SCHWAB CAPITAL TRUST, 485APOS, 1998-12-10

SCHWAB CAPITAL TRUST
485APOS, 1998-12-10

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<PAGE> 1
File Nos. 33-62470 and 811-7704
As filed with the Securities and Exchange Commission on December 10, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 29 [X]
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 31 [X]

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

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

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

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

Copies of communications to:
<TABLE>
<S> <C> <C>
John Grady, Esq. Martin E. Lybecker Frances Cole, Esq.
Morgan Lewis & Brockius Ropes & Gray Charles Schwab Investment
1800 M Street, N.W. One Franklin Square Management, Inc.
Washington, D.C. 20036 1301 Franklin, NW, Suite 800 East 101 Montgomery Street120K-14-109
Washington, DC 20005 San Francisco, CA 94104
</TABLE>

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

[ ] Immediately upon filing pursuant to paragraph (b)
[ ] On (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] On February 28, 1999 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 the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2

PROSPECTUS
February 28, 1999

SCHWAB
MARKETTRACK PORTFOLIOS(TM)

ALL EQUITY PORTFOLIO

GROWTH PORTFOLIO

BALANCED PORTFOLIO

CONSERVATIVE PORTFOLIO

As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.

SCHWABFUNDS(R)
<PAGE> 3
ABOUT THE PORTFOLIOS

Schwab
MarketTrack Portfolios(TM)

ABOUT THE PORTFOLIOS

4 All Equity Portfolio

8 Growth Portfolio

12 Balanced Portfolio

16 Conservative Portfolio

20 Portfolio Management

INVESTING IN THE PORTFOLIOS

22 Buying Shares

23 Selling/Exchanging Shares

24 Transaction Policies

25 Distributions and Taxes

<PAGE> 4

The portfolios in this prospectus share the same investment approach. Each
portfolio seeks to maintain a DEFINED MIX of asset classes over time, and each
invests mainly in a COMBINATION of other SchwabFunds,(R) which are managed using
INDEXING STRATEGIES. Each portfolio pursues a different investment goal.

This approach is intended to offer the investor key features of two types of
well-known investment strategies: asset allocation and indexing. Because of its
asset allocation, each portfolio's performance is a blend of the performance of
different asset classes or different segments within an asset class.

Indexing, a strategy of tracking the performance of a given market over time,
involves looking to an index to determine what securities to own. By investing
in a combination of index mutual funds, the portfolios can offer a high level of
diversification in a single investment.

The portfolios are designed for long-term investors. Their performance will
fluctuate over time and, as with all investments, future performance may differ
from past performance.

<PAGE> 5

SCHWAB MARKETTRACK
ALL EQUITY PORTFOLIO

TICKER SYMBOL: SWEGX

GOAL

THE PORTFOLIO'S GOAL IS TO SEEK HIGH CAPITAL GROWTH THROUGH AN ALL-STOCK
PORTFOLIO.

STRATEGY

TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. The
portfolio's target allocation is 100% in stock investments, with certain
percentages for different segments of the stock market.

The portfolio invests mainly in other SchwabFunds,(R) particularly three of the
Equity Index Funds. These underlying funds seek to track the total returns of
various stock market indices. They typically invest in the stocks included in
the index they are tracking, and generally give each stock the same weight as
the index does. Each underlying fund focuses on a different segment of the stock
market. Below are the underlying funds for this portfolio and the indices they
seek to track, listed according to their corresponding category in the fund's
asset allocation:

<TABLE>
<CAPTION>
ALLOCATION FUND AND INDEX
<S> <C>
LARGE-CAP SCHWAB S&P 500 FUND. Seeks to track the S&P 500 Index,(R) a widely
STOCK recognized index maintained by Standard & Poor's that includes 500
U.S. large-cap stocks.

SMALL-CAP SCHWAB SMALL-CAP INDEX FUND.(R) Seeks to track the Schwab Small-Cap
STOCK Index(R), which includes the second-largest 1,000 U.S. stocks as
measured by market capitalization.

INTERNATIONAL SCHWAB INTERNATIONAL INDEX FUND.(R) Seeks to track the Schwab
STOCK International Index(R), which includes the largest 350 stocks (as
measured by market capitalization) that are publicly traded in
developed securities markets outside the United States.
</TABLE>

The portfolio managers monitor the portfolio's holdings and cash flow and manage
them as needed in order to maintain the portfolio's target allocation. In
seeking to enhance after-tax performance, the managers may permit modest
deviations from the target allocation for certain periods of time.

ASSET ALLOCATION

Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.

The portfolio's allocation focuses on stock investments for long-term growth.
The portfolio typically does not change its stock segment allocations for
purposes of investment strategy, and seeks to remain close to the target
allocations shown below.

[PIE CHART]

small-cap 25%
int'l 30%
large-cap 45%

Because the portfolio must keep a small portion of its assets in cash for
business operations, the portfolio's actual investments will be slightly less
than 100% in stock funds.

4
ALL EQUITY PORTFOLIO

<PAGE> 6

This portfolio's exposure to a broad spectrum of U.S. and international
stocks makes it a choice for long-term investors seeking a composite of U.S.
and international stock market performance in a single fund.

MAIN RISKS

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

THE PORTFOLIO'S STOCK ALLOCATIONS CAN HAVE AN EFFECT ON RETURNS. The risks and
returns of different segments of the stock market can vary over the long term
and the short term. Because of this, the portfolio's performance could suffer
during times when segments emphasized by its target allocation are out of favor,
or when stocks in general are out of favor.

MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH STOCK INDEX FUNDS. The
portfolio's underlying stock index funds seek to track the performance of
various segments of the stock market, as measured by their respective indices.
Neither the portfolio, because of its asset allocation strategy, nor the
underlying funds, because of their indexing strategy, can take steps to reduce
market exposure or to lessen the effects of a declining market.

THE VALUES OF CERTAIN TYPES OF STOCKS, SUCH AS SMALL-CAP STOCKS AND
INTERNATIONAL STOCKS, MAY FLUCTUATE MORE WIDELY THAN OTHERS. With small-cap
stocks, one reason is that their prices may be based in part on future
expectations rather than current achievements. International stock investments
can be affected by changes in currency exchange rates, which can erode market
gains or widen market losses. Other reasons for the volatility of international
markets range from a lack of reliable company information to the risk of
political upheaval.

OTHER RISK FACTORS

While the portfolio's underlying funds seek to track the returns of various
indices, in each case their performance normally is below that of the index.

This gap occurs mainly because, unlike an index, the underlying funds incur
expenses and must keep a small portion of their assets in cash. To the extent
that an underlying fund lends securities or makes short-term or other
investments to reduce its performance gap, it may increase the risk that its
performance will be reduced.

The portfolio itself keeps a small portion of its assets in cash, which may
contribute modestly to lower performance.

ALL EQUITY PORTFOLIO
<PAGE> 7

PERFORMANCE

Because the fund had less than one calendar year of performance as of the date
of this prospectus, no performance figures are given. Figures will appear
beginning with next year's prospectus.

PORTFOLIO FEES AND EXPENSES

The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance.

<TABLE>
<CAPTION>
FEE TABLE (%)

SHAREHOLDER FEES

None
<S> <C>
ANNUAL OPERATING EXPENSES (% of average net assets)

Management fees 0.00
Distribution (12b-1) fees None
Other expenses 0.00
----
Total annual operating expenses 0.00

EXPENSE REDUCTION (DUE TO CONTRACTUAL
LIMITATIONS OFFERED BY SCHWAB AND/OR
THE INVESTMENT ADVISER) (0.00)
----
NET OPERATING EXPENSES (CONTRACTUAL
LIMITATION THROUGH 00/00/00) 0.00
</TABLE>

EXPENSES ON A $10,000 INVESTMENT

Designed to help you compare expenses, this example uses the same assumptions
as all mutual fund prospectuses: a $10,000 investment, a 5% return each year
and no changes in operating expenses. The expenses would be the same whether
you stayed in the portfolio or sold your shares at the end of each period. Your
actual costs may be higher or lower.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$00 $000 $000 $000
</TABLE>

ALL EQUITY PORTFOLIO

<PAGE> 8
FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
5/20/98-
10/31/98
<S> <C>
PER-SHARE DATA ($)

Net asset value at beginning of period 00.00
-----
Income from investment operations:
Net investment income 00.00
Net realized and unrealized gain on investments 00.00
-----
Total income from investment operations 00.00

Less distributions:
Dividends from net investment income (00.00)
-----
NET ASSET VALUE AT END OF PERIOD 00.00
=====
Total return (%) 00.00

RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to average net assets 00.00 1
Expense reductions reflected in above ratio 00.00
Ratio of net investment income to average net assets 00.00 1
Portfolio turnover rate 00.00
Net assets, end of period ($ x 1,000,000) 00
</TABLE>

1 Annualized.

ALL EQUITY PORTFOLIO

<PAGE> 9
SCHWAB MARKETTRACK
GROWTH PORTFOLIO

TICKER SYMBOL: SWHGX

GOAL

THE PORTFOLIO'S GOAL IS TO SEEK HIGH CAPITAL GROWTH WITH LESS VOLATILITY THAN AN
ALL-STOCK PORTFOLIO.

STRATEGY

TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. The
portfolio's target allocation includes stock, bond and cash investments.

The portfolio invests mainly in other SchwabFunds,(R) particularly index funds,
which seek to track the total returns of various market indices. These
underlying funds typically invest in the securities included in the index they
are tracking, and give each security the same weight as the index does. Each
underlying fund focuses on a different market segment. Below are the underlying
funds for this portfolio and the indices they seek to track, listed according to
their corresponding category in the fund's asset allocation:

SMALL-CAP SCHWAB SMALL-CAP INDEX FUND.(R) Seeks to track the Schwab Small-Cap
STOCK Index(R), which includes the second-largest 1,000 U.S. stocks as
measured by market capitalization.

INTERNATIONAL SCHWAB INTERNATIONAL INDEX FUND.(R) Seeks to track the Schwab
STOCK International Index(R), which includes the largest 350 stocks (as
measured by market capitalization) that are publicly traded in developed
securities markets outside the United States.

BOND SCHWAB TOTAL BOND MARKET INDEX FUND. Seeks to track the Lehman
Brothers Aggregate Bond Index, which includes a broad-based mix of
U.S. investment-grade bonds with maturities greater than one year.
</TABLE>

The portfolio also may use individual securities in its allocations and may
continue to hold any individual securities it currently owns. The portfolio
managers monitor the portfolio's holdings and cash flow and manage them as
needed in order to maintain the portfolio's target allocation. In seeking to
enhance after-tax performance, the managers may permit modest deviations from
the target allocation for certain periods of time.

ASSET ALLOCATION

Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.

The Growth Portfolio's allocation focuses on stock investments, while including
some bonds and cash investments to reduce volatility. The portfolio typically
does not change its asset allocations for purposes of investment strategy, and
seeks to remain close to the target allocations shown below.

[PIE CHART]

cash 5%
bonds 15%
stocks 80%

The stock allocation is further divided into three segments: 40% of assets for
large-cap, 20% for small-cap and 20% for international.

GROWTH PORTFOLIO

<PAGE> 10
By emphasizing stocks while including other investments to temper market risk,
this portfolio could be appropriate for investors seeking attractive long-term
growth with potentially lower volatility.

MAIN RISKS

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

THE PORTFOLIO'S ASSET AND STOCK ALLOCATIONS CAN HAVE AN EFFECT ON RETURNS. The
risks and returns of different classes of assets and different segments of the
stock market can vary over the long term and the short term. Because of this,
the portfolio's performance could suffer during times when the types of stocks
favored by its target allocation are out of favor, or when stocks in general are
out of favor.

OTHER RISK FACTORS

For the portion of the portfolio's assets that are invested in the bond market,
a major risk is that bond prices generally fall when interest rates rise.
Portfolio performance also could be affected if bonds held by its underlying
funds go into default. Another risk is that certain bonds may be paid off, or
"called," substantially earlier or later than expected.

While the portfolio's underlying funds seek to track the returns of various
indices, in each case their performance normally is below that of the index.

The portfolio itself keeps a small portion of its assets in cash, which may
contribute modestly to lower performance.

GROWTH PORTFOLIO

<PAGE> 11

PERFORMANCE

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

ANNUAL TOTAL RETURNS (%) AS OF 12/31

[BAR GRAPH]

BEST QUARTER: 00.00% QX 19xx
WORST QUARTER: 00.00% QX 19xx

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/98

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
<S> <C> <C>
Portfolio 000 000
S&P 500(R) Index 000 000
Lehman Brothers Aggregate Bond Index 000 000
</TABLE>

1 Portfolio inception: 11/20/95.

PORTFOLIO FEES AND EXPENSES

<TABLE>
<CAPTION>
FEE TABLE (%)

SHAREHOLDER FEES

NONE
<S> <C>
ANNUAL OPERATING EXPENSES (% of average net assets)

Management fees 0.00
Distribution (12b-1) fees None
Other expenses 0.00
----
Total annual operating expenses 0.00

EXPENSE REDUCTION (DUE TO CONTRACTUAL
LIMITATIONS OFFERED BY SCHWAB AND/OR
THE INVESTMENT ADVISER) (0.00)
----
NET OPERATING EXPENSES (CONTRACTUAL
LIMITATION THROUGH 00/00/00) 0.00
</TABLE>

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$00 $000 $000 $000
</TABLE>

The performance information above shows you how performance has varied from
year-to-year and how it averages out over time.

GROWTH PORTFOLIO

<PAGE> 12

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
11/1/97- 11/1/96- 11/20/95-
10/31/98 10/31/97 10/31/96
<S> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 00.00 00.00 00.00
----- ----- -----
Income from investment operations:
Net investment income 00.00 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00 00.00
----- ----- -----
Total income from investment operations 00.00 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00) (00.00)
----- ----- -----
NET ASSET VALUE AT END OF PERIOD 00.00 00.00 00.00
===== ===== =====
Total return (%) 00.00 00.00 00.00

RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to average net assets 00.00 00.00 00.00 1
Expense reductions reflected in above ratio 00.00 00.00 00.00
Ratio of net investment income to average net assets 00.00 00.00 00.00 1
Portfolio turnover rate 00.00 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00 00
</TABLE>

1 Annualized.

GROWTH PORTFOLIO

<PAGE> 13
SCHWAB MARKETTRACK
BALANCED PORTFOLIO

TICKER SYMBOL: SWBGX

GOAL

THE PORTFOLIO'S GOAL IS TO SEEK BOTH CAPITAL GROWTH AND INCOME.

STRATEGY

TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. The
portfolio's target allocation includes bond, stock and cash investments.

SMALL-CAP SCHWAB SMALL-CAP INDEX FUND.(R) Seeks to track the Schwab Small-Cap
STOCK Index(R), which includes the second-largest 1,000 U.S. stocks as
measured by market capitalization.

INTERNATIONAL SCHWAB INTERNATIONAL INDEX FUND.(R) Seeks to track the Schwab
STOCK International Index(R), which includes the largest 350 stocks (as measured
by market capitalization) that are publicly traded in developed
securities markets outside the United States.

ASSET ALLOCATION

Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.

The Balanced Portfolio's allocation is weighted toward stock investments, while
including substantial bond investments to add income and reduce volatility. The
portfolio typically does not change its asset allocations for purposes of
investment strategy, and seeks to remain close to the target allocations shown
below.

[PIE CHART]
<TABLE>

<S> <C>
Cash 5%
Bonds 35%
Stocks 60%
</TABLE>

The stock allocation is further divided into three segments: 30% of assets for
large-cap, 15% for small-cap and 15% for international.

12
BALANCED PORTFOLIO
<PAGE> 14

With a blend of asset types that modestly favors stocks, this portfolio may be
suitable for intermediate-term investors or for long-term investors with
moderate sensitivity to risk.

MAIN RISKS

THE PORTFOLIO'S ASSET AND STOCK ALLOCATIONS CAN HAVE A SUBSTANTIAL EFFECT ON
PERFORMANCE. The risks and returns of different classes of assets and different
segments of the stock market can vary over the long term and the short term.
Because it intends to maintain substantial exposure to stocks as well as bonds,
the portfolio will be hurt by poor performance in either market. Also, because
it does not intend to make strategic changes in its allocation, it could
underperform any asset allocation funds that underweight asset classes or types
of stocks that perform poorly during a given period.

MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH INDEX FUNDS. The
portfolio's underlying index funds seek to track the performance of various
segments of the stock or bond market, as measured by their respective indices.
Neither the portfolio, because of its asset allocation strategy, nor the
underlying funds, because of their indexing strategy, can take steps to reduce
market exposure or to lessen the effects of a declining market.

MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence market-wide trends; the outcome may be positive or negative, short
term or long term. Any type of stock can temporarily fall out of favor with the
market. The values of certain types of stocks, such as small-cap stocks and
international stocks, may fluctuate more widely than others.

BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE, WHICH CAN AFFECT THE BOND
PORTION OF THE PORTFOLIO. This risk is generally greater for bond investments
with longer maturities. Portfolio performance also could be affected if bonds
held by its underlying funds go into default. Another risk is that certain bonds
may be paid off, or "called," substantially earlier or later than expected.

OTHER RISK FACTORS

While the portfolio's underlying funds seek to track the returns of various
indices, in each case their performance normally is below that of the index.

The portfolio itself keeps a small portion of its assets in cash, which may
contribute modestly to lower performance.

13
BALANCED PORTFOLIO
<PAGE> 15
PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]

BEST QUARTER: 00.00% Qx 19xx
WORST QUARTER: 00.00% Qx 19xx

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/98

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
------ ------------
<S> <C> <C>
Portfolio 000 000
S&P 500(R) Index 000 000
Lehman Brothers Aggregate Bond Index 000 000
</TABLE>

1 Portfolio inception: 11/20/95.

PORTFOLIO FEES AND EXPENSES

FEE TABLE (%)

SHAREHOLDER FEES

None
ANNUAL OPERATING EXPENSES (% of average net assets)
Management Fees 0.00
Distribution (12b-1) fees None
Other expenses 0.00
----
Total annual operating expenses 0.00

EXPENSE REDUCTION (DUE TO CONTRACTUAL
LIMITATIONS OFFERED BY SCHWAB AND/OR
THE INVESTMENT ADVISER) (0.00)
----
NET OPERATING EXPENSES (CONTRACTUAL
LIMITATION THROUGH 00/00/00) 0.00
</TABLE>

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$00 $000 $000 $000
</TABLE>

The performance information above shows you how performance has varied from
year-to-year and how it averages out over time.

