1933, as amended.

/s/ Ropes & Gray
---------------------
Ropes & Gray

Washington, D.C.
February 27, 1996

<PAGE> 1
Exhibit 11b

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 7 to the registration
statement of Schwab Capital Trust on Form N-1A (Registration Statement) of our
reports dated November 22, 1995, relating to the financial statements of Schwab
International Index Fund and Schwab Small-Cap Index Fund, and the statements of
assets and liabilities of Schwab Asset Director-High Growth Fund, Schwab Asset
Director-Balanced Growth Fund, and Schwab Asset Director-Conservative Growth
Fund, which appear in such Statement of Additional Information, and to the
incorporation by reference of our reports into the Prospectuses which constitute
part of this Registration Statement. We also consent to the references to us
under the headings "Financial Highlights" in such Prospectuses.

/s/ Price Waterhouse LLP
- -------------------------
Price Waterhouse LLP
San Francisco, California
February 20, 1996

<PAGE> 1
EXHIBIT 13d

PURCHASE AGREEMENT

Schwab Capital Trust (the "Trust"), a Massachusetts business trust, and
Charles Schwab & Co., Inc. ("Schwab"), a California corporation, hereby agree on
the 26th day of February, 1996 as follows:

1. The Trust hereby offers and Schwab hereby purchases 100 units
of beneficial interest of each class of Series F representing interest in the
two classes of the series of shares known as the Schwab S&P 500 Fund - Investor
Shares and the Schwab S&P 500 Fund - e.Shares, respectively, (such 200 units of
beneficial interest being hereafter collectively known as "Shares") at a price
of $10.00 per Share. Schwab hereby acknowledges purchase of the Shares, and the
Trust hereby acknowledges receipt from Schwab of funds in the amount of $2,000
in full payment for the Shares. It is further agreed that no certificate for the
Shares will be issued by the Trust.

2. Schwab represents and warrants to the Trust that the Shares are
being acquired for investment purposes and not with a view to the distribution
thereof.

3. The names "Schwab Capital Trust" and "Trustees of Schwab
Capital Trust" refer, respectively to the Trust created and the Trustees as
Trustees but not individually or personally, acting from time to time under an
Agreement and Declaration of Trust dated as of May 6, 1993, to which reference
is hereby made and a copy of which is on file at the Office of the Secretary of
State of the Commonwealth of Massachusetts and elsewhere as required by law, and
to any and all amendments thereto so filed or hereafter filed. The obligations
of "Schwab Capital Trust" entered into in the name or on behalf thereof by any
of the Trustees, representatives or agents are not made individually, but only
in such capacities, and are not binding upon any of the Trustees, Shareholders
or representatives of the Trust personally, but bind only the assets of the
Trust, and all persons dealing with any series of Shares of the Trust must look
solely to the assets for the Trust belonging to such series for the enforcement
of any claims against the Trust.

-1 of 2-
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed day and year first written above.

Attest: SCHWAB CAPITAL TRUST

/s/ Christina Perrino By: /s/ Stephen B. Ward
- --------------------- -------------------------------
Name: Stephen B. Ward
Title: Senior Vice President
and Chief Investment
Officer

Attest: CHARLES SCHWAB & CO., INC.

/s/ Christina Perrino By: /s/ William J. Klipp
- --------------------- -------------------------------
Name: William J. Klipp
Title: Senior Vice President

-2 of 2-

<PAGE> 1
EXHIBIT 18

SCHWAB CAPITAL TRUST
MULTIPLE CLASS PLAN

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

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

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

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

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

2. Purchases: Investor Shares are distributed to the general public
pursuant to procedures outlined in the Trust's Registration Statement. The
e.Shares may be purchased only through electronic means pursuant to procedures
established by the distributor, as outlined in the Trust's Registration
Statement, e.g., through SchwabLink(TM).

3. Shareholder Services Specific to Each Class. Regular assistance
through non-electronic shareholder services (e.g. the placement of purchase and
redemption orders and exchange requests for Fund Shares) shall be offered only
with respect to the Investor Shares and not the e.Shares. Accordingly, the
shareholder service fee charged to Investor Shares shall be higher than that
charged to e.Shares, as set forth on Schedule A hereto and in the Shareholder
Service Agreement and schedules, dated July 21, 1993, as amended from time to
time, between the Trust and Charles Schwab & Co., Inc. (the "Shareholder
Servicing Agent").