14
BALANCED PORTFOLIO
<PAGE> 16
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
1/1/98- 11/1/96- 11/20/95-
INVESTOR SHARES 12/31/98 10/31/97 10/31/96
<S> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 00.00 00.00 00.00
----- ----- -----
Income from investment operations:
Net investment income 00.00 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00 00.00
----- ----- -----
Total income from investment operations 00.00 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00) (00.00)
----- ----- -----
NET ASSET VALUE AT END OF PERIOD 00.00 00.00 00.00
===== ===== =====
Total return (%) 00.00 00.00 00.00

1 Annualized.

15
BALANCED PORTFOLIO

<PAGE> 17

SCHWAB MARKETTRACK
CONSERVATIVE PORTFOLIO

TICKER SYMBOL: SWCGX

GOAL

THE PORTFOLIO'S GOAL IS TO SEEK INCOME AND MORE GROWTH POTENTIAL THAN AN
ALL-BOND PORTFOLIO.

STRATEGY

TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. The
portfolio's target allocation includes bond, stock and cash investments.

SMALL-CAP SCHWAB SMALL-CAP INDEX FUND.(R) Seeks to track the Schwab Small-Cap
STOCK Index(R), which includes the second-largest 1,000 U.S. stocks as
measured by market capitalization.

INTERNATIONAL SCHWAB INTERNATIONAL INDEX FUND.(R) Seeks to track the Schwab
STOCK International Index(R), which includes the largest 350 stocks (as measured
by market capitalization) that are publicly traded in developed
securities markets outside the United States.

ASSET ALLOCATION

Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.

The Conservative Portfolio's allocation is weighted toward bond investments,
while including substantial stock investments for long-term growth. The
portfolio typically does not change its asset allocations for purposes of
investment strategy, and seeks to remain close to the target allocations shown
below.

[Asset Allocation Pie Chart]

<TABLE>
<S> <C>
cash 5%
stocks 40%
bonds 55%
</TABLE>

The stock allocation is further divided into three segments: 20% of assets for
large-cap, 10% for small-cap and 10% for international.

16
CONSERVATIVE PORTFOLIO
<PAGE> 18

Conservative investors and investors with shorter time horizons are among those
for whom this portfolio was created.

MAIN RISKS

OTHER RISK FACTORS

While the portfolio's underlying funds seek to track the returns of various
indices, in each case their performance normally is below that of the index.

The portfolio itself keeps a small portion of its assets in cash, which may
contribute modestly to lower performance.

17
CONSERVATIVE PORTFOLIO

<PAGE> 19

PERFORMANCE

ANNUAL TOTAL RETURNS (%) AS OF 12/31

[BAR GRAPH]

BEST QUARTER: 00.00% Qx 19xx
WORST QUARTER: 00.00% Qx 19xx

AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/98

<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
------ ------------
<S> <C> <C>
Portfolio 000 000
S&P 500(R)Index 000 000
Lehman Brothers Aggregate Bond Index 000 000
</TABLE>

1 Portfolio inception: 11/20/95.

PORTFOLIO FEES AND EXPENSES

<TABLE>
<CAPTION>
FEE TABLE (%)

<S> <C>
SHAREHOLDER FEES
None
ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees 0.00
DISTRIBUTION (12b-1) FEES NONE
Other expenses 0.00
----
Total annual operating expenses 0.00

EXPENSE REDUCTION (DUE TO CONTRACTUAL
LIMITATIONS OFFERED BY SCHWAB AND/OR
THE INVESTMENT ADVISER) (0.00)
----
NET OPERATING EXPENSES (CONTRACTUAL
LIMITATION THROUGH 00/00/00) 0.00
</TABLE>

EXPENSES ON A $10,000 INVESTMENT

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$00 $000 $000 $000
</TABLE>

The performance information above shows you how performance has varied from
year-to-year and how it averages out over time.

18
CONSERVATIVE PORTFOLIO
<PAGE> 20
FINANCIAL HIGHLIGHTS

1 Annualized.

19
CONSERVATIVE PORTFOLIO
<PAGE> 21
PORTFOLIO MANAGEMENT

The portfolios' investment adviser, Charles Schwab Investment Management, Inc.,
has more than $0.0 billion under management.

THE INVESTMENT ADVISER for the Schwab MarketTrack Portfolios(TM) is Charles
Schwab Investment Management, Inc., 101 Montgomery Street, San Francisco, CA
94104. Founded in 1989, the firm today serves as investment adviser for all of
the SchwabFunds.(R) The firm manages assets for more than XX million shareholder
accounts. (All figures on this page are as of 10/31/98.)

As the investment adviser, the firm oversees the asset management and
administration of the Schwab MarketTrack Portfolios. As compensation for these
services, the firm receives a management fee from each portfolio. For the 12
months ended 10/31/98, these fees were 0.00% for the All Equity Portfolio, 0.00%
for the Growth Portfolio, 0.00% for the Balanced Portfolio and 0.00% for the
Conservative Portfolio. These figures, which are expressed as a percentage of
each portfolio's average daily net assets, represent the actual amounts paid,
including the effects of reductions.

GERI HOM, a vice president of the investment adviser, is responsible for the
day-to-day management of the equity portions of the portfolios. She joined the
firm in 1995 and has nearly 20 years of experience in equity index management.

KIMON DAIFOTIS, CFA, a vice president of the investment adviser, is responsible
for the day-to-day management of the bond and cash portions of the portfolios.
He joined the firm in October 1997, bringing more than 17 years of prior
experience in research and asset management.

YEAR 2000 AND EURO CONVERSION ISSUES

Two issues with the potential to disrupt portfolio operations and affect
performance are the inability of some computers to recognize the year 2000 and
the conversion of certain European currencies to the euro beginning 1/1/99.

The investment adviser will continue to take steps to enable its systems to
handle these changes. With regard to the year 2000 problem, the investment
adviser also is seeking assurances that its service providers and business
partners are taking similar steps as well. However, it is impossible to know in
advance exactly how either of these issues will affect portfolio administration,
portfolio performance (particularly for portfolios with European exposure) or
securities markets in general.

PORTFOLIO MANAGEMENT

20
<PAGE> 22

INVESTING IN THE PORTFOLIOS

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

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

INVESTING IN THE PORTFOLIOS

21
<PAGE> 23
BUYING SHARES

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

The information below is for Schwab brokerage account investors. If you are
investing through a third-party investment provider, some of the instructions,
minimums and policies may be different. Some investment providers may charge
transaction or other fees. Contact your investment provider for more
information.

STEP 1

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

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

STEP 2

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

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

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

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

STEP 3

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

SCHWAB ACCOUNTS

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

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

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

INVESTING IN THE PORTFOLIOS

22
<PAGE> 24

SELLING/EXCHANGING SHARES

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

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

- - Proceeds from a sale may take up to seven days to be paid to your account.
- - If you are selling shares that were recently purchased by check, the
proceeds may be delayed until the check for purchase clears; this may take
up to 15 days from the date of purchase.
- - Exchange orders must meet the minimum investment and other requirements
for the fund and, if applicable, the share class into which you are
exchanging.
- - You will need to obtain and read the prospectus for the fund into which
you are exchanging prior to placing your order.

WHEN PLACING ORDERS

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

- - Your name
- - Your account number (for SchwabLink transactions, include the master
account and subaccount numbers)
- - The name of the portfolio whose shares you want to buy or sell
- - The dollar amount or number of shares you would like to buy, sell or
exchange
- - For exchanges, the name of the fund into which you want to exchange and
the distribution option you prefer
- - When selling shares, how you would like to receive the proceeds

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

METHODS FOR PLACING ORDERS

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

INTERNET
www.schwab.com/schwabfunds

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

MAIL
Write to SchwabFunds at:
101 Montgomery Street, San Francisco, CA 94104

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

IN PERSON
Visit the nearest Charles Schwab branch office.

INVESTING IN THE PORTFOLIOS

23
<PAGE> 25

TRANSACTION POLICIES

THE PORTFOLIOS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE
(NYSE) IS OPEN. Orders to buy, sell or exchange shares made in accordance with a
portfolio's policies prior to the close of business (generally 4 p.m. Eastern
time) will be executed that day.

THE PORTFOLIOS CALCULATE THEIR SHARE PRICES EACH BUSINESS DAY, after the close
of the NYSE. A portfolio's share price is its net asset value per share, or NAV,
which is the portfolio's net assets divided by the number of its shares
outstanding. Each order to buy, sell or exchange shares made in accordance with
a portfolio's policies is executed at the next share price calculated.

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

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

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

- - To automatically redeem your shares if the account they are held in is
closed for any reason or your balance falls below the minimum for your
share class as a result of selling or exchanging your shares
- - To modify or terminate the exchange privilege upon 60 days' written notice
to shareholders
- - To refuse any purchase or exchange order, including those that appear to
be associated with short-term trading activities
- - To change or waive a portfolio's investment minimums
- - To suspend the right to sell shares back to the portfolio, and delay
sending proceeds, during times when trading on the NYSE is restricted or
halted, or otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus

INVESTING IN THE PORTFOLIOS

<PAGE> 26

DISTRIBUTIONS AND TAXES

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

AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS AND GAINS YOUR
PORTFOLIO EARNS. Every year, each portfolio distributes to its shareholders
substantially all of its net investment income and net capital gains, if any.
These distributions typically are paid in December to all shareholders of
record, except for the Conservative Portfolio, which typically makes income
distributions at the end of every calendar quarter.

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

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

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

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

MORE ON DISTRIBUTIONS

13
INVESTING IN THE FUND

<PAGE> 69
NOTES

14 NOTES
<PAGE> 70

TO LEARN MORE

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

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

SCHWABFUNDS
101 Montgomery Street
San Francisco, CA 94104
800-435-4000
www.schwab.com/schwabfunds

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

SEC FILE NUMBER
Schwab Analytics Fund 811-7704

SCHWAB
ANALYTICS FUND(R)

PROSPECTUS

February 28, 1999

SCHWABFUNDS(R)

MKT3758FLT
<PAGE> 71
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB MARKETTRACK PORTFOLIOS(TM)
ALL EQUITY PORTFOLIO
GROWTH PORTFOLIO
BALANCED PORTFOLIO
CONSERVATIVE PORTFOLIO

FEBRUARY 28, 1999

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the portfolios' prospectus dated February 28, 1999 (as
amended from time to time).

To obtain a copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, or write to the portfolios at 101 Montgomery
Street, San Francisco, California 94104. For TDD service call 800-345-2550, 24
hours a day. The prospectus also may be available on the Internet at:
http://www.schwab.com/schwabfunds.

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

The portfolios are series of Schwab Capital Trust (the trust).

TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES, RISKS
AND LIMITATIONS................................................................2
MANAGEMENT OF THE PORTFOLIOS..................................................15
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...........................18
INVESTMENT ADVISORY AND OTHER SERVICES........................................19
BROKERAGE ALLOCATION AND OTHER PRACTICES......................................21
DESCRIPTION OF THE TRUST......................................................22
PURCHASE, REDEMPTION AND PRICING OF SHARES....................................23
TAXATION......................................................................24
CALCULATION OF PERFORMANCE DATA...............................................26
<PAGE> 72
INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVES

Each portfolio's investment objective may be changed only by vote of a majority
of its shareholders.

ALL EQUITY PORTFOLIO seeks high capital growth over the long term.

GROWTH PORTFOLIO seeks high capital growth with less volatility than an all
stock portfolio.

BALANCED PORTFOLIO seeks maximum total return, including both capital growth and
income.

CONSERVATIVE PORTFOLIO seeks income and more growth potential than an all bond
fund.

The following investment strategies, risks and limitations supplement those set
forth in the prospectus and may be changed without shareholder approval unless
otherwise noted. Also, policies and limitations that state a maximum percentage
of assets that may be invested in a security or other asset, or that set forth a
quality standard, shall be measured immediately after and as a result of a
portfolio's acquisition of such security or asset unless otherwise noted. Thus,
any subsequent change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with a portfolio's
investment policies and limitations.

UNDERLYING FUND INVESTMENTS, SECURITIES AND RISKS

The portfolios' underlying fund investments, the different types of securities
the underlying funds typically may invest in, the investment techniques they may
use and the risks normally associated with these investments are discussed
below. Not all investments that may be made by underlying funds are currently
known. Not all underlying funds discussed below are eligible investments for
each portfolio. A portfolio will invest in underlying funds that are intended to
help achieve its investment objective.

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

2
<PAGE> 73
contracts. Although some stock funds invest exclusively in equity securities and
may focus in a specialized segment of the stock market, like stocks of small
companies or foreign issuers, or may focus in a specific industry or group of
industries. The greater a fund's investment in stock, the greater exposure it
will have to stock risk and stock market risk. Stock risk is the risk that a
stock may decline in price over the short or long term. When a stock's price
declines, its market value is lowered even though the intrinsic value of the
company may not have changed. Some stocks, like small company and international
stocks, are more sensitive to stock risk than others. Diversifying investments
across companies can help to lower the stock risk of a portfolio. Market risk is
typically the result of a negative economic condition that affects the value of
an entire class of securities, such as stocks or bonds. Diversification among
various asset classes, such as stocks, bonds and cash, can help to lower the
market risk of a portfolio. The SchwabFunds(R) stock funds that the portfolios
may currently invest in are the Schwab S&P 500 Fund, Schwab Small-Cap Index
Fund(R) and Schwab International Index Fund(R) or Schwab Equity Index Funds. A
stock fund's other investments and use of investment techniques also will affect
its performance and portfolio value.

SMALL-CAP STOCK FUNDS seek capital growth and invest primarily in equity
securities of companies with smaller market capitalization. Small-cap stock
funds generally make similar types of investments and employ similar types of
techniques as other stock funds, except that they focus on stocks issued by
companies at the lower end of the total capitalization of the U.S. stock market.
These stocks tend to be more volatile than stocks of companies of larger
capitalized companies. Small-cap stock funds, therefore, tend to be more
volatile than stock funds that invest in mid- or large-cap stocks, and are
normally recommended for long-term investors. The SchwabFunds small-cap stock
fund that the portfolios may currently invest in is the Schwab Small-Cap Index
Fund.

INTERNATIONAL STOCK FUNDS seek capital growth and invest primarily in equity
securities of foreign issuers. Global stock funds invest primarily in equity
securities of both domestic and foreign issuers. International and global stock
funds generally make similar types of investments and employ similar types of
investment techniques as other stock funds, except they focus on stocks of
foreign issuers. Although some international stock and global stock funds invest
exclusively in foreign securities. Some of these funds invest in securities of
issuers located in emerging or developing securities markets. These funds have
greater exposure to the risks associated with international investing.
International and global stock funds also may invest in foreign currencies and
depositary receipts and enter into futures and options contracts on foreign
currencies and forward foreign currency exchange contracts. The SchwabFunds
international stock fund that the portfolios may currently invest in is the
Schwab International Index Fund.

BOND FUNDS seek high current income by investing primarily in debt securities,
including U.S. government securities, corporate bonds, stripped securities and
mortgage- and asset-backed securities. Other investments may include some
illiquid and restricted securities. Bond funds typically may enter into
delayed-delivery or when-issued securities transactions, repurchase agreements,
swap agreements and futures contracts. Bond funds are subject to interest rate
and income risks as well as credit and prepayment risks. When interest rates
fall, the prices of debt securities generally rise, which may affect the values
of bond funds and their yields. For example, when interest rates fall, issuers
tend to pre-pay their outstanding debts and issue new ones paying lower interest
rates. A bond fund holding these securities would be forced to invest the
principal received from the issuer in lower yielding debt securities.
Conversely, in a rising interest rate environment, prepayment on outstanding
debt securities generally will not occur. This risk is known as extension risk
and may affect the value of a bond fund if the value of its securities are
depreciated as a result of the higher market interest rates. Bond funds also are

3
<PAGE> 74
subject to the risk that the issuers of the securities in their portfolios will
not make timely interest and/or principal payments or fail to make them at all.
The SchwabFunds(R) bond fund that the portfolios may currently invest in is the
Schwab Total Bond Market Index Fund.

MONEY MARKET FUNDS typically seek current income and a stable share price of
$1.00 by investing in money market securities. Money market securities include
commercial paper and short-term U.S. government securities, certificates of
deposit, banker's acceptances and repurchase agreements. Some money market
securities may be illiquid or restricted securities or purchased on a
delayed-delivery or when issued basis. The SchwabFunds money market fund that
the portfolios may currently invest in is the Schwab Value Advantage Money
Fund(R).

INVESTMENTS, STRATEGIES AND RISKS

The different types of securities the underlying funds typically may invest in,
the investment techniques they may use and the risks normally associated with
these investments are discussed below. Not all investments that may be made by
underlying funds are currently known. Each portfolio also may invest in
securities other than shares of SchwabFunds, such as stocks, bonds and money
market securities, and engage in certain investment techniques. Not all
securities or techniques discussed below are eligible investments for each
portfolio. A portfolio will make investments that are intended to help achieve
its investment objective.

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

BORROWING may subject a portfolio or underlying fund to interest costs, which
may exceed the interest received on the securities purchased with the borrowed
funds. A portfolio or underlying fund normally may borrow at times to meet
redemption requests rather than sell portfolio securities to raise the necessary
cash. Borrowing can involve leveraging when securities are purchased with the
borrowed money. To avoid this, each portfolio will not purchase securities while
borrowings represent more than 5% of its total assets.

CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure to industry risk. For example, the automobile industry may have a
greater exposure to a single factor, such as an increase in the price of oil,
which may adversely affect the sale of automobiles and, as a result, the value
of the industry's securities. Each portfolio will not concentrate its
investments in a particular industry or group of industries, unless its
underlying fund investments are so concentrated.

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

4
<PAGE> 75
fixed, variable or floating rate of interest on the amount of money borrowed
(the "principal") until it is paid back upon maturity.

Debt securities experience price changes when interest rates change. Typically,
longer-maturity bonds react to interest rate changes more severely than
shorter-term bonds (all things being equal) but generally offer greater rate of
interest. Variable and floating rate securities pay an interest rate, which is
adjusted either periodically or at specific intervals or which floats
continuously according to a formula or benchmark. Although these structures
generally are intended to minimize the fluctuations in value that occur when
interest rates rise and fall, some structures may be linked to a benchmark in
such a way as to cause greater volatility to the security's value.

Some variable rate securities may be combined with a put or demand feature
(variable rate demand securities) that entitles the holder to the right to
demand repayment in full. While the demand feature is intended to reduce credit
risks, it is not always unconditional, and may make the securities more
difficult to sell quickly without losses. Corporate bonds are debt securities
issued by corporations. Although a higher return is expected from corporate
bonds, these securities, while subject to the same general risks as U.S.
government securities, are subject to greater credit risk than U.S. government
securities. Their prices may be affected by the perceived credit quality of the
issuer.

Credit and liquidity supports may be employed by issuers to reduce the credit
risk of their securities. Credit supports include letters of credit, insurance
and guarantees provided by foreign and domestic entities. Liquidity supports
include puts and demand features. Most of these arrangements move the credit
risk of an investment from the issuer of the security to the support provider.
Changes in the credit quality of a support provider could cause losses to a
portfolio or fund, and affect its share price.

Each portfolio and underlying fund may invest in investment-grade securities are
medium- and high-quality securities, although some still possess varying degrees
of speculative characteristics and risks. Debt securities rated below investment
grade are riskier, but may offer higher yields. These securities are sometimes
referred to as "junk bonds." The market for these securities has historically
been less liquid than for investment grade securities.

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

DEPOSITARY RECEIPTS include American or European Depositary Receipts (ADRs or
EDRs), Global Depositary Receipts or Shares (GDRs or GSSs) or other similar
global instruments that are receipts representing ownership of shares of a
foreign-based issuer held in trust by a bank or similar financial institution.
These securities are designed for U.S. and European securities markets as
alternatives to purchasing underlying securities in their corresponding national
markets and currencies. Depositary receipts can be sponsored or unsponsored.
Sponsored depositary receipts

5
<PAGE> 76
are certificates in which a bank or financial institution participates with a
custodian. Issuers of unsponsored depositary receipts are not contractually
obligated to disclose material information in the United States. Therefore,
there may not be a correlation between such information and the market value of
an unsponsored depositary receipt.

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

EQUITY SECURITIES represent ownership interests in a corporation, and are
commonly called "stocks." Equity securities historically have outperformed most
other securities, although their prices can fluctuate based on changes in a
company's financial condition, market conditions and political, economic or even
company-specific news. When a stock's price declines, its market value is
lowered even though the intrinsic value of the company may not have changed.
Sometimes factors, such as economic conditions or political events, affect the
value of stocks of companies of the same or similar industry or group of
industries, and may affect the entire stock market.

Types of equity securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, which are probably the most recognized
type of equity security, usually entitle the owner to voting rights in the
election of the corporation's directors and any other matters submitted to the
corporation's shareholders for voting. Preferred stocks do not ordinarily carry
voting rights or may carry limited voting rights, but normally have preference
over the corporation's assets and earnings. For example, preferred stocks have
preference over common stock in the payment of dividends. Preferred stocks also
may pay specified dividends.

Convertible securities are typically preferred stock or bonds that are
exchangeable for a specific number of another form of security (usually the
issuer's common stock) at a specified price or ratio. A corporation may issue a
convertible security that is subject to redemption after a specified date and
usually under certain circumstances. A holder of a convertible security that is
called for redemption would be required to tender it for redemption to the
issuer, convert it to the underlying common stock or sell it to a third party.
Convertible bonds typically pay a lower interest rate than nonconvertible bonds
of the same quality and maturity, because of the convertible feature. This
structure allows the holder of the convertible bond 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 securities provide higher income potential than the
issuer's common stock, but typically are more sensitive to interest rate changes
than the underlying common stock. In the event of liquidation, bondholders have
claims on company assets senior to those of stockholders; preferred stockholders
have claims senior to those of common stockholders.

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<PAGE> 77
stock and interest rates. When the underlying value of the common stocks
decline, the price of the issuer's convertible securities will tend not to fall
as much because the convertible security's income potential will act as a price
support. While the value of a convertible security also tends to rise when the
underlying common stock value rises, it will not rise as much because their
conversion value is more narrow. The value of convertible securities also is
affected by changes in interest rates. For example, when interest rates fall,
the value of convertible securities may rise because of their fixed income
component.

Warrants are a type of security usually issued with bonds and preferred stock
that entitles the holder to a proportionate amount of common stock at specified
price for a specific period of time. The prices of warrants do not necessarily
move parallel to the prices of the underlying common stock. Warrants have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer. If a warrant is not exercised within the specified time
period, it will become worthless and a portfolio or underlying fund will lose
the purchase price it paid for the warrant and the right to purchase the
underlying security.

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

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

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

7
<PAGE> 78
Investments in the securities of foreign issuers are usually made and held in
foreign currencies. In addition, the portfolios or underlying fund may hold cash
in foreign currencies. These investments may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may cause a portfolio or underlying fund to incur costs in connection with
conversions between various currencies. The rate of exchange between the U.S.
dollar and other currencies is determined by the forces of supply and demand in
the foreign exchange market as well as by political and economic factors.
Changes in the foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by a portfolio or underlying fund.

In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the upcoming conversion of the 11 of the
15 Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). Exchange rates
between the U.S. dollar and the local currencies involved in the conversion may
become more volatile as the conversion date of January 1, 1999 approaches. There
also may be increased volatility in the exchange rates for currencies of other
European countries. After January 3, 1999, the euro will be the official
currency of the EMU, the rate of exchange will have been set between the euro
and the currency of each converting country and the European Central Bank, all
national central banks and all stock exchanges and depositories will price,
trade and settle in euro even if the securities traded are not denominated in
euro. Each securities transaction that requires converting to euro may involve
rounding that could affect the value of the security converted. In addition,
issuers of securities that require converting may experience increased costs as
a result of the conversion, which may affect the value of their securities. It
is possible that uncertainties related to the conversion will affect investor
expectations and cause investments to shift away from European countries,
thereby making the European market less liquid. All of these factors could
affect the value of the portfolios' investments and/or increase its expenses.
While the investment advisor is taking steps to minimize the impact of the
conversion on the portfolios, it is not possible to know precisely what impact
the conversion will have on the portfolios, if any, nor is it possible to
eliminate the risks completely.

Securities that are acquired by a portfolio outside the United States and that
are publicly traded in the United States on a foreign securities exchange or in
a foreign securities market, are not considered illiquid provided that: (1) the
portfolio acquires and holds the securities with the intention of reselling the
securities in the foreign trading market, (2) the portfolio reasonably believes
it can readily dispose of the securities readily in the foreign trading market
or for cash in the United States, or (3) foreign market and current market
quotations are readily available. Investments in foreign securities where
delivery takes place outside the United States 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.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS involve the purchase or sale of
foreign currency at an established exchange rate, but with payment and delivery
at a specified future time. Many foreign securities markets do not settle trades
within a time frame that would be considered customary in the U.S. stock market.
Therefore, a portfolio or underlying fund may engage in forward foreign currency
exchange contracts in order to secure exchange rates for portfolio securities
purchased or sold, but waiting settlement. These transactions do not seek to
eliminate any fluctuations in the underlying prices of the securities involved.
Instead, the

8
<PAGE> 79
transactions simply establish a rate of exchange that can be expected when the
portfolio or fund settles its securities transactions in the future.

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

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

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

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

9
<PAGE> 80
continue to make daily cash payments to maintain its margin requirements. If the
portfolio or underlying fund had insufficient cash to meet these requirements it
may have to sell portfolio securities at a disadvantageous time or incur extra
costs by borrowing the cash. Also, the portfolio of underlying fund may be
required to make or take delivery and incur extra transaction costs buying or
selling the underlying securities. The portfolios and underlying funds seek to
reduce the risks associated with futures transactions by buying and selling
futures contracts that are traded on national exchanges or for which there
appears to be a liquid secondary market.

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

INDEXING STRATEGIES involve tracking the investments and, therefore, performance
of an index. Each Schwab Equity Index Fund normally will invest at least 80% of
its total assets in the securities of its index. The Schwab Total Bond Market
Index Fund normally will invest at least 65% of its total assets in the
securities of its index. Moreover, each fund will invest so that its portfolio
performs similarly to that of its index. Each fund tries to generally match its
holdings in a particular security to its weight in the index. Each fund will
seek a correlation between its performance and that of its index of 0.90 or
better. A perfect correlation of 1.0 is unlikely as the funds incur operating
and trading expenses unlike their indices. A fund may rebalance its holdings in
order to track its index more closely. In the event its intended correlation is
not achieved, the board of trustees will consider alternative arrangements for a
fund.

LENDING of portfolio securities is a common practice in the securities industry.
A portfolio or underlying fund will engage in security lending arrangements with
the primary objective of increasing its income through investment of the cash
collateral in short-term, interest-bearing obligations, but will do so only to
the extent that it will not lose the tax treatment available to regulated
investment companies. Lending portfolio securities involve risks that the
borrower may fail to return the securities or provide additional collateral.
Also, voting rights with respect to the loaned securities may pass with the
lending of the securities. A portfolio or underlying fund may loan portfolio
securities to qualified broker-dealers or other institutional investors
provided: (1) the loan is secured continuously by collateral consisting of U.S.
government securities, letters of credit, cash or cash equivalents maintained on
a daily marked-to-market basis in an amount at least equal to the current market
value of the securities loaned; (2) the fund may at any time call the loan and
obtain the return of the securities loaned; (3) the fund will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the fund.

MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
certificates of deposit, banker's acceptances, notes and time deposits.
Certificates of deposit are certificates issued against funds deposited in a
banking institution for a specified period of time at a specified interest rate.
Banker's 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. Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs.

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<PAGE> 81
Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or sold separately, sometimes called demand features or
guarantees, which are agreements that allow the buyer to sell a security at a
specified price and time to the seller or "put provider." When a portfolio or
fund buys a put, losses could occur as a result of the costs of the put or if it
exercises its rights under the put and the put provider does not perform as
agreed. Standby commitments are types of puts.

MORTGAGE-BACKED SECURITIES represent an interest in an underlying pool of
mortgages. Issuers of these securities include agencies and instrumentalities of
the U.S. government, such as the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association, and private entities, such as banks. The
income paid on mortgage-backed securities depends upon the income received from
the underlying pool of mortgages. Mortgage-backed securities include
collateralized mortgage obligations, mortgage-backed bonds and stripped
mortgage-backed securities. These securities are subject to interest rate risk,
like other debt securities, in addition to prepayment and extension risk.
Prepayments occur when the holder of an individual mortgage prepays the
remaining principal before the mortgage's scheduled maturity date. As a result
of the pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities are often subject to more rapid prepayment of
principal than their stated maturity indicates. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the realized yield or average life of a particular issue of
mortgage-backed securities. Prepayment rates are important because of their
effect on the yield and price of the securities. Accelerated prepayments
adversely impact yields for mortgage-backed securities purchased at a premium
(i.e., a price in excess of principal amount) and may involve additional risk of
loss of principal because the premium may not be fully amortized at the time the
obligation is repaid. The opposite is true for mortgage-backed securities
purchased at a discount. The portfolios may purchase mortgage-related securities
at a premium or at a discount. When interest rates rise, extension risk
increases and may affect the value of a portfolio or underlying fund. Principal
and interest payments on the mortgage-related securities are guaranteed by the
government to the extent described below. Such guarantees do not extend to the
value or yield of the mortgage-related securities themselves or of a portfolio's
shares.

OTHER SECURITIES. Under certain circumstances, an underlying fund may make
payment of a redemption by a portfolio wholly, or in part, by a distribution
in-kind of securities from its portfolio rather than payment in cash. In such a
case, the portfolio may hold the securities distributed until the investment
advisor determined that it was appropriate to sell them.

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

11
<PAGE> 82
security; and (4) the nature of the security and marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer). To the extent a portfolio or underlying fund invests in
restricted securities that are deemed liquid, is general level of illiquidity
may be increased if qualified institutional buyers become uninterested in
purchasing these securities.

SMALL-CAP STOCKS are common stocks issued by U.S. operating companies with
market capitalizations that place them within the second-largest 1,000 such
companies, as measured by the Small-Cap Index.(R) Historically, small-cap stocks
have been riskier than stocks issued by large- or mid-cap companies for a
variety of reasons. Small-cap companies may have less certain growth prospects
and are typically less diversified and less able to withstand changing economic
conditions than larger capitalized companies. Small-cap companies also may have
more limited product lines, markets or financial resources than companies with
larger capitalizations, and may be more dependent on a relatively small
management group. In addition, small-cap companies may not be well known to the
investing public, may not have institutional ownership and may have only
cyclical, static or moderate growth prospects. Most small-cap company stocks pay
low or no dividends.

These factors and others may cause sharp changes in the value of a small-cap
company's stock, and even cause some small-cap companies to fail. Additionally,
small-cap stocks may not be as broadly traded as large- or mid cap stocks, and a
portfolio's or underlying fund's position in securities of such companies may be
substantial in relation to the market for such securities. Accordingly, it may
be difficult for a portfolio or underlying fund to dispose of securities of
these small-cap companies at prevailing market prices in order to meet
redemptions. This lower degree of liquidity can adversely affect the value of
these securities. For these reasons and others, the value of a portfolio's or
underlying fund's investments in small-cap stocks is expected to be more
volatile than other types of investments, including other types of stock
investments. While small-cap stocks are generally considered to offer greater
growth opportunities for investors, they involve greater risks and the share
price of a portfolio or underlying fund that invests in small-cap stocks may
change sharply during the short term and long term.

SWAP AGREEMENTS are an exchange of one security for another. A swap may be
entered into in order to help a portfolio or underlying fund track an index, or
to change its maturity, to protect its value from changes in interest rates or
to expose it to a different security or market. These agreements are subject to
the risk that the counterparty will not fulfill its obligations. The risk of
loss in a swap agreement can be substantial due to the degree of leverage that
can be involved. In order to help minimize this risk, a portfolio or underlying
fund will segregate appropriate assets as necessary.

U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
U.S. Treasury securities, include bills, notes and bonds, and are backed by the
full faith and credit of the United States. Not all U.S. government securities
are backed by the full faith and credit of the United States. Some U.S.
government securities are supported by a line of credit the issuing entity has
with the U.S. Treasury. Others are supported solely by the credit of the issuing
agency or instrumentality. There can be no assurance that the U.S. government
will provide financial support to U.S. government securities of its agencies and
instrumentalities if it is not obligated to do so under law. Of course U.S.
government securities, including U.S. Treasury securities, are among the safest
securities, however, not unlike other fixed-income securities, they are still
sensitive to interest rate changes, which will cause their yields to fluctuate.

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<PAGE> 83
INVESTMENT LIMITATIONS

THE FOLLOWING INVESTMENT LIMITATIONS MAY BE CHANGED ONLY BY VOTE OF A MAJORITY
OR EACH PORTFOLIO'S SHAREHOLDERS.

THE ALL EQUITY PORTFOLIO MAY:

1) Purchase securities of any issuer unless consistent with the
maintenance of its status as a diversified company under the 1940 Act.

2) Not concentrate investments in a particular industry or group of
industries as concentration is defined under the 1940 Act, or the rules
or regulations thereunder.

3) Purchase or sell commodities, commodities contracts or real estate,
lend or borrow money, issue senior securities, underwrite securities,
or pledge, mortgage or hypothecate any of its assets, except as
permitted by the 1940 Act or the rules or regulations thereunder.

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

Diversification. Under the 1940 Act, a diversified investment management
company, with respect to 75% of its total assets, may not purchase securities
(other than U.S. government securities or securities of other investment
companies) if, as a result, more than 5% of its total assets would be invested
in the securities of such issuer or it would own more than 10% of such issuer's
outstanding voting securities.

Borrowing. The 1940 Act presently restricts an investment management company
from borrowing (including pledging, mortgaging or hypothecating assets) in
excess of 33 1/3% of its total assets (not including temporary borrowings not in
excess of 5% of its total assets).

Lending. Under the 1940 Act, an investment management company may make loans
only if expressly permitted by its investment policies.

Concentration. The 1940 Act presently defines concentration as investing 25% or
more of an investment company's total assets in an industry or group of
industries, with certain exceptions.

EACH OF THE GROWTH PORTFOLIO, BALANCED PORTFOLIO AND CONSERVATIVE PORTFOLIO 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 or investments in other registered investment
companies) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer.

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

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<PAGE> 84
4) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the trust or the investment advisor
individually own beneficially more than one-half 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, commodity contracts or real estate,
including interests in real estate limited partnerships, provided that
each portfolio may (1) purchase securities of companies that deal in
real estate or interests therein, (2) purchase or sell futures
contracts, options contracts, equity index participations and index
participation contracts and (3) 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 portfolio may (1) purchase a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are distributed
publicly or customarily purchased by institutional investors, and (2)
lend its portfolio securities.

9) Borrow money or issue senior securities, except that each portfolio 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 portfolio 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 portfolio 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.

THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS FOR EACH
PORTFOLIO.

EACH PORTFOLIO 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. The definition of "securities" does not
include cash and cash items (including receivables), government
securities and the securities of other investment companies, including
private investment companies and qualified purchaser funds.

2) 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 portfolio in units or attached to
other securities are deemed to be without value.

14
<PAGE> 85
3) 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 portfolio's net assets.

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

5) 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.

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

ALL EQUITY PORTFOLIO MAY NOT:

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

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

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

4) Purchase securities of other investment companies, except as permitted
by the 1940 Act, including any exemptive relief granted by the SEC.

Except with respect to investments in futures and options contracts and illiquid
securities, later changes in values do not require a portfolio to sell the
investment even if it portfolio could not then make the same investment.

MANAGEMENT OF THE PORTFOLIOS

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

15
<PAGE> 86
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS &
NAME/DATE OF BIRTH THE TRUSTS AFFILIATIONS
- ------------------------------------- ----------------------- --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Co-Chief Executive Officer and
July 29, 1937 Director, The Charles Schwab Corporation;
Chairman, Chief Executive Officer and
Director, Charles Schwab Holdings,
Inc.; Chairman and Director, Charles Schwab
& Co., Inc., Charles Schwab Investment
Management, Inc., The Charles Schwab
Trust Company and Schwab Retirement
Plan Services, Inc.; Chairman and Director
(current board positions), and Chairman
(officer position) until December 1995, Mayer &
Schweitzer, Inc. (a securities brokerage
subsidiary of The Charles Schwab Corporation);
Director, The Gap, Inc. (a clothing retailer),
Transamerica Corporation (a financial services
organization), AirTouch Communications (a
telecommunications company) and Siebel Systems
(a software company).

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

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

- ----------
* This trustee is an "interested person" of the trusts.
+ Effective August 18, 1998, Mr. Scheid was elected as President and Trustee.

16
<PAGE> 87
<TABLE>
<S> <C> <C>
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).