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

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

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

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

8. Dividends. The amount of dividends payable on Investor Shares and
e.Shares will be calculated on the basis of net asset value per share. Dividends
declared will be paid annually in December, subject to the Trust's Board of
Trustees.

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

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

SCHWAB CAPITAL TRUST

Signature:/s/ William J. Klipp
------------------------------
Name: William J. Klipp
Title: Senior Vice President and Chief
Operating Officer
Date: February 28, 1996
<PAGE> 3
SCHEDULE A TO THE
MULTIPLE CLASS PLAN OF
SCHWAB CAPITAL TRUST

<TABLE>
<CAPTION>
Shareholder Service Fee
(as a percentage of the
average daily net assets of
Name of Fund and Class the Fund Class)
- ---------------------- ---------------------------
<S> <C>
Schwab S & P 500 Fund- Investor Shares .20%

Schwab S & P 500 Fund - e.Shares .05%
</TABLE>

SCHWAB CAPITAL TRUST

Signature:/s/ William J. Klipp
------------------------------
Name: William J. Klipp
Title: Senior Vice President and Chief
Operating Officer
Date: February 28, 1996

<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> SCHWAB INTERNATIONAL INDEX FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 165729
<INVESTMENTS-AT-VALUE> 178207
<RECEIVABLES> 945
<ASSETS-OTHER> 848
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 180000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 388
<TOTAL-LIABILITIES> 388
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165464
<SHARES-COMMON-STOCK> 16138
<SHARES-COMMON-PRIOR> 13066
<ACCUMULATED-NII-CURRENT> 2051
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (402)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12499
<NET-ASSETS> 179612
<DIVIDEND-INCOME> 3386
<INTEREST-INCOME> 161
<OTHER-INCOME> 0
<EXPENSES-NET> 1309
<NET-INVESTMENT-INCOME> 2238
<REALIZED-GAINS-CURRENT> 193
<APPREC-INCREASE-CURRENT> 2557
<NET-CHANGE-FROM-OPS> 4988
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1532
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6778
<NUMBER-OF-SHARES-REDEEMED> 3840
<SHARES-REINVESTED> 134
<NET-CHANGE-IN-ASSETS> 37257
<ACCUMULATED-NII-PRIOR> 1306
<ACCUMULATED-GAINS-PRIOR> (580)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1080
<INTEREST-EXPENSE> 0886
<GROSS-EXPENSE> 1886
<AVERAGE-NET-ASSETS> 180165
<PER-SHARE-NAV-BEGIN> 10.89
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 0.22
<PER-SHARE-DIVIDEND> 0.12
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.13
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> SCHWAB SMALL-CAP INDEX FUND
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 108606
<INVESTMENTS-AT-VALUE> 122232
<RECEIVABLES> 257
<ASSETS-OTHER> 68
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 122557
<PAYABLE-FOR-SECURITIES> 346
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 137
<TOTAL-LIABILITIES> 483
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 108201
<SHARES-COMMON-STOCK> 10432
<SHARES-COMMON-PRIOR> 6780
<ACCUMULATED-NII-CURRENT> 484
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (237)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13626
<NET-ASSETS> 122074
<DIVIDEND-INCOME> 1072
<INTEREST-INCOME> 133
<OTHER-INCOME> 0
<EXPENSES-NET> 609
<NET-INVESTMENT-INCOME> 596
<REALIZED-GAINS-CURRENT> 291
<APPREC-INCREASE-CURRENT> 13029
<NET-CHANGE-FROM-OPS> 13916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 408
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5910
<NUMBER-OF-SHARES-REDEEMED> 2296
<SHARES-REINVESTED> 38
<NET-CHANGE-IN-ASSETS> 53946
<ACCUMULATED-NII-PRIOR> 296
<ACCUMULATED-GAINS-PRIOR> (528)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 447
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 912
<AVERAGE-NET-ASSETS> 121873
<PER-SHARE-NAV-BEGIN> 10.05
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 1.61
<PER-SHARE-DIVIDEND> 0.06
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.70
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> SCHWAB ASSET DIRECTOR - HIGH GROWTH FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> SEP-25-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 1000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 100
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 1000
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> SCHWAB ASSET DIRECTOR - BALANCED GROWTH FUND

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> SCHWAB ASSET DIRECTOR - CONSERVATIVE GROWTH FUND

</TABLE>