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

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

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Financial Officer Charles Schwab Investment Management, Inc. From
1994 to 1996, Ms. Tung was Controller for
Robertson Stephens Investment Management,
Inc. From 1993 to 1994, she was Vice President of
Fund Accounting, Capital Research and
Management Co.

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

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

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

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

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

17
<PAGE> 88
Each portfolio is overseen by a board of trustees. The board of trustees meets
regularly to review each portfolio's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of the portfolio's shareholders. The following table provides information as of
October 31, 1998, concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 38 funds as of
October 31, 1998.

<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Aggregate Compensation Benefits Compensation
Trustee from each portfolio Accrued as from Fund
Part of Complex
Portfolio
Expenses
----------------------------------------------------
All Equity Growth Balanced Conservative
Portfolio Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. 0 0 0 0 N/A 0
Schwab

Tom D. Seip 1 0 0 0 0 N/A 0

Steven L.
Scheid 2

William J. 0 0 0 0 N/A 0
Klipp,

Donald F. N/A
Dorward

Robert G. N/A
Holmes

Donald R. N/A
Stephens

Michael W. N/A
Wilsey
</TABLE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 1999, [VAR: QLEGAL: name of person or entity and the
jurisdiction under the laws of which it is organized and all parent companies]
control the [VAR: Fund Name] through ownership of [VAR: QLEGAL: x.x%] securities
or other basis of control.]

As of February 1, 1999, the officers and trustees of the trust(s), as a group
owned of record or beneficially [VAR: QLEGAL: x.x% / less than 1%] of the
outstanding voting securities of each portfolio.

As of February 1, 1999 , the [VAR: QLEGAL: name of entity or person] directly or
beneficially owned, [VAR: QLEGAL: x.xx%] of shares of the [VAR: Fund Name /
Class Name].

- ----------
1 Effective May 15, 1998 Mr. Seip resigned as President and trustee.
2 Effective August 18, 1998, Mr. Scheid was elected as President and trustee.

18
<PAGE> 89
INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISOR

Charles Schwab Investment Management, Inc. (CSIM or the investment advisor), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the portfolios' investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement
(Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc.
(Schwab) is an affiliate of the investment advisor and is the trust's
distributor, shareholder services agent and transfer agent. Charles R. Schwab is
the founder, Chairman, Co-Chief Executive Officer and Director of The Charles
Schwab Corporation. As a result of his ownership of and interests in The Charles
Schwab Corporation, Mr. Schwab may be deemed to be a controlling person of the
investment advisor and Schwab.

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

For its advisory and administrative services to the portfolios, the investment
advisor is entitled to receive a graduated annual fee, payable monthly, of 0.74%
of each portfolio's average daily net assets not in excess of $1 billion, 0.69%
of the next $1 billion and 0.64% of such net assets over $2 billion.

The investment advisor and Schwab have guaranteed that, through at least
February 28, 1999, the total operating expenses for each portfolio, including
the impact of underlying SchwabFunds investments, will not exceed 0.84% of its
average daily net assets.

For the fiscal period of May 20, 1998, (commencement of operations) to October
31, 1998, the All Equity Portfolio paid investment advisory fees of $_____,
(fees were reduced by $______).

For the fiscal years ended October 31, 1998 and 1997 and fiscal period of
November 20, 1995 (commencement of operations) to October 31, 1996, the Growth
Portfolio paid investment advisory fees of $______, $337,000 and $426,000 (fees
were reduced by $____, $296,000 and $546,000), respectively.

For the fiscal years ended October 31, 1998 and 1997 and fiscal period ended of
November 20, 1995, (commencement of operations) to October 31, 1996, the
Balanced Portfolio paid investment advisory fees of $ ____, $219,000, $352,000
(fees were reduced by $___, $242,000 and $496,000), respectively.

19
<PAGE> 90
For fiscal years ended October 31, 1998 and 1997 and fiscal period of November
20, 1995 (commencement of operations) to October 31, 1996, the Conservative
Portfolio paid investment advisory fees of $___, $26,000 and $5,000 (fees were
reduced by $____, $118,000 and $203,000), respectively.

DISTRIBUTOR

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

SHAREHOLDER SERVICES AND TRANSFER AGENT

Schwab provides portfolio information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
portfolios' prospectuses, financial reports and other informational literature
about the portfolios . Schwab maintains the office space, equipment and
personnel necessary to provide these services.

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

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

CUSTODIAN AND FUND ACCOUNTANT

Chase Manhattan Bank, 1 Pierrepont Plaza, Brooklyn, NY 11201, serves as
custodian and SEI Fund Resources, One Freedom Valley Drive, Oaks, PA 19456,
serves as fund accountant for the portfolios.

The custodians are responsible for the daily safekeeping of securities and cash
held or sold by the portfolios. The accountants maintain all books and records
related to each portfolio's transactions.

INDEPENDENT ACCOUNTANT

The portfolios' independent accountant, ______________, audits and reports on
the annual financial statements the portfolios and review certain regulatory
reports and each portfolio's federal income tax return. It also performs other
professional accounting, auditing, tax and advisory services when the trusts
engage it to do so. Their address is .
Each portfolio's audited financial statements for the fiscal year ended
October 31, 1998 are included in the portfolios' annual report, which is a
separate report supplied with the SAI.

20
<PAGE> 91
BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

For reporting purposes, each portfolio's turnover rate is calculated by dividing
the value of purchases or sales of portfolio securities for the fiscal year,
whichever is less, by the monthly average value of portfolio securities the
portfolio owned during the fiscal year. When making the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded.

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.

Typically, funds with high turnover (such as a 100% or more) tend to generate
higher capital gains and transaction costs, such as brokerage commissions.
Although brokerage commissions are generally not paid on purchases or sales of
mutual fund shares.

The All Equity Portfolio's turnover rate for the fiscal period of May 20, 1998
(commencement of operations) to the fiscal year ended October 31, 1998 was
____%.

The Growth Portfolio's turnover rates for the fiscal years ended October 31,
1998 and 1997, were _____% and 113%, respectively.

The Balanced Portfolio's turnover rates for the fiscal years ended October 31,
1998 and 1997, were ____% and 104%, respectively.

The Conservative Portfolio's turnover rates for the fiscal years ended October
31, 1998 and 1997, were ____% and 104%, respectively.

The higher turnover rates for the portfolios are attributed to the portfolios'
conversion from investing directly in securities to investments in other mutual
funds index funds. The portfolios do not anticipate additional brokerage
expenses due to these higher portfolio turnover rates. In addition, over the
short- or intermediate term during the first year of operations, a portfolio may
have a higher turnover rate as a result of building an investment portfolio.

PORTFOLIO TRANSACTIONS

In effecting securities transactions for a portfolio, the investment advisor
seeks to obtain best price and execution. Subject to the supervision of the
board of trustees, the investment advisor will generally select brokers and
dealers for the portfolios primarily on the basis of the quality and reliability
of brokerage services, including execution capability and financial
responsibility.

In assessing these criteria, the investment advisor will, among other things,
monitor the performance of brokers effecting transactions for the portfolios to
determine the effect, if any, that the portfolios' transactions through those
brokers have on the market prices of the stocks involved. This may be of
particular importance for the portfolios' investments in relatively smaller
companies whose stocks are not as actively traded as those of their larger
counterparts. The portfolios 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.

21
<PAGE> 92
When the execution capability and price offered by two or more broker-dealers
are comparable, the investment advisor 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 also may be used by the investment advisor when
providing advisory services to other investment advisory clients, including
mutual funds.

In an attempt to obtain best execution for the portfolios, the investment
advisor may 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 portfolios to trade directly
with other institutional holders on a net basis. At times, this may allow the
portfolios to trade larger blocks than would be possible trading through a
single market maker.

In determining when and to what extent to use Schwab or any other affiliated
broker-dealer as its broker for executing orders for the portfolios on
securities exchanges, the investment advisor follows procedures, adopted by the
board of trustees, that are designed to ensure that affiliated brokerage
commissions (if relevant) are reasonable and fair in comparison to unaffiliated
brokerage commissions for comparable transactions. The board reviews the
procedures annually and approves and reviews transactions involving affiliated
brokers quarterly.

BROKERAGE COMMISSIONS

For the fiscal period of May 20, 1998, (commencement of operations) to October
31, 1998, the All Equity Portfolio paid brokerage commissions of $___________.

For the fiscal years ended October 31, 1998 and 1997 and fiscal period of
November 20, 1995 (commencement of operations) to October 31, 1996, the Growth
Portfolio, paid brokerage commissions of $___________, $32,365 and $92,248,
respectively.

For the fiscal years ended October 31, 1998 and 1997 and fiscal period of
November 20, 1995 (commencement of operations) to October 31, 1996, the Balanced
Portfolio, paid brokerage commissions of $___________, $27,084 and $48,733,
respectively.

For the fiscal years ended October 31, 1998 and 1997 and fiscal period of
November 20, 1995 (commencement of operations) to October 31, 1996, the
Conservative Portfolio, paid brokerage commissions of $___________, $4,153 and
$10,741, respectively.

DESCRIPTION OF THE TRUST

Each portfolio, is a series of Schwab Capital Trust, an open-end investment
management company organized as a Massachusetts business trust on May 7, 1993.

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

22
<PAGE> 93
Proxy materials will be mailed to shareholders prior to any meetings, and will
include a voting card and information explaining the matters to be voted upon.

The bylaws of the trust 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, or of the Declaration of Trust or of the bylaws
permits or requires that (1) holders of any series shall vote as a series, then
a majority of the aggregate number of shares of that series entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that series, or (2) holders of any class shall vote as a class, then a majority
of the aggregate number of shares of that class entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that class.
Any lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. The Declaration of
Trust specifically authorizes the board of trustees to terminate the trust (or
any of its investment portfolios) by notice to the shareholders without
shareholder approval.

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

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

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE PORTFOLIOS

As long as the portfolios or Schwab follow reasonable procedures to confirm that
your telephone order is genuine, they will not be liable for any losses an
investor may experience due to unauthorized or fraudulent instructions. These
procedures may include requiring a form of personal identification before acting
upon any telephone order, providing written confirmation of telephone orders and
tape recording all telephone orders.

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

23
<PAGE> 94
not want to receive consolidated mailings, you may write to your portfolio and
request that your mailings not be consolidated.

The portfolios have 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 these limits may be paid, in whole or in part,
in investment securities or in cash, as the board of trustees may deem
advisable. Payment will be made wholly in cash unless the board of trustees
believes that economic or market conditions exist that would make such payment a
detriment to the best interests of a portfolio. If redemption proceeds are paid
in investment securities, such securities will be valued as set forth in
"Pricing of Shares". A redeeming shareholder would normally incur brokerage
expenses if he or she were to convert the securities to cash.

PRICING OF SHARES

In accordance with the 1940 Act, the underlying mutual funds are valued at their
respective net asset values as determined by those funds. The underlying mutual
funds that are money market funds may value their portfolio securities based on
the value or amortized cost method. The other underlying mutual funds value
their portfolio securities based on market quotes if they are readily available.
The investment advisor assigns fair values to the portfolios' other investments
in good faith under board of trustees guidelines. The board of trustees
regularly reviews these values. Securities traded on stock exchanges are valued
at the last quoted sales price on the exchange on which such securities are
primarily traded, or, lacking any sales, at the mean between the bid and ask
prices. Securities traded in the over-the-counter market are valued at the last
sales price that day, or if no sales that day, at the mean between the bid and
ask prices.

Securities that are primarily traded on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective exchanges
with these values then translated into U.S. dollars at the current exchange
rate. Foreign securities for which the closing values are not readily available
are valued at fair value as determined in good faith pursuant to the board of
trustees' guidelines.

Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations on their sale and illiquid
securities) are valued at fair value as determined in good faith pursuant to
guidelines adopted by the board of trustees. Securities may be valued on the
basis of prices provided by pricing services when such prices are believed to
reflect fair market value. The board of trustees regularly reviews any fair
values assigned to portfolio securities.

TAXATION

FEDERAL TAX INFORMATION FOR THE PORTFOLIOS

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

24
<PAGE> 95
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. For
the foregoing purposes, a portfolio is treated as having distributed any amount
on which it is subject to income tax for any taxable year ending in such
calendar year.

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

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

The discussion of federal income taxation presented below supplements the
discussion in the portfolios' prospectus and only summarizes some of the
important federal tax considerations generally affecting shareholders of the
portfolios. 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 portfolio.

Any dividends declared by a portfolio in October, November or December and paid
the following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. Long-term
capital gain distributions are taxable as long-term capital gains, regardless of
how long you have held your shares. However, if you receive a long-term capital
gain distribution with respect to portfolio 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. For
corporate investors in the portfolios, dividend distributions the portfolios
designate 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 portfolios were regular corporations.
Distributions by a portfolio also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.

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

25
<PAGE> 96
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.

Income that the portfolios receive from sources within various foreign countries
may be subject to foreign income taxes withheld at the source. If a portfolio
has at least 50% of its assets invested in foreign securities at the end of its
taxable year, it may elect to "pass through" to its shareholders the ability to
take either the foreign tax credit or the deduction for foreign taxes. 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, and may
either 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 sections 901 and 904 (but not both). A
shareholder who does not itemize deductions may not claim a deduction for
foreign taxes. It is expected that the portfolios will not have 50% of their
assets invested in foreign securities at the close of their taxable years, and
therefore will not be permitted to make this election. Also, to the extent a
portfolios invests in an underlying mutual fund that elects to pass through
foreign taxes, these portfolios will not be able to pass through the taxes paid
by the underlying mutual fund. Each shareholder's respective pro rata share of
foreign taxes the portfolio pays will, therefore, be netted against their share
of the portfolio's gross income.

The portfolios may invest in a non-U.S. corporation that could be treated as a
passive foreign investment company (PFIC) 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 portfolios do invest in PFICs, they may elect to treat the PFIC as a
"qualified electing fund" or mark-to-market its investments in PFICs annually.
In either case, the portfolios may be required to distribute amounts in excess
of realized income and gains. To the extent that the portfolios do invest in
foreign securities that 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 portfolios' shareholders. Therefore, the payment of this
tax would reduce the portfolios' economic return from their PFIC shares, and
excess distributions received with respect to such shares are treated as
ordinary income rather than capital gains.

An underlying mutual fund may invest in non-U.S. corporations which would be
treated as PFICs or become a PFIC. 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 an underlying mutual 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 underlying
mutual fund may be required to distribute amounts in excess of its realized
income and gains. To the extent that the underlying mutual fund itself is
required to pay a tax on income or gain from investment in PFICs, the payment of
this tax would reduce the portfolios' economic return.

CALCULATION OF PERFORMANCE DATA

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

26
<PAGE> 97
Average annual total returns for one year ended October 31, 1998 and since a
portfolio's commencement of operations are stated below.

<TABLE>
<CAPTION>
Portfolio and One Year Life of the Portfolio
Commencement Date
- -----------------------------------------------------------------------------
<S> <C> <C>
All Equity (5/20/98) % %
Growth (11/20/95) % %
Balanced (11/20/95) % %
Conservative (11/20/95) % %
</TABLE>

A portfolio also may advertise its cumulative total return since inception. This
number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from commencement of
operations to the fiscal year end October 31, 1998.

<TABLE>
<CAPTION>
Name of Portfolio and Date Portfolio Cumulative Total Return From
Commenced Operations* Commencement of Operations
- ------------------------------------ ----------------------------
<S> <C>
All Equity (5/20/98) %
Growth (11/20/95) %
Balanced (11/20/95) %
Conservative (11/20/95) %
</TABLE>

The performance of the portfolios may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices of investment performance, U.S. government obligations, bank
certificates of deposit, the consumer price index information provided by
proprietary and non-proprietary research services and other investments for
which reliable data is available.

The portfolios also may compare their historical performance figures to the
performance of indices similar to their asset categories and sub-categories, and
to the performance of "blended indices" similar to the portfolios' strategies.

The indices and asset categories for large company stocks is the S&P 500 Index;
for small company stocks, the Ibbottson, the BARRA Small-Cap Index and the
Russell 2000(R) Index; for foreign stocks, the MSCI-EAFE Index; and for bonds
the Ibbottson and Lehman Brothers Aggregate Bond indices.

27
<PAGE> 98
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB MARKETMANAGER PORTFOLIOS(TM)
GROWTH PORTFOLIO
BALANCED PORTFOLIO
SMALL CAP PORTFOLIO
INTERNATIONAL PORTFOLIO

FEBRUARY 28, 1999

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the portfolios' prospectus dated February 28, 1999 (as
amended from time to time).

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

The portfolios are a series of Schwab Capital Trust (the trust).

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES,
RISKS AND LIMITATIONS..................................................... 2
MANAGEMENT OF THE PORTFOLIOS.............................................. 17
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 20
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 21
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 22
DESCRIPTION OF THE TRUST.................................................. 24
PURCHASE, REDEMPTION AND PRICING OF SHARES................................ 25
TAXATION.................................................................. 25
CALCULATION OF PERFORMANCE DATA........................................... 28
</TABLE>

1
<PAGE> 99
INVESTMENT OBJECTIVES, SECURITIES, STRATEGIES, RISKS AND LIMITATIONS

INVESTMENT OBJECTIVES

Each portfolio's investment objective may be changed only by vote of a majority
of its shareholders.

GROWTH PORTFOLIO seeks capital growth with less volatility than a portfolio
comprised entirely of stock funds.

BALANCED PORTFOLIO seeks capital growth and income with less volatility than the
Growth Portfolio.

SMALL CAP PORTFOLIO seeks long-term capital appreciation.

INTERNATIONAL PORTFOLIO seeks long-term capital appreciation.

The following investment securities, strategies, risks and limitations
supplement those set forth in the prospectus and may be changed without
shareholder approval unless otherwise noted. Also, policies and limitations that
state a maximum percentage of assets that may be invested in a security or other
asset, or that set forth a quality standard, shall be measured immediately after
and as a result of a portfolio's acquisition of such security or asset unless
otherwise noted. Thus, any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with a portfolio's investment policies and limitations.

UNDERLYING FUND INVESTMENTS, SECURITIES AND RISKS

MUTUAL FUNDS are registered investment companies, which may issue and redeem
their shares on a continuous basis (open-end mutual funds) or may offer a fixed
number of shares usually listed on an exchange (closed-end mutual funds). Mutual
funds generally offer investors the advantages of diversification and
professional investment management, by combining shareholders' money and
investing it in various types of securities, such as stocks, bonds and money
market securities. Mutual funds also make various investments and use certain
techniques in order to enhance their performance. These may include entering
into delayed-delivery and when-issued securities transactions or swap
agreements; buying and selling futures contracts, illiquid and restricted
securities and repurchase agreements and borrowing or lending money and/or
portfolio securities. The risks of investing in mutual funds generally reflect
the risks of the securities in which the mutual funds invest and the investment
techniques they may employ. Also, mutual funds charge fees and incur operating
expenses. Although the portfolios do not intend to pay any sales loads or
transaction fees when buying underlying mutual funds.

The portfolios intend to purchase shares of mutual funds in compliance with the
requirements of federal law or any applicable exemptive relief received from the
Securities and Exchange Commission (SEC). Mutual fund investments for each
portfolio are currently restricted under

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federal regulations, and therefore, the extent to which a portfolio may invest
in another mutual fund may be limited. In addition, the portfolios intend to
vote any proxies of underlying mutual funds in accordance with the instructions
received, or in the same proportion as the vote of all other shareholders of the
underlying mutual fund.

Each portfolio will normally invest at least 65% of its total assets in other
mutual funds, including those available through Schwab's Mutual Fund
OneSource(R) service.

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

Each portfolio will normally invest no more than 35% of its total assets in
other funds.

STOCK FUNDS typically seek growth of capital and invest primarily in equity
securities. Other investments generally include debt securities, such as U.S.
government securities, and some illiquid and restricted securities. Stock funds
typically may enter into delayed-delivery or when-issued securities
transactions, repurchase agreements, swap agreements and futures and options
contracts. Although some stock funds invest exclusively in equity securities and
may focus in a specialized segment of the stock market, like stocks of small
companies or foreign issuers, or may focus in a specific industry or group of
industries. The greater a fund's investment in stock, the greater exposure it
will have to stock risk and stock market risk. Stock risk is the risk that a
stock may decline in price over the short or long term. When a stock's price
declines, its market value is lowered even though the intrinsic value of the
company may not have changed. Some stocks, like small company and international
stocks, are more sensitive to stock risk than others. Diversifying investments
across companies can help to lower the stock risk of a portfolio. Market risk is
typically the result of a negative economic condition that affects the value of
an entire class of securities, such as stocks or bonds. Diversification among
various asset classes, such as stocks, bonds and cash, can help to lower the
market risk of a portfolio. A stock fund's other investments and use of
investment techniques also will effect its performance and portfolio value.

The Growth Portfolio will normally invest at least 65% of its total assets in
stock funds.

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The Small Cap Portfolio will normally invest at least 65% of its total assets in
small-cap stock (equity) funds.

The International Portfolio will normally invest at least 65% of its total
assets in international stock (equity) funds.

SECTOR FUNDS are a sub-category of stock funds and typically seek capital
appreciation. Sector funds invest in narrow segments of the economy, such as
biotechnology, natural resources, automotive and real estate. Because these
funds invest in narrow segments of the economy, they may experience higher price
volatility and more exposure to industry risk than more diversified funds.
Industry risk is the risk that the companies of a particular industry will
experience a decline in the price of their stock. Sometimes a negative economic
condition will affect a single industry or group of industries. For example, the
automotive industry may have a greater exposure to a single factor, such as an
increase in the price of oil, which may affect the sale of automobiles and
impact the value of the industries' securities. Diversifying investments across
industries can help to reduce the industry risk of a portfolio.

BOND FUNDS seek high current income by investing primarily in debt securities,
including U.S. government securities, corporate bonds, stripped securities and
mortgage- and asset-backed securities. Other investments may include some
illiquid and restricted securities. Bond funds typically may enter into
delayed-delivery or when-issued securities transactions, repurchase agreements,
swap agreements and futures contracts. Bond funds are subject to interest rate
and income risks as well as credit and prepayment risks. When interest rates
fall, the prices of debt securities generally rise, which may affect the values
of bond funds and their yields. For example, when interest rates fall, issuers
tend to pre-pay their outstanding debts and issue new ones paying lower interest
rates. A bond fund holding these securities would be forced to invest the
principal received from the issuer in lower yielding debt securities.
Conversely, in a rising interest rate environment, prepayment on outstanding
debt securities generally will not occur. This risk is known as extension risk
and any affect the value of a bond fund if the value of its securities are
depreciated as a result of the higher market interest rates. Bond funds also are
subject to the risk that the issuers of the securities in their portfolios will
not make timely interest and/or principal payments or fail to make them at all.

The portfolios intend to invest in bond funds that invest primarily in
investment-grade debt securities, including U.S. government securities. The
Balanced Portfolio will normally invest at least 25% of its total assets in bond
funds.

INTERNATIONAL BOND FUNDS seek high current income by investing primarily in debt
securities of foreign issuers. Global bond funds invest primarily in debt
securities of all issuers, both domestic and foreign. International and global
bond funds generally make similar types of investments and

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employ similar types of investment techniques as other bond funds, except they
focus on debt securities of foreign issuers. Although some international bond
and global bond funds may invest exclusively in foreign securities. Some of
these funds invest in securities of issuers located in emerging or developing
securities markets. These funds have greater exposure to risks associated with
international investing. International and global bond funds also may invest in
foreign currencies and depositary receipts and enter into futures and options
contracts on foreign currencies and forward foreign currency exchange contracts.

BALANCED FUNDS must invest at least 25% of their assets in debt securities, and
typically also invest substantial amounts in stocks. The stock portion of a
balanced fund has the risk associated with stock investments, and the bond
portion has the risks associated with bond investments.

INVESTMENT SECURITIES, STRATEGIES AND RISKS

The different types of securities the underlying funds typically may invest in,
the investment techniques they may use and the risks normally associated with
these investments are discussed below. Not all investments that may be made by
underlying funds are currently known. Each portfolio also may invest in
securities other than fund shares, such as stocks, bonds and money market
securities, and engage in certain investment techniques. Not all securities or
techniques discussed below are eligible investments for each portfolio. A
portfolio will make investments that are intended to help achieve its investment
objective.

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its underlying fund investments are so concentrated.

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

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

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

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

EMERGING OR DEVELOPING MARKETS exist in countries that are considered to be in
the initial stages of industrialization. The risks of investing in these markets
are similar to the risks of international investing in general, although the
risks are greater in emerging and developing markets. Countries with emerging or
developing securities markets tend to have economic structures that are less
stable than countries with developed securities markets. This is because their
economies may be based on only a few industries and their securities markets may
trade a small number of securities. Prices on these exchanges tend to be
volatile, and securities in these countries historically have offered greater
potential for gain (as well as loss) than securities of companies located in
developed countries.

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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 securities typically trade at prices above their conversion value,
which is the current market value of the common stock received upon conversion,
because of their higher yield potential than the underlying common stock. The
difference between the conversion value and the price of a convertible security
will vary depending on the value of the underlying common stock and interest
rates. When the underlying value of the common stocks decline, the price of the
issuer's convertible securities will tend not to fall as much because the
convertible security's income potential will act as a price support. While the
value of a convertible security also tends to rise when the underlying common
stock value rises, it will not rise as much because their conversion value is
more narrow. The value of convertible securities also is affected by changes in
interest rates. For example, when interest rates fall, the value of convertible
securities may rise because of their fixed income component.

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companies than in the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. There may be difficulties in obtaining or enforcing judgments
against foreign issuers as well. These factors and others may increase the risks
with respect to the liquidity of a portfolio or underlying fund containing
foreign investments, and its ability to meet a large number of shareholder
redemption requests.

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

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

In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the upcoming conversion of the 11 of the
15 Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union ("EMU"). Exchange rates
between the U.S. dollar and the local currencies involved in the conversion may
become more volatile as the conversion date of January 1, 1999 approaches. There
also may be increased volatility in the exchange rates for currencies of other
European countries. After January 3, 1999, the euro will be the official
currency of the EMU, the rate of exchange will have been set between the euro
and the currency of each converting country and the European Central Bank, all
national central banks and all stock exchanges and depositories will price,
trade and settle in euro even if the securities traded are not denominated in
euro. Each securities transaction that requires converting to euro may involve
rounding that could affect the value of the security converted. In addition,
issuers of securities that require converting may experience increased costs as
a result of the conversion, which may affect the value of their securities. It
is possible that uncertainties related to the conversion will affect investor
expectations and cause investments to shift away from European countries,
thereby making the European market less liquid. All of these factors could
affect the value of the portfolios' investments and/or increase its expenses.
While the investment advisor is taking steps to minimize the impact of the
conversion on the portfolios, it is not possible to know precisely what impact
the conversion will have on the portfolios, if any, nor is it possible to
eliminate the risks completely.

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States, or (3) foreign market and current market quotations are readily
available. Investments in foreign securities where delivery takes place outside
the United States 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.

Underlying funds also may engage in forward foreign currency exchange contracts
to protect the value of specific portfolio positions, which is called "position
hedging." When engaging in position hedging, an underlying fund may enter into
forward 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 that
the underlying fund expects to purchase).

Buying and selling foreign currency exchange contracts involve costs and may
result in losses. The ability an underlying fund to engage in these transactions
may be limited by tax considerations. 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. Transactions in these contracts involve certain other risks.
Unanticipated fluctuations in currency prices may result in a poorer overall
performance for the underlying funds than if they had not engaged in any such
transactions. Moreover, there may be imperfect correlation between the
underlying fund's holdings of securities denominated in a particular currency
and forward contracts into which the underlying fund enters. Such imperfect
correlation may cause an underlying fund to sustain losses, which will prevent
it from achieving a complete hedge or expose it to risk of foreign exchange
loss. Losses to an underlying fund will affect the performance of a portfolio.

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

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

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security it has acquired or sold or expects to acquire or sell. The underlying
funds may enter into futures contracts for these or these or other reasons.

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

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

When interest rates are rising or securities prices are falling, the portfolios
and the underlying funds may 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 portfolios and the underlying funds,
through the purchase of futures contracts, may attempt to secure better rates or
prices than might later be available in the market when they effect anticipated
purchases. Similarly, the portfolios and the underlying funds may sell futures
contracts on a specified currency to protect against a decline in the value of
that currency and their portfolio securities that are denominated in that
currency. The portfolios and the underlying funds may purchase futures contracts
on a foreign currency to fix the price in U.S. dollars of a security denominated
in that currency that the portfolios and the underlying funds have acquired or
expect to acquire.

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

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by buying and selling futures contracts that are traded on national exchanges or
for which there appears to be a liquid secondary market.

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

LENDING of portfolio securities is a common practice in the securities industry.
A portfolio will engage in security lending arrangements with the primary
objective of increasing its income through investment of the cash collateral in
short-term, interest-bearing obligations, but will do so only to the extent that
it will not lose the tax treatment available to mutual funds. Lending portfolio
securities involve risks that the borrower may fail to return the securities or
provide additional collateral. Also, voting rights with respect to the loaned
securities may pass with the lending of the securities. A portfolio may loan
portfolio securities to qualified broker-dealers or other institutional
investors provided: (1) the loan is secured continuously by collateral
consisting of U.S. government securities, letters of credit, cash or cash
equivalents maintained on a daily marked-to-market basis in an amount at least
equal to the current market value of the securities loaned; (2) the portfolio
may at any time call the loan and obtain the return of the securities loaned;
(3) the portfolio will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the portfolio.

Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or sold separately, sometimes called demand features or
guarantees, which are agreements that allow the buyer to sell a security at a
specified price and time to the seller or "put provider." When a portfolio or
fund buys a put, losses could occur as a result of the costs of the put or if it
exercises its rights under the put and the put provider does not perform as
agreed. Standby commitments are types of puts.

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

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securities. These securities are subject to interest rate risk, like other debt
securities, in addition to prepayment and extension risk. Prepayments occur when
the holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity indicates. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of mortgage-backed securities.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for
mortgage-backed securities purchased at a premium (i.e., a price in excess of
principal amount) and may involve additional risk of loss of principal because
the premium may not be fully amortized at the time the obligation is repaid. The
opposite is true for mortgage-backed securities purchased at a discount. The
portfolios may purchase mortgage-related securities at a premium or at a
discount. When interest rates rise, extension risk increases and may affect the
value of a portfolio or underlying fund. Principal and interest payments on the
mortgage-related securities are guaranteed by the government to the extent
described below. Such guarantees do not extend to the value or yield of the
mortgage-related securities themselves or of a portfolio's shares.

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

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

A put option is the opposite of a call option. It gives the buyer the right to
sell a specified number of shares of a security at a fixed price on or before a
specified date in the future. Put option buyers are usually anticipating a
decline in the price of the underlying security, and wish to offset those losses
when selling the security at a later date. All put options the portfolios write
will be covered, which means that the portfolio will deposit with its custodian
cash, U.S. government securities or other high-grade debt securities (i.e.,
securities rated in one of the top three categories by Moody's Investor Service
("Moody's") or Standard & Poor's ("S&P") or, if unrated, determined by the
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 portfolios. However, in return
for the option premium, the portfolios 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 portfolios and underlying funds may purchase and write put and call options
on any securities in which they may invest or any securities index based on
securities in which they may invest. The

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portfolios or underlying 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. Like futures contracts, option contracts are rarely
exercised. Option buyers usually sell the option before it expires. Option
writers may terminate their obligations under a written call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." The portfolios and underlying
funds may enter into closing sale transactions in order to realize gains or
minimize losses on options they have purchased or wrote.

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

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

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

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

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

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OTHER SECURITIES may be held by a portfolio under certain circumstances. For
example, an underlying fund could make payment of a redemption by a portfolio
wholly, or in part, by a distribution in-kind of securities from its portfolio
instead of in cash. In such a case, the portfolio may hold the securities
distributed until the investment advisor determines that it is appropriate to
sell them.

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

SMALL-CAP STOCKS are common stocks issued by U.S. operating companies with
market capitalizations that place them at the lower of the total U.S market.
Historically, small-cap stocks have been riskier than stocks issued by large-or
mid-cap companies for a variety of reasons. Small-cap companies may have less
certain growth prospects and are typically less diversified and less able to
withstand changing economic conditions than larger capitalized companies.
Small-cap companies also may have more limited product lines, markets or
financial resources than companies with larger capitalizations, and may be more
dependent on a relatively small management group. In addition, small-cap
companies may not be well known to the investing public, may not have
institutional ownership and may have only cyclical, static or moderate growth
prospects. Most small-cap company stocks pay low or no dividends.

These factors and others may cause sharp changes in the value of a small-cap
company's stock, and even cause some small-cap companies to fail. Additionally,
small-cap stocks may not be as broadly traded as large- or mid-cap stocks, and a
portfolio's or underlying fund's position in securities of such companies may be
substantial in relation to the market for such securities. Accordingly, it may
be difficult for a portfolio or fund to dispose of securities of these small-cap
companies at prevailing market prices in order to meet redemptions. This lower
degree of liquidity can adversely affect the value of these securities. For
these reasons and others, the value of a portfolio's or underlying fund's
investments in small-cap stocks is expected to be more volatile than other types
of investments, including other types of stock investments. While small-cap
stocks are generally considered to offer greater growth opportunities for
investors, they involve greater risks and the share price of a portfolio or
underlying fund that invests in small-cap stocks may change sharply during the
short term and long term.

15
<PAGE> 113
order to help minimize this risk, a portfolio will segregate appropriate assets
as necessary.

U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities. U.S. Treasury securities, include bills, notes and bonds,
and are backed by the full faith and credit of the United States. Not all
U.S. government securities are backed by the full faith and credit of the
United States. Some U.S. government securities are supported by a line of
credit the issuing entity has with the U.S. Treasury. Others are supported
solely by the credit of the issuing agency or instrumentality. There can be
no assurance that the U.S. government will provide financial support to U.S.
government securities of its agencies and instrumentalities if it is not
obligated to do so under law. Of course U.S. government securities,
including U.S. Treasury securities, are among the safest securities, however,
not unlike other fixed-income securities, they are still sensitive to
interest rate changes, which will cause their yields to fluctuate.

INVESTMENT LIMITATIONS

THE FOLLOWING INVESTMENT LIMITATIONS MAY BE CHANGED ONLY BY VOTE OF A MAJORITY
OF EACH PORTFOLIO'S SHAREHOLDERS.

EACH OF THE GROWTH PORTFOLIO, BALANCED PORTFOLIO AND SMALL CAP PORTFOLIO MAY
NOT:

1) Purchase securities of any issuer unless consistent with the maintenance
of its status as a diversified company under the 1940 Act.

2) Concentrate investments in a particular industry or group of industries as
concentration is defined under the 1940 Act, or the rules or regulations
thereunder.

3) Purchase or sell commodities, commodities contracts or real estate, lend
or borrow money, issue senior securities, underwrite securities, or
pledge, mortgage or hypothecate any of its assets, except as permitted by
the 1940 Act or the rules or regulations thereunder.

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

Lending. Under the 1940 Act, an investment management company may make loans
only if expressly permitted by its investment policies.

Concentration. The 1940 Act presently defines concentration as investing 25% or
more of an investment company's total assets in an industry or group of
industries, with certain exceptions.

16
<PAGE> 114
THE INTERNATIONAL PORTFOLIO 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 or investments in other registered investment companies)
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 the portfolio will invest 25% or more of
its total assets in other investment companies).

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

4) Lend money to any person, except that the portfolio may (1) purchase a
portion of an issue of short-term debt securities or similar obligations
(including repurchase agreements) that are distributed publicly or
customarily purchased by institutional investors, and (2) lend its
portfolio securities.

5) Borrow money or issue senior securities, except that the portfolio 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 the portfolio will not purchase securities while
borrowings represent more than 5% of its total assets.

6) Pledge, mortgage or hypothecate any of its assets, except that, to secure
allowable borrowings, the portfolio may do so with respect to no more than
one-third of the value of its total assets.

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

THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS FOR EACH
PORTFOLIO.

EACH PORTFOLIO MAY NOT:

1) Invest more than 15% of its net assets in illiquid securities, including
repurchase agreements with maturities in excess of seven days.

2) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or the investment advisor 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.

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

17
<PAGE> 115
4) Purchase securities of other investment companies, except as permitted by
the 1940 Act, including any exemptive relief granted by the SEC.

5) 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. The definition of "securities" does not
include cash and cash items (including receivables), government securities
and the securities of other investment companies, including private
investment companies and qualified purchaser funds.

6) 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 portfolio in units or attached to
other securities are deemed to be without value.

7) 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 its net assets.

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

9) 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.

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

Except with respect to investments in futures and options contracts and illiquid
securities, later changes in values do not require a portfolio to sell the
investment even if it could not then make the same investment.

MANAGEMENT OF THE PORTFOLIOS

18
<PAGE> 116
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS &
NAME/DATE OF BIRTH THE TRUST AFFILIATIONS
- -------------------------------------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Chairman, Co-Chief Executive
July 29, 1937 Trustee Officer and Director, The
Charles Schwab Corporation;
Chairman, Chief Executive Officer
and Director, Charles Schwab
Holdings, Inc.; Chairman and
Director, Charles Schwab & Co.,
Inc., Charles Schwab Investment
Management, Inc., The Charles
Schwab Trust Company and Schwab
Retirement Plan Services, Inc.;
Chairman and Director (current
board positions), and Chairman
(officer position) until December
1995, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of
The Charles Schwab Corporation);
Director, The Gap, Inc. (a clothing
retailer), Transamerica Corporation
(a financial services
organization), AirTouch
Communications (a telecommunications
company) and Siebel Systems
(a software company).

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

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

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

* This trustee is an "interested person" of the trusts.

+ Effective August 18, 1998, Mr. Scheid was elected as President and
Trustee.

19
<PAGE> 117
<TABLE>
<S> <C> <C>
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Company (investments) and
Chairman and Chief Executive
Officer of North American Trust
(real estate investment trust).

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

TAI-CHIN TUNG Treasurer and Vice President, Treasurer and
March 7, 1951 Principal Controller, Charles Schwab
Financial Investment Management, Inc.
Officer From 1994 to 1996, Ms. Tung was
Controller for Robertson
Stephens Investment Management,
Inc. From 1993 to 1994, she was
Vice President of Fund
Accounting, Capital Research and
Management Co.

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

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

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

Each portfolio is overseen by a board of trustees. The board of trustees meets
regularly to review each portfolio's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of the portfolio's shareholders. The following table provides information as of
October 31, 1998, concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 38 funds as of
October 31, 1998.

* This Trustee is an "interested person" of the Trust.

20
<PAGE> 118
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Aggregate Compensation Benefits Compensation
Trustee from the Accrued as from Fund
Part of Fund Complex
Expenses
-----------------------------------------
Balanced Growth Small Interna-
Portfolio Portfolio Cap tional
Portfolio Portfolio
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. 0 0 0 0 N/A 0
Schwab

Tom D. Seip 1 0 0 0 0 N/A 0

Steven L.
Scheid 2

William J. 0 0 0 0 N/A 0
Klipp,

Donald F. N/A
Dorward

Robert G. N/A
Holmes

Donald R. N/A
Stephens

Michael W. N/A
Wilsey
</TABLE>

1 Effective May 15, 1998, Mr. Seip resigned as President and trustee.

2 Effective August 18, 1998, Mr. Scheid was elected as President and trustee.

21
<PAGE> 119
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of February 1, 1999, [VAR: QLEGAL: name of person or entity and the
jurisdiction under the laws of which it is organized and all parent
companies] control the [VAR: Fund Name] through ownership of [VAR: QLEGAL:
x.x%] securities or other basis of control.]

As of February 1, 1999, the [VAR: QLEGAL: name of entity or person] directly
or beneficially owned, [VAR: QLEGAL: x.xx%] of shares of the [VAR:
Fund Name / Class Name].

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISOR

Charles Schwab Investment Management, Inc. (CSIM or the investment advisor), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the portfolios' investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement
("Advisory Agreement") between it and the trust. Charles Schwab & Co., Inc.
("Schwab") is an affiliate of the investment advisor and is the trust's
distributor, shareholder services agent and transfer agent. Charles R. Schwab is
the founder, Chairman, Co-Chief Executive Officer and Director of The Charles
Schwab Corporation. As a result of his ownership of and interests in The Charles
Schwab Corporation, Mr. Schwab may be deemed to be a controlling person of the
investment advisor and Schwab.

The Schwab MarketManager Portfolios(TM) are actively managed by a team of
dedicated investment professionals, led by portfolio managers, and supported by
the Schwab Center for Investment Research.

For its advisory and administrative services to the Growth Portfolio and the
Balanced Portfolio, the investment advisor is entitled to receive a graduated
annual fee, payable monthly, of 0.74% of the first $1 billion of each
portfolio's average daily net assets, 0.69% of the next $1 billion, and 0.64% of
net assets over $2 billion.

22
<PAGE> 120
For the fiscal year ended October 31, 1998, and fiscal period November 8, 1996
(commencement of operations) to October 31, 1997, Growth Portfolio paid
investment advisory fees of $___ (fees were reduced by $___) and $211,000 (fees
were reduced by $499,000), respectively.

For the fiscal year ended October 31, 1998, and fiscal period November 8, 1996
(commencement of operations) to October 31, 1997, Balanced Portfolio paid
investment advisory fees of $___ (fees were reduced by $___) and $23,000 (fees
were reduced by $321,000), respectively.

For its advisory and administrative services to Small Cap Portfolio, the
investment advisor is entitled to receive a graduated annual fee, payable
monthly, of 0.74% of the first $1 billion of the portfolio's average daily net
assets, 0.69% of the next $1 billion, and 0.64% of net assets over $2 billion.

For fiscal period ended October 31, 1998, and fiscal period September 16, 1997
(commencement of operations) to October 31, 1997, Small Cap Portfolio paid
investment advisory fees of $___ (fees were reduced by $___) and $58,000 (fees
were reduced by $124,000), respectively.

For its advisory and administrative services to International Portfolio, the
investment advisor is entitled to receive a graduated annual fee, payable
monthly, of 0.74% of the portfolio's average daily net assets not in excess of
$1 billion, 0.69% of the next $1 billion and 0.64% of net assets over $2
billion.

For fiscal year ended October 31, 1998, 1997 and for fiscal period October 16,
1996 (commencement of operations) to October 31, 1996, International Portfolio
paid investment advisory fees of $ _____, (fees were reduced by $______),
$147,000 (fees were reduced by $423,000) and $0 (fees were reduced by $17,000),
respectively.

The investment advisor and Schwab have guaranteed that, through at least
February 28, 1999, the total fund operating expenses (excluding interest, taxes
and extraordinary expenses) for each portfolio will not exceed 0.50% of its
average daily net assets.

DISTRIBUTOR

SHAREHOLDER SERVICES AND TRANSFER AGENT

Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
portfolios' prospectuses, financial reports and other informational literature
about the portfolios. Schwab maintains the office space, equipment and personnel
necessary to provide these services.

23
<PAGE> 121
For the services performed as shareholder services agent under its contract with
each portfolio, Schwab is entitled to receive an annual fee, payable monthly
from the portfolio, in the amount of 0.20% of each portfolio's average daily net
assets.

Schwab currently receives remuneration from fund companies participating in its
Mutual Fund OneSource(R) service equal to 0.25% to 0.35% per annum of assets
invested in the MarketManager Portfolios. In light of this remuneration and
compensation, Schwab guarantees, through at least December 31, 2001, to waive
its transfer agent and shareholder service fees for the portfolios. After
December 31, 2001, the guarantee may be terminated, modified or continued.

CUSTODIAN AND FUND ACCOUNTANT

Chase Manhattan Bank, 1 Pierrepont Plaza, Brooklyn, NY 11201, serves as
custodian and SEI Fund Resources, One Freedom Valley Drive, Oaks, PA 19456,
serves as fund accountant for the portfolios.

The custodians are responsible for the daily safekeeping of securities and cash
held or sold by the portfolios. The accountants maintain all books and records
related to each fund's transactions.

INDEPENDENT ACCOUNTANT

The portfolios' independent accountant, ______________, audits and reports on
the annual financial statements the funds and review certain regulatory reports
and each portfolio's federal income tax return. It also performs other
professional accounting, auditing, tax and advisory services when the trusts
engage it to do so. Their address is _________________________________. Each
portfolio's audited financial statements for the fiscal year ended October 31,
1998, are included in the portfolios' annual report, which is a separate report
supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

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 Growth Portfolio's turnover rates for the fiscal year ended October 31, 1998
and for the fiscal period November 18, 1996 (commencement of operations) to
fiscal year end October 31, 1997, were ____% and 92%, respectively.

24
<PAGE> 122
The Balanced Portfolio's turnover rates for the fiscal year ended October 31,
1998 and for the fiscal period November 18, 1996 (commencement of operations) to
fiscal year end October 31, 1997, were ____% and 171%, respectively.

The Small Cap Portfolio's turnover rates for the fiscal year ended October 31,
1998, and the period from September 1, 1997 (commencement of operations) to
fiscal year ended October 31, 1997 were _____% and 10%, respectively.

The International Portfolio's turnover rates for the fiscal years ended October
31, 1998 and 1997, were ____% and 179%.

The higher portfolio turnover rates for the portfolios are attributed to a
portfolio management strategy that includes both a component of funds that the
portfolio managers intend to hold and a "tactical" position of funds
strategically chosen for their growth potential. In addition, over the short or
intermediate term during the first year of operation, a portfolio may have a
higher portfolio turnover rate as a result of building its investment portfolio.
The portfolios do not anticipate additional brokerage expenses due to these
higher portfolio turnover rates.

PORTFOLIO TRANSACTIONS

When the execution capability and price offered by two or more broker-dealers
are comparable, the investment advisor 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 also may be used by the investment advisor when
providing advisory services to other investment advisory clients, including
mutual funds.

In an attempt to obtain best execution for the portfolios, the investment
advisor may 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.

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 advisor follows procedures, adopted by the board of
trustees, that are designed to ensure that affiliated brokerage commissions (if
relevant) are reasonable and fair in comparison to unaffiliated brokerage
commissions for comparable transactions. The Board reviews the procedures
annually and approves and reviews transactions involving affiliated brokers
quarterly.

25
<PAGE> 123
BROKERAGE COMMISSIONS

For the fiscal years ended October 31, 1998 and 1997, and for the period of
October 16, 1996 (commencement of operations) to fiscal year ended October 31,
1996, the MarketManager International Portfolio paid brokerage
commissions of $1,020, $0 and $0, respectively.

DESCRIPTION OF THE TRUST

Each portfolio, is a series of Schwab Capital Trust, an open-end investment
management company organized as a Massachusetts business trust on May 7, 1993.

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

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

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

26
<PAGE> 124
As more fully described in the Declaration of Trust, the trustees may each year,
or more frequently, distribute to the shareholders of each series accrued income
less accrued expenses and any net realized capital gains less accrued expenses.
Distributions of each year's income of each series shall be distributed pro rata
to shareholders in proportion to the number of shares of each series held by
each of them. Distributions will be paid in cash or shares or a combination
thereof as determined by the trustees. Distributions paid in shares will be paid
at the net asset value as determined in accordance with the bylaws.

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE PORTFOLIOS

The portfolio's reserve the right to waive the early redemption fee for certain
tax-advantaged retirement plans.

PRICING OF SHARES

In accordance with the 1940 Act, the underlying funds are valued at their
respective net asset values as determined by those funds. The underlying funds
that are money market funds may value their portfolio securities based on the
value or amortized cost method. The other underlying funds value their portfolio
securities based on market quotes if they are readily available. The investment
advisor assigns fair values to the portfolios' other investments in good faith
under board of trustees guidelines. The board of trustees regularly reviews
these values. Securities traded on stock exchanges are valued at the last quoted
sales price on the exchange on which such securities are primarily traded, or,
lacking any sales, at the mean between the bid and ask prices. Securities traded
in the over-the-counter market are valued at the last sales price that day, or
if no sales that day, at the mean between the bid and ask prices.

27
<PAGE> 125
Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations on their sale and illiquid
securities) are valued at fair value as determined in good faith pursuant to
guidelines adopted by the board of trustees. Securities may be valued on the
basis of prices provided by pricing services when such prices are believed to
reflect fair market value. The board of trustees regularly reviews any fair
values assigned to portfolio securities.

TAXATION

FEDERAL TAX INFORMATION FOR THE FUNDS

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

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

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

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

28
<PAGE> 126
domestic corporations will be eligible for the 70% corporate dividends-received
deduction to the extent they would qualify if the portfolios were regular
corporations. Distributions by a portfolio also may be subject to state, local
and foreign taxes, and its treatment under applicable tax laws may differ from
the federal income tax treatment.

Foreign shareholders (i.e., nonresident alien individuals and foreign
corporations, partnerships, trusts and estates) are generally subject to U.S.
withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions
derived from net investment income and short-term capital gains. Distributions
to foreign shareholders of long-term capital gains and any gains from the sale
or other disposition of shares of the funds generally are not subject to U.S.
taxation, unless the recipient is an individual who 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.

Income that the portfolios receive from sources within various foreign countries
may be subject to foreign income taxes withheld at the source. If a portfolio
has at least 50% of its assets invested in foreign securities at the end of its
taxable year, it may elect to "pass through" to its shareholders the ability to
take either the foreign tax credit or the deduction for foreign taxes. 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, and may
either 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 sections 901 and 904 (but not both). A
shareholder who does not itemize deductions may not claim a deduction for
foreign taxes. It is expected that the portfolios will not have 50% of their
assets invested in foreign securities at the close of their taxable years, and
therefore will not be permitted to make this election. Also, to the extent a
portfolio invests in an underlying fund that elects to pass through foreign
taxes, the portfolio will not be able to pass through the taxes paid by the
underlying fund. Each shareholder's respective pro rata share of foreign taxes
the portfolio pays will, therefore, be netted against their share of the
portfolio's gross income.

The portfolios may invest in a non-U.S. corporation that could be treated as a
passive foreign investment company ("PFIC") 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 portfolios do invest in PFICs, they may elect to treat the PFIC
as a "qualified electing fund" or mark-to-market its investments in PFICs
annually. In either case, the portfolios may be required to distribute amounts
in excess of realized income and gains. To the extent that the portfolios do
invest in foreign securities that 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 portfolios' shareholders. Therefore, the payment
of this tax would reduce the portfolios' economic return from their PFIC shares,
and excess distributions received with respect to such shares are treated as
ordinary income rather than capital gains.

29
<PAGE> 127
An underlying fund may invest in non-U.S. corporations, which would be treated
as PFICs or become a PFIC. 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 an underlying 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 underlying fund may be
required to distribute amounts in excess of its realized income and gains. To
the extent that the underlying fund itself is required to pay a tax on income or
gain from investment in PFICs, the payment of this tax would reduce the
portfolios' economic return.

30
<PAGE> 128
CALCULATION OF PERFORMANCE DATA

<TABLE>
<CAPTION>
Portfolio and One Year Life of Fund
Commencement Date
- -----------------------------------------------------------------------
<S> <C> <C>
MarketManager Portfolios
Growth (11/18/96) % %
Balanced (11/18/96) % %
Small Cap 9/16/97 % %
International (10/16/96) % %
</TABLE>

<TABLE>
<CAPTION>
Cumulative Total Return From
Name of Portfolio Commenced Operations* Commencement of Operations
- --------------------------------------- ----------------------------
<S> <C>
Growth (11/18/96) %
Balanced (11/18/96) %
Small Cap(9/16/97) %
International (10/16/96) %
</TABLE>

The performance of the portfolios may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices of investment performance, U.S. government obligations, bank
certificates of deposit, the consumer price index, information provided by
proprietary and non-proprietary research services and other investments for
which reliable data is available.

The Growth Portfolio, the Balanced Portfolio and Small Cap Portfolio also may
compare their historical performance figures to the performance of indices
similar to their asset categories and sub-categories, and to the performance of
"blended indices" similar to the portfolios' strategies.

31
<PAGE> 129
STATEMENT OF ADDITIONAL INFORMATION

SCHWAB ANALYTICS FUND(R)

FEBRUARY 28, 1999

The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the fund's prospectus dated February 28, 1999 (as
amended from time to time).

To obtain a copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, or write to the fund at 101 Montgomery Street, San
Francisco, California 94104. For TDD service call 800-345-2550, 24 hours a day.
The prospectus also may be available on the Internet at:
http://www.schwab.com/schwabfunds.

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

The fund is a series of Schwab Capital Trust (the trust).

TABLE OF CONTENTS

Page
----
INVESTMENT STRATEGIES, RISKS AND LIMITATIONS...................................2
MANAGEMENT OF THE FUND.........................................................9
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...........................11
INVESTMENT ADVISORY AND OTHER SERVICES........................................12
BROKERAGE ALLOCATION AND OTHER PRACTICES......................................14
DESCRIPTION OF THE TRUST......................................................15
PURCHASE, REDEMPTION AND PRICING OF SHARES....................................16
TAXATION......................................................................17
CALCULATION OF PERFORMANCE DATA...............................................18

1
<PAGE> 130
INVESTMENT STRATEGIES, RISKS AND LIMITATIONS

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

INVESTMENT OBJECTIVE

The fund's investment objective may be changed only by vote of a majority of its
shareholders.

ANALYTICS FUND(R) seeks long-term capital growth.

INVESTMENT STRATEGIES AND RISKS

BORROWING may subject the fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. The fund may
borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash.

CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure to industry risk. For example, the automobile industry may have a
greater exposure to a single factor, such as an increase in the price of oil,
which may adversely affect the sale of automobiles and, as a result, the value
of the industry's securities. The fund will not concentrate its investments in a
particular industry or group of industries, unless the S&P 500(R) Index is so
concentrated. This policy may be changed only by shareholders.

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

2
<PAGE> 131
unsponsored depositary receipts are not contractually obligated to disclose
material information in the United States. Therefore, there may not be a
correlation between such information and the market value of an unsponsored
depositary receipt.

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

3
<PAGE> 132
income potential will act as a price support. While the value of a convertible
security also tends to rise when the underlying common stock value rises, it
will not rise as much because their conversion value is more narrow. The value
of convertible securities also is affected by changes in interest rates. For
example, when interest rates fall, the value of convertible securities may rise
because of their fixed income component.

Warrants are a type of security usually issued with bonds and preferred stock
that entitle the holder to a proportionate amount of common stock at specified
price for a specific period of time. The prices of warrants do not necessarily
move parallel to the prices of the underlying common stock. Warrants have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer. If a warrant is not exercised within the specified time
period, it will become worthless and a fund will lose the purchase price it paid
for the warrant and the right to purchase the underlying security.

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

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

4
<PAGE> 133
conversion may become more volatile as the conversion date of January 1, 1999
approaches. There also may be increased volatility in the exchange rates for
currencies of other European countries. After January 3, 1999, the euro will be
the official currency of the EMU, the rate of exchange will have been set
between the euro and the currency of each converting country and the European
Central Bank, all national central banks and all stock exchanges and
depositories will price, trade and settle in euro even if the securities traded
are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift away
from European countries, thereby making the European market less liquid. All of
these factors could affect the value of the fund's investments and/or increase
its expenses. While the investment adviser is taking steps to minimize the
impact of the conversion on the fund, it is not possible to know precisely what
impact the conversion will have on the fund, if any, nor is it possible to
eliminate the risks completely.

Securities that are acquired by the fund outside the United States and that are
publicly traded in the United States on a foreign securities exchange or in a
foreign securities market, are not considered illiquid provided that: (1) the
fund acquires and holds the securities with the intention of reselling the
securities in the foreign trading market, (2) the fund reasonably believes it
can readily dispose of the securities readily in the foreign trading market or
for cash in the United States, or (3) foreign market and current market
quotations are readily available. Investments in foreign securities where
delivery takes place outside the United States 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.

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

The fund must maintain a small portion of its assets in cash to process
shareholder transactions in and out of the fund and to pay its expenses. In
order to reduce the effect this otherwise uninvested cash would have on its
performance, a fund may purchase futures contracts. Such transactions allow the
fund's cash balance to produce a return similar to that of the underlying
security or index on which the futures contract is based. The fund does not
intend to engage in speculative futures transactions.

When buying or selling futures contracts, a fund must place a deposit with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and must be in the form of liquid debt instruments, including
cash, cash-equivalents and U.S. government securities. Subsequent payments to
and from the broker, known as "variation margin" are made at least daily as the
value of the futures contracts fluctuate. This process is known as
"marking-to-market." The margin amount will be returned to the fund upon
termination of the futures contracts assuming all contractual obligations are
satisfied. The fund's aggregate initial and variation margin payments required
to establish its futures positions may not exceed 5% of its net assets.

5
<PAGE> 134
While the fund intends to purchase and sell futures contracts in order to
simulate full investment, there are risks associated with these transactions.
Adverse market movements could cause the fund to experience substantial losses
when buying and selling futures contracts. Of course, barring significant market
distortions, similar results would have been expected if the fund had instead
transacted in the underlying securities directly. There also is the risk of
losing any margin payments held by a broker in the event of its bankruptcy.
Additionally, the fund incurs transaction costs (i.e. brokerage fees) when
engaging in futures trading.

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

LENDING of portfolio securities is a common practice in the securities industry.
A fund will engage in security lending arrangements with the primary objective
of increasing its income through investment of the cash collateral in
short-term, interest-bearing obligations, but will do so only to the extent that
it will not lose the tax treatment available to regulated investment companies.
Lending portfolio securities involve risks that the borrower may fail to return
the securities or provide additional collateral. A fund may loan portfolio
securities to qualified broker-dealers or other institutional investors
provided: (1) the loan is secured continuously by collateral consisting of U.S.
government securities, letters of credit, cash or cash equivalents maintained on
a daily market-to-market basis in an amount at least equal to the current market
value of the securities loaned; (2) the fund may at any time call the loan and
obtain the return of the securities loaned; (3) the fund will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the fund.

REPURCHASE AGREEMENTS are instruments under which a buyer acquires ownership of
certain securities (usually U.S. government securities) from a seller who agrees
to repurchase the securities at a mutually agreed-upon time and price, thereby
determining the yield during the buyer's holding period. Any repurchase
agreements the fund enters into will involve the fund as the buyer and banks or
broker-dealers as sellers. The period of repurchase agreements is usually short
- -- from overnight to one week, although the securities collateralizing a
repurchase agreement may have longer maturity dates. Default by the seller might
cause the fund to experience a loss or delay in the liquidation of the
collateral securing the repurchase agreement. The fund also may incur
disposition costs in liquidating the collateral. 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. The fund will make
payment under a repurchase agreement only upon physical delivery or evidence of
book entry transfer of the collateral to the account of its custodian bank.

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

6
<PAGE> 135
securities that are deemed liquid, the general level of illiquidity in the
fund's portfolios may be increased if qualified institutional buyers become
uninterested in purchasing these securities.

SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by the fund,
including those managed by its investment adviser. Because other investment
companies employ investment advisers and other service providers, investments by
the fund may cause shareholders to pay duplicative fees.

U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
U.S. Treasury securities, include bills, notes and bonds, and are backed by the
full faith and credit of the United States. Not all U.S. government securities
are backed by the full faith and credit of the United States. Some U.S.
government securities are supported by a line of credit the issuing entity has
with the U.S. Treasury. Others are supported solely by the credit of the issuing
agency or instrumentality. There can be no assurance that the U.S. government
will provide financial support to U.S. government securities of its agencies and
instrumentalities if it is not obligated to do so under law. Of course U.S.
government securities, including U.S. Treasury securities, are among the safest
securities, however, not unlike other fixed income securities, they are still
sensitive to interest rate changes, which will cause their yields to fluctuate.

INVESTMENT LIMITATIONS

THE FOLLOWING INVESTMENT LIMITATIONS MAY BE CHANGED ONLY BY VOTE OF A MAJORITY
OF THE FUND'S SHAREHOLDERS.

THE FUND MAY NOT:

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 fund may purchase securities
under such circumstances only to the extent that the S&P 500 also is so
concentrated).

3) Purchase or sell commodities, commodity contracts or real estate,
including interests in real estate limited partnerships, provided that
the fund may (1) purchase securities of companies that deal in real
estate or interests therein, (2) purchase or sell futures contracts,
options contracts, equity index participations and index participation
contracts, and (3) purchase securities of companies that deal in
precious metals or interests therein.

4) Lend money to any person, except that the fund may (1) purchase a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are distributed
publicly or customarily purchased by institutional investors, and (2)
lend its portfolio securities.

5) Borrow money or issue senior securities, except that the fund may
borrow from banks as a temporary measure to satisfy redemption requests
or for extraordinary or emergency

7
<PAGE> 136
purposes and then only in an amount not to exceed one-third of the
value of its total assets (including the amount borrowed), provided
that the fund will not purchase securities while borrowings represent
more than 5% of its total assets.

6) Pledge, mortgage or hypothecate any of its assets, except that, to
secure allowable borrowings, the fund may do so with respect to no more
than one-third of the value of its total assets.

THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS FOR THE
FUND.

THE FUND MAY NOT:

2) 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 the fund in units or attached to
other securities are deemed to be without value.

3) 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 net assets.

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

5) 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.

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

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

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

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

8
<PAGE> 137
10) Purchase securities of other investment companies, except as permitted
by the 1940 Act, including any exemptive relief granted by the SEC.

MANAGEMENT OF THE FUND

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS &
NAME/DATE OF BIRTH THE TRUST AFFILIATIONS
- ------------------ ------------- -----------------------

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

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

- -------------------
* This trustee is an "interested person" of the trust.
+ Effective August 18, 1998, Mr. Scheid was elected as President and Trustee.

9
<PAGE> 138
<TABLE>
<S> <C> <C>
Interstate Bank of Texas.

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

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

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

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

TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Financial Officer Charles Schwab Investment Management, Inc. From
1994 to 1996, Ms. Tung was Controller for
Robertson Stephens Investment Management,
Inc. From 1993 to 1994, she was Vice
President of Fund Accounting, Capital
Research and Management Co.

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

FRANCES COLE Secretary Senior Vice President, Chief Counsel and
</TABLE>

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

10
<PAGE> 139
<TABLE>
<S> <C> <C>
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>

The fund is overseen by a board of trustees. The board of trustees meets
regularly to review the fund's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of the fund's shareholders. The following table provides information as of
October 31, 1998, concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 38 funds as of
October 31, 1998.

<TABLE>
<CAPTION>
($) Pension or ($)
Aggregate Retirement Total
Name of Trustee Compensation from Benefits Accrued Compensation from
Fund as Part of Fund Fund Complex
Expenses

- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles R. N/A 0
Schwab

Tom D. Seip 1 N/A 0

Steven L. N/A 0
Scheid 2

William J. N/A 0
Klipp,

Donald F. N/A
Dorward

Robert G. N/A
Holmes

Donald R. N/A
Stephens

Michael W. N/A
Wilsey
</TABLE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

- -------------------
1 Effective May 15, 1998, Mr. Seip resigned as President and trustee.
2 Effective August 18, 1998, Mr. Scheid was elected as President and trustee.

11
<PAGE> 140
As of February 1, 1999, the officers and trustees of the trust(s), as a group
owned of record or beneficially [VAR: QLEGAL: x.x% / less than 1%] of the
outstanding voting securities of each fund.

As of February 1, 1999, the [VAR: QLEGAL: name of entity or person] directly or
beneficially owned, [VAR: QLEGAL: x.xx%] of shares of the [VAR: Fund Name /
Class Name].

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISER

Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the fund's investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement
(Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc.
(Schwab) is an affiliate of the investment adviser and is the trust's
distributor, shareholder services agent and transfer agent. Charles R. Schwab is
the founder, Chairman, Co-Chief Executive Officer and Director of The Charles
Schwab Corporation. As a result of his ownership of and interests in The Charles
Schwab Corporation, Mr. Schwab may be deemed to be a controlling person of the
investment adviser and Schwab.

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

For its advisory and administrative services to the fund, the investment adviser
is entitled to receive a graduated annual fee, payable monthly, of 0.74% of the
fund's average daily net assets not in excess of $1 billion, 0.69% of the next
$1 billion and 0.64% of such net assets over $2 billion.

For the fiscal year ended October 31, 1998, 1997 and fiscal period of July 1,
1996, (commencement of operations) to October 31, 1996, the fund paid investment
advisory fees of $________, $429,000 (fees were reduced by $483,000) and $66,000
(fees were reduced by $151,000), respectively.

The investment adviser and Schwab have guaranteed that, through at least
February 28, 1999, the total fund operating expenses for the fund will not
exceed 0.75% of its average daily net assets.

SUB-ADVISER

The investment adviser has entered into an investment sub-advisory agreement
(the "Sub-Advisory Agreement") with Symphony Asset Management, Inc. (the
"sub-adviser" or "Symphony") pursuant to which Symphony Asset Management, Inc.
will act as the fund's sub-adviser. The sub-adviser makes investment decisions
for the fund's non-cash investments and uses quantitative techniques

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and proprietary real-time databases and software models to continually identify
and rank stocks that exhibit a favorable combination of attributes that
historically have been associated with aggregate total returns greater than that
of the S&P 500. Once rankings are determined, statistical methodologies will be
used to construct a portfolio of the most attractive stocks in terms of
potential long-term capital growth.

For the sub-adviser's services, the investment adviser pays the sub-adviser an
annual investment sub-advisory fee, payable monthly, of 0.20% of the fund's
average daily net assets not in excess of $300 million, 0.15% of the next $500
million and 0.10% of such assets over $800 million.

DISTRIBUTOR

Pursuant to an agreement, Schwab is the principal underwriter for shares of the
fund and is the trust's agent for the purpose of the continuous offering of the
fund's shares. The fund pays for 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 agreement. Terms of continuation, termination
and assignment under the agreement are identical to those described above with
respect to the Advisory Agreement.

SHAREHOLDER SERVICES AND TRANSFER AGENT

Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
fund's prospectuses, financial reports and other informational literature about
the fund. Schwab maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services.

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

CUSTODIAN AND FUND ACCOUNTANT

PNC Bank, 400 Bellevue Parkway, Wilmington, DE 19809, serves as custodian and
SEI Fund Resources, One Freedom Valley Drive, Oaks, PA 19456, serves as fund
accountant for the fund.

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

INDEPENDENT ACCOUNTANT

The fund's independent accountant, PricewaterhouseCoopers LLP, audits and
reports on the annual financial statements of the fund and review certain
regulatory reports and the fund's federal income

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<PAGE> 142
tax return. It also performs other professional accounting, auditing, tax and
advisory services when the trust engages it to do so. Their address is 333
Market Street, San Francisco, CA 94105. The fund's audited financial statements
for the fiscal year ended October 31, 1998, are included in the fund's annual
report, which is a separate report supplied with the SAI.

BROKERAGE ALLOCATION AND OTHER PRACTICES

PORTFOLIO TURNOVER

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

Typically, funds with high turnover (such as a 100% or more) tend to generate
higher capital gains and transaction costs, such as brokerage commissions.

The fund's portfolio turnover rates for the fiscal years ended October 31, 1998
and 1997 were 115% and 120%, respectively.

The turnover rate for the fund is dictated by the portfolio models which help
the fund construct its investment portfolio. The fund does not anticipate
additional brokerage expenses or tax consequences due to higher portfolio
turnover rates.

PORTFOLIO TRANSACTIONS

In effecting securities transactions for the fund, the investment adviser seeks
to obtain best price and execution. Subject to the supervision of the board of
trustees, the investment adviser will generally select brokers and dealers for
the fund primarily on the basis of the quality and reliability of brokerage
services, including execution capability and financial responsibility.

In assessing these criteria, the investment adviser will, among other things,
monitor the performance of brokers effecting transactions for the fund to
determine the effect, if any, that the fund's transactions through those brokers
have on the market prices of the stocks involved. This may be of particular
importance for the fund's investments in relatively smaller companies whose
stocks are not as actively traded as those of their larger counterparts. The
fund 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.

When the execution capability and price offered by two or more broker-dealers
are comparable, the investment adviser 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 also may be used by the investment adviser when
providing advisory services to other investment advisory clients, including
mutual funds.

In an attempt to obtain best execution for the funds, the investment adviser may
place orders directly with market makers or with third market brokers, Instinet
or brokers on an agency basis.

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<PAGE> 143
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.

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 adviser follows procedures, adopted by the board of
trustees, that are designed to ensure that affiliated brokerage commissions (if
relevant) are reasonable and fair in comparison to unaffiliated brokerage
commissions for comparable transactions. The board reviews the procedures
annually and approves and reviews transactions involving affiliated brokers
quarterly.

BROKERAGE COMMISSIONS

For the fiscal years ended October 31, 1998 and 1997, and for the fiscal period
of July 1, 1996 (commencement of operations) to October 31, 1996, the fund paid
brokerage commissions of $___________, $155,109 and $90,932, respectively.

DESCRIPTION OF THE TRUST

The fund, is a series of Schwab Capital Trust, an open-end investment management
company organized as a Massachusetts business trust on May 7, 1993.

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

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

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<PAGE> 144
property of an investment portfolio in which a shareholder owns or owned shares
for all losses and expenses of such shareholder or former shareholder if he or
she is held personally liable for the obligations of the trust solely by reason
of being or having been a shareholder. Moreover, the trust will be covered by
insurance which the trustees consider adequate to cover foreseeable tort claims.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote, because it is limited to
circumstances in which a disclaimer is inoperative and the trust itself is
unable to meet its obligations.

PURCHASE, REDEMPTION AND PRICING OF SHARES

PURCHASING AND REDEEMING SHARES OF THE FUND

As long as the fund or Schwab follow reasonable procedures to confirm that your
telephone order is genuine, they will not be liable for any losses an investor
may experience due to unauthorized or fraudulent instructions. These procedures
may include requiring a form of personal identification before acting upon any
telephone order, providing written confirmation of telephone orders and tape
recording all telephone orders.

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

The fund 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 these limits may be paid, in whole or in part,
in investment securities or in cash, as the board of trustees may deem
advisable. Payment will be made wholly in cash unless the board of trustees
believes that economic or market conditions exist that would make such payment a
detriment to the best interests of a fund. If redemption proceeds are paid in
investment securities, such securities will be valued as set forth in "Pricing
of Shares." A redeeming shareholder would normally incur brokerage expenses if
he or she were to convert the securities to cash.

PRICING OF SHARES

Securities traded on stock exchanges are valued at the last quoted sales price
on the exchange on which such securities are primarily traded, or, lacking any
sales, at the mean between the bid and ask prices. Securities traded in the
over-the-counter market are valued at the last sales price that day, or if no
sales that day, at the mean between the bid and ask prices.

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Securities for which market quotations are not readily available (including
restricted securities that are subject to limitations on their sale and illiquid
securities) are valued at fair value as determined in good faith pursuant to
guidelines adopted by the board of trustees. Securities may be valued on the
basis of prices provided by pricing services when such prices are believed to
reflect fair market value. The board of trustees regularly reviews any fair
values assigned to portfolio securities.

TAXATION

FEDERAL TAX INFORMATION FOR THE FUNDS

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

The fund's transactions in futures contracts, forward contracts, foreign
currency transactions, options and certain other investment and hedging
activities may be restricted by the Code and are subject to special tax rules.
In a given case, these rules may accelerate income to a fund, defer its losses,
cause adjustments in the holding periods of 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 fund will endeavor to
make any available elections pertaining to these transactions in a manner
believed to be in the best interest of the fund and their shareholders.

FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS

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

Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. Long-term
capital gains distributions are taxable as long-term capital gains, regardless
of how long you have held your shares. However, if you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss. For corporate investors in the fund, dividend distributions the fund
designate to be from dividends received from qualifying domestic

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<PAGE> 146
corporations will be eligible for the 70% corporate dividends-received deduction
to the extent they would qualify if the fund were regular corporations.
Distributions by a fund also may be subject to state, local and foreign taxes,
and its treatment under applicable tax laws may differ from the federal income
tax treatment.

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

Foreign shareholders (i.e., nonresident alien individuals and foreign
corporations, partnerships, trusts and estates) are generally subject to U.S.
withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions
derived from net investment income and short-term capital gains. Distributions
to foreign shareholders of long-term capital gains and any gains from the sale
or other disposition of shares of the fund 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.

CALCULATION OF PERFORMANCE DATA

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

<TABLE>
<CAPTION>
Fund (Commencement of One Year ended Five Years ended Ten years ended or
Operations) October 31, 1998 October 31, 1998 from Commencement
of Operations to
October 31, 1998
- ---------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Analytics Fund(R) (7/1/96) % N/A %
</TABLE>

An after-tax total return for the fund may be calculated by taking its total
return and subtracting applicable federal taxes from the portions of the fund's
total return attributable to capital gain and ordinary income distributions.
This after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.

The fund also may report the percentage of its total return that would be paid
to taxes annually (at the applicable federal personal income and capital gains
tax rates) before redemption of fund shares.

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<PAGE> 147
This proportion may be compared to that of other mutual funds with similar
investment objectives as reported by independent sources.

The fund also may advertise its cumulative total return since inception. This
number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from commencement of
operations to the fiscal year ended October 31, 1998.

<TABLE>
<CAPTION>
Fund (Commencement of Operations) Cumulative Total Return
- --------------------------------- -----------------------

<S> <C>
Analytics Fund(R) (7/1/96) %
</TABLE>

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

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PART C
OTHER INFORMATION
SCHWAB CAPITAL TRUST

Item 24. Exhibits.

(a) Articles of Agreement and Declaration of Trust, dated May 6,
Incorporation 1993 is incorporated by reference to Exhibit 1 of
Post-Effective Amendment No. 21 to Registrant's
Registration on Form N-1A, electronically filed on
December 17, 1997.

(b) By-Laws Amended and Restated Bylaws are incorporated by
reference to Exhibit 2 of Post-Effective Amendment
No. 7 to Registrant's Registration Statement on
Form N-1A, electronically filed on February 27,
1996.

(c) Instruments (i) Article III, Section 5, Article V, Article VI,
Defining rights Article VIII, Section 4 and Article IX, Sections 1,
of Security 5 and 7 of the Agreement and Declaration of Trust,
Holders dated May 6, 1993, referenced in Exhibit (a) above,
are incorporated by reference to Exhibit 1 to
Post-Effective Amendment No. 21 of Registrant's
registration Statement on Form N-1A electronically
filed on December 17, 1997.

(ii) Articles 9 and 11 of the Amended and Restated
Bylaws are incorporated by reference to Exhibit 2
of Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A, electronically
filed on February 27, 1996.

(d) Investment (i) Investment Advisory and Administration Agreement
Advisory between Registrant and Charles Schwab Investment
Contracts Management, Inc. (the "Investment Manager"), dated
June 15, 1994, is incorporated by reference to
Exhibit 5(a) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A,
electronically filed on December 17, 1997.

(ii) Amended Schedules A and B to Investment Advisory
and Administration Agreement referenced in Exhibit
(d)(i) above are incorporated by reference to
Exhibit 5(b) of Post-Effective Amendment No. 26 to
Registrant's Registration Statement on Form N-1A,
electronically filed on August 14, 1998. Forms of
Schedules A and B to the Investment Advisory and
Administration Agreement on behalf of the
Institutional Select Funds are incorporated by
reference to Exhibit 5(b) of Post-Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-1A, electronically filed on
August 14, 1998.

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(iii) Investment Sub-Advisory Agreement between
Investment Manager, on behalf of the Schwab
Analytics Fund(R), and Symphony Asset Management is
incorporated by reference to Exhibit 5(d) of
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A, electronically
filed on May 17, 1996.

(e) Underwriting (i) Distribution Agreement between Registrant and
Contracts Charles Schwab & Co., Inc. ("Schwab"), dated July
21, 1993, is incorporated by reference to Exhibit
6(a) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A,
electronically filed on December 17, 1997.

(ii) Amended Schedule A to the Distribution Agreement,
referenced at Exhibit (e)(i) above, on behalf of
Schwab MarketTrack(TM) All Equity Portfolio is
incorporated herein by reference to Exhibit 6(b) of
Post-Effective Amendment No. 26, electronically
filed on August 14, 1998; Form of Schedule A to the
Distribution Agreement, referenced at Exhibit
(e)(i) above, on behalf of the Institutional Select
Funds is incorporated by reference to Exhibit 6(b)
of Post-Effective Amendment No. 26 to Registrant's
Registration Statement on Form N-1A, electronically
filed on August 14, 1998.

(f) Bonus or Profit Inapplicable
Sharing Contracts

(g) Custodian (i) Custodian Agreement between Registrant and Morgan
Agreements Stanley Trust Company, dated April 4, 1997, is
incorporated by reference to Exhibit 8(a) of
Post-Effective Amendment No. 18 to Registrant's
Registration Statement on Form N-1A, electronically
filed on April 14, 1997.

(ii) Amended Appendix 2 to Custodian Agreement between
the Registrant and Morgan Stanley Trust Company
referred to at Exhibit g(i) above is incorporated
by reference to Exhibit 8(e) of Post-Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-1A, electronically filed on
August 14, 1998.

(iii) Amendment to Custodian Agreement referred to at
Exhibit g(i) above is incorporated by reference to
Exhibit 8(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A,
electronically filed on December 17, 1997.

(iv) Accounting Services Agreement between Registrant
and SEI Investments is incorporated by reference to
Exhibit 8(d) of Post-Effective Amendment No. 26 to
Registrant's Registration Statement on Form N-1A,
electronically filed on August 14, 1998.

C-2
<PAGE> 150
(v) Form of Amended to Accounting Services Agreement
referred to at Exhibit g(iv) above is incorporated
by reference to Exhibit 8(e) of Post-Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-1A, electronically filed on
August 14, 1998.

(vi) Custodian Services Agreement between Registrant, on
behalf of the Schwab S&P 500 Fund, and PNC Bank,
National Association ("PNC Bank") is incorporated
by reference to Exhibit 8(c) of Post-Effective
Amendment No. 7 to Registrant's Registration
Statement on Form N-1A, electronically filed on
February 27, 1996.

(vii) Form of Schedule to the Custodian Services
Agreement referred to at Exhibit g(vi) above
between Registrant, on behalf of the Institutional
Select Index Funds and PNC Bank is incorporated by
reference to Exhibit 8(g) of Post-Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-1A, electronically filed on
August 14, 1998.

(viii) Accounting Services Agreement between Registrant,
on behalf of the Schwab S&P 500 Fund, and PFPC Inc.
is incorporated by reference to Exhibit 8(d) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A, electronically
filed on February 27, 1996.

(ix) Amended Schedule to the Accounting Services
Agreement referred to at Exhibit g(viii) above
between Registrant, on behalf of the Schwab S&P 500
Fund and the Schwab Analytics Fund, and PFPC Inc.
is incorporated by reference to Exhibit 8(f) of
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A, electronically
filed on May 17, 1996.

(x) Transfer Agency Agreement between Registrant and
Schwab is incorporated by reference to Exhibit 8(j)
of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A, electronically
filed on December 17, 1997.

(xi) Amended Schedules A and C to the Transfer Agency
Agreement referred to at Exhibit g(x) are
incorporated herein by reference to Exhibit 8(k) of
Post-Effective Amendment No. 26 to Registrant's
Registration Statement on Form N-1A, electronically
filed on August 14, 1998; Forms of Schedules A and
C to the Transfer Agency Agreement on behalf of the
Institutional Select Index Funds are incorporated
by reference to Exhibit 8(k) of Post-Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-1A, electronically filed on
August 14, 1998.

C-3
<PAGE> 151
(xii) Shareholder Service Agreement between Registrant
and Schwab, dated July 21, 1993 is incorporated by
reference to Exhibit 8(l) of Post-Effective
Amendment No. 21 to Registrant's Registration
Statement on Form N-1A, electronically filed on
December 17, 1997.

(xiii) Amended Schedules A and C to the Shareholder
Service Agreement between Registrant and Schwab
referred to at Exhibit g(xii) are incorporated
herein by reference to Exhibit 8(m) of
Post-Effective Amendment No. 26 to Registrant's
Registration Statement on Form N-1A, electronically
filed on August 14, 1998; Forms of Schedules A and
C to the Shareholder Service Agreement between
Registrant and Schwab on behalf of the
Institutional Select Index Funds are incorporated
by reference to Exhibit 8(m) of Post-Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-1A, electronically filed on
August 14, 1998.

(h) Other Material License Agreement between Schwab Capital Trust, on
Contracts behalf of Schwab S&P 500 Fund, and Standard &
Poor's is incorporated by reference to Exhibit 9 of
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A, electronically
filed on May 17, 1996.

I Legal Opinion To be filed by subsequent amendment.

J Other Opinions To be filed by subsequent amendment.

K Omitted Financial Inapplicable.
Statements

L Initial Capital (i) Purchase Agreement for the Schwab International
Agreement Index Fund(R), dated June 17, 1993, is incorporated
by reference to Exhibit 13(a) of Post-Effective
Amendment No. 21 to Registrant's Registration
Statement on Form N-1A, electronically filed on
December 17, 1997.

(ii) Purchase Agreement for the Schwab Small-Cap Index
Fund(R), dated October 13, 1993, is incorporated by
reference to Exhibit 13(b) of Post-Effective
Amendment No. 21 to Registrant's Registration
Statement on Form N-1A, electronically filed on
December 17, 1997.

(iii) Purchase Agreement for the Schwab MarketTrack
Portfolios - Growth Portfolio, Balanced Portfolio
and Conservative Portfolio (formerly Schwab Asset
Director(R)- High Growth, Schwab Asset Director -
Balanced Growth, and Schwab Asset Director -
Conservative Growth Funds) is incorporated by
reference to Exhibit 13(c) of Post-Effective
Amendment No. 6 to registrant's Registration
Statement on Form N-1A, electronically filed on
December 15, 1996.

C-4
<PAGE> 152
(iv) Purchase Agreement for the Schwab S&P 500
Fund-Investor Shares and e.Shares(R) is
incorporated by reference to Exhibit 13(d) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A, electronically
filed on February 27, 1996.

(v) Purchase Agreement for the Schwab Analytics Fund(R)
is incorporated by reference to Exhibit 13(e) to
Post-Effective Amendment No. 13 of Registrant's
Registration Statement on Form N-1A, electronically
filed on October 10, 1996.

(vi) Purchase Agreement for Schwab MarketManager
International Portfolio (formerly Schwab
OneSource(R) Portfolios-International) is
incorporated by reference to Exhibit 13(f) of
Post-Effective Amendment No. 13 to Registrant's
Registration Statement on Form N-1A, electronically
filed on October 10, 1996.

(vii) Purchase Agreement for Schwab MarketManager Growth
Portfolio and Balanced Portfolio (formerly Schwab
OneSource Portfolios-Growth Allocation and Schwab
OneSource Portfolios-Balanced Allocation) is
incorporated by reference of Exhibit 13(g) to
Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A, electronically filed on
December 18, 1996.

(viii) Purchase Agreement for Schwab MarketManager(TM)
Small Cap Portfolio (formerly Schwab OneSource(R)
Portfolios-Small Company) is incorporated by
reference to Exhibit 13(h) of Post-Effective
Amendment No. 21 to Registrant's Registration
Statement on Form N-1A, electronically filed on
December 17, 1997.

(ix) Purchase Agreement for MarketTrack(TM) All Equity
Portfolio is incorporated by reference to Exhibit
13(I) of Post-Effective Amendment No. 26 to
Registrant's Registration Statement on Form N-1A,
electronically filed on August 14, 1998.

(x) Form of Purchase Agreement for Institutional
Large-Cap Index Fund, Institutional Select
Large-Cap Value Index Fund and Institutional Select
Small-Cap Value Index Fund are incorporated by
reference to Exhibit 13(j) of Post-Effective
Amendment No. 26 to Registrant's Registration
Statement on Form N-1A, electronically filed on
August 14, 1998.

(m) Rule 12b-1 Plan Inapplicable.

(n) Financial Data (i) Financial Data Schedules Exhibits (i)-(xi) to be
Schedule filed by subsequent amendment.

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<PAGE> 153
(o) Rule 18f-3 Plan Amended and Restated Multiple Class Plan, dated
April 10, 1997, for Schwab International Index
Fund, Schwab Small-Cap Index Fund and Schwab S&P
500 Fund is incorporated by reference to Post
Effective Amendment 18 to Registrant's Registration
Statement on Form N1-A, electronically filed on
April 14, 1997.

Item 24. Persons Controlled by or under Common Control with the Fund.

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.

Item 25. 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 jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.

Item 26. Business and Other Connections of Investment Adviser

Registrant's Investment Manager, Charles Schwab Investment Management, Inc., a
Delaware corporation, organized in October 1989 to serve as Investment Manager
to Registrant, also serves

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<PAGE> 154
as the Investment Manager to The Charles Schwab Family of Funds, 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 and Schwab Annuity Portfolios and any other investment companies
that Schwab may sponsor in the future.

The business, profession, vocation or employment of a substantial nature in
which each director and/or senior or executive officer of the Investment Manager
(CSIM) and/or Schwab & Co. Inc. (principal underwriter) is or has been engaged
during the past two fiscal years is as follows:

<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Co-Chief Executive
Officer and Director

Schwab Holdings, Inc. Chairman, Chief Executive
Officer and Director

Charles Schwab Investment Management, Inc. Chairman and Director

The Charles Schwab Trust Company Chairman and Director

Mayer & Schweitzer, Inc. Chairman and Director

Schwab Retirement Plan Services, Inc. Chairman and Director

Charles Schwab Limited Chairman, Chief Executive
Officer and Director

Performance Technologies, Inc. Chairman and Director

TrustMark, Inc. Chairman and Director

Schwab (SIS) Holdings, Inc. I Chairman, Chief Executive
Officer and Director

Schwab International Holdings, Inc. Chairman, Chief Executive
Officer and Director

The Gap, Inc. Director

Transamerica Corporation Director

AirTouch Communications Director

Siebel Systems Director
</TABLE>

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<PAGE> 155
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer and
Director

The Charles Schwab Corporation President, Co-Chief Executive
Officer and Director

Schwab Holdings, Inc. Director

Schwab Retirement Plan Services, Inc. Director

Charles Schwab Limited Director

Charles Schwab Investment Management, Inc. Director

Mayer & Schweitzer, Inc. Director

Performance Technologies, Inc. Director

Schwab (SIS) Holdings, Inc. I President, Chief Operating
Officer and Director

Schwab International Holdings, Inc. President, Chief Operating
Officer and Director

TrustMark, Inc. Director

Steven L. Scheid Charles Schwab & Co., Inc. Enterprise President - Financial
Products and Services and Chief
Financial Officer

The Charles Schwab Corporation Executive Vice President and
Chief Financial Officer

Schwab Holdings, Inc. Executive Vice President, Chief
Financial Officer and Director

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

The Charles Schwab Trust Company Director

Charles Schwab Limited Finance Officer and Director

Schwab Retirement Plan Services, Inc. Director

Performance Technologies, Inc. Director

Mayer & Schweitzer, Inc. Director
</TABLE>

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<PAGE> 156
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Schwab (SIS) Holdings, Inc. I Chief Financial Officer and
Director

Schwab International Holdings, Inc. Chief Financial Officer and
Director

Karen W. Chang Charles Schwab & Co., Inc. Enterprise President - General
Investor Services

The Charles Schwab Corporation Executive Vice President

John P. Coghlan Charles Schwab & Co., Inc. Enterprise President - Retirement
Plan Services and Services to
Investment Managers

The Charles Schwab Corporation Executive Vice President

The Charles Schwab Trust Company President, Chief Executive Officer
and Director

Schwab Retirement Plan Services, Inc. Director

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

Linnet F. Deily Charles Schwab & Co., Inc. President - Schwab Retail Group

The Charles Schwab Corporation Executive Vice President

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

The Charles Schwab Corporation Senior Vice President and
Controller

Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President -
Corporate Oversight, General
Counsel and Corporate Secretary

Wayne W. Fieldsa Charles Schwab & Co., Inc. Enterprise President - Brokerage
Operations

Lon Gorman Charles Schwab & Co., Inc. Enterprise President - Capital
Markets and Trading

The Charles Schwab Corporation Executive Vice President

James M. Hackley Charles Schwab & Co., Inc. Executive Vice President and Head
of Branches
</TABLE>

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<PAGE> 157
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary

Charles Schwab & Co., Inc. Assistant Corporate Secretary

Charles Schwab Investment Management, Inc. Corporate Secretary

The Charles Schwab Trust Company Assistant Corporate Secretary

Mayer & Schweitzer Secretary

Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President - Mutual
Fund Operations

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

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

Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and Chief
Strategy Officer

Charles Schwab & Co., Inc. Executive Vice President and Chief
Strategy Officer

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

The Charles Schwab Corporation Executive Vice President and Chief
Information Officer

Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President - Retail
Investor Specialized Services

The Charles Schwab Corporation Executive Vice President

Gideon Sasson Charles Schwab & Co., Inc. Enterprise President - Brokerage
Operations

The Charles Schwab Corporation Executive Vice President

Leonard Short Charles Schwab & Co., Inc. Executive Vice President - CRS
Advertising and Branch Management
</TABLE>

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<PAGE> 158
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995; Vice
Chairman until August 1994

The Charles Schwab Corporation Vice Chairman and Director until
May 1998; Chief Operating Officer
until March 1994

Mayer & Schweitzer, Inc. Director until February 1995

The Charles Schwab Trust Company Director until December 1996

Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President -
International and Chief
Administrative Officer

The Charles Schwab Corporation Executive Vice President and Chief
Administrative Officer

Commercial Credit Corporation Managing Director until February
1994

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

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

Neil L. Rudolph Symphony Asset Management, Inc. Chief Operating Officer/Chief Compliance
Officer
</TABLE>

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<PAGE> 159
<TABLE>
<CAPTION>
Name Name of Company Capacity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 until 1994

Michael J. Henman Symphony Asset Management, Inc. Director of Business Development

Wells Fargo Nikko Investment Advisors Managing Director
until 1994
</TABLE>

Item 27. 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 26(b) for information on the officers and directors of
Schwab. The principal business address of Schwab is 101 Montgomery Street, San
Francisco, California 94104.

Item 28. Location of Accounts and Records.

All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of Registrant; Registrant's investment manager and
administrator, Charles Schwab Investment Management, Inc., 101 Montgomery
Street, San Francisco, California 94104; Registrant's former sub-investment
adviser, Dimensional Fund Advisors Inc., 1299 Ocean Avenue, Suite 1100, Santa
Monica, California 90401; Registrant's sub-investment adviser for the Schwab
Analytics Fund(R) 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 custodian and fund accountants, PNC Bank, National
Association/PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, Morgan
Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New York 11201, and SEI
Investments Oaks Pennsylvania 19456; Registrant's former custodians and fund
accountants, Federated Services Company, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222, State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02180; or Ropes & Gray, counsel to Registrant, 1301 K
Street, N.W., Suite 800 East, Washington, District of Columbia 20005.

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<PAGE> 160
Item 29. Management Services.

Not applicable.

Item 30. Undertakings.

Not applicable.

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<PAGE> 161
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. 29 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Washington, District of Columbia on the 10th day of December, 1998.

SCHWAB CAPITAL TRUST
Registrant

Charles R. Schwab*
Charles R. Schwab, Chairman

Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 29 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 10th day
of December, 1998.

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

Charles R. Schwab* Chairman, Chief Executive Officer and Trustee
Charles R. Schwab

Steve Scheid* President and Trustee
Steve Scheid

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

Donald F. Dorward* Trustee
Donald F. Dorward

Robert G. Holmes* Trustee
Robert G. Holmes

Donald R. Stephens* Trustee
Donald R. Stephens

Michael W. Wilsey* Trustee
Michael W. Wilsey

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

*By: /s/Martin E. Lybecker
Martin E. Lybecker, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.

